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With the sharp slide in the stock market following the installation of the new Administration last week, it is clear that the residue of slowing in the global economy will continue to surface in the near term. Unfortunately the US economy doesn’t seem to have gotten fully around the financial sector threat yet, and with potentially severe trouble seemingly surfacing last week in the UK Banking system, there might be more than one trouble spot facing the commodity markets in the coming weeks. With many physical commodities seeing a noted recovery bounce off the December lows and extending those gains through the first days of 2009, it is clear that some of the oversold pricing might have been mitigated. However, in looking ahead it is also clear that even more pipeline type slowing is to be expected in the January US monthly unemployment report that is due out in the first week of February. Therefore, it is our opinion that macroeconomic sentiment is set to worsen dramatically in the coming weeks, especially if the financial sector turmoil serves to rupture consumer sentiment even further. With the added burden of a rising US Dollar, the outlook for most physical commodity prices is suspect. We would suggest that traders look to implement short side plays in markets that are vulnerable to demand destruction.
While some markets are obviously overbought and vulnerable to bearish near term technical and fundamental developments, it might also pay to keep a longer term market perspective in place for signs of what could eventually become a major bottoming event in the coming 2 months, such as natural gas, unleaded, copper, cattle, hogs, sugar and coffee. In the near term, we remain short term bearish toward soybeans, cocoa, crude oil, corn and cotton. As always, we must reiterate the need to utilize option and futures combination strategies to actively participate in these volatile markets. In some cases traders might combine long term bottoming expectations with bearish short term market views to reduce the cost of a long term position. For instance, those that are longer term bullish toward unleaded prices might attempt to benefit from potential near term weakness in the lead up to the next unemployment report by purchasing longer term calls, and then selling near to expiration just out of the money calls. Taking another approach, traders that are longer term bullish toward corn prices might look to be short corn futures and long December 2009 calls for an eventual recovery. In the near term, with current corn prices 70 cents above the December lows and corn demand thought to be falling off sharply, the corn market could be vulnerable to a slide below the January lows.
While we doubt that deflationary concerns will return to the full blown levels seen in early December, the combination of patently bearish macro economic conditions and distinctly bearish 2009 ending stocks projections could send December 2009 corn prices to the lowest levels since early December. For those traders who are short futures and long calls, this could serve to finance an investment in the long side of corn.
In the energy complex, those with a long term bottoming mentality toward unleaded gasoline might consider the purchase of near to expiration puts as a hedge against an even larger outlay of capital for long call plays! We still see the prospect of a major bottoming in select physical commodities in the coming months, but if one is forged, we can probably expect periodic aggressive bouts of deflation.
