After maintaining a mostly upbeat attitude toward equities and most physical commodities over the last several months, we have begun to see a bit of divergence between the evidence of recovery and the expectations of recovery. While the market has seen consistent improvement in weekly initial and ongoing claims data, we suspect that the string of unemployment rate gains is going to continue and that the recovery view is going to be questioned a bit. While one shouldn’t jump to conclusions off the slight slide in the NAHB Housing Index and the most recent housing starts and permits data, there does seem to be a portion of the trade that is sensing that the US housing market will be unable to continue to recover without the first-time home buyer’s tax credit. We also saw the lack of initial additional upside momentum in the US equity markets in the wake of stellar earnings from Intel and Apple recently as a sign that even the equity market is in need of evidence that the recovery is progressing.
Furthermore, a host of physical commodity markets have recently benefited from a combination of upbeat economic numbers and a lower Dollar. While the Dollar appears to be entrenched in a downtrend pattern that looks to at least partially underpin many physical commodity markets, we also suspect that upcoming economic data (especially the next US monthly unemployment report due out on November 6th) will reiterate the news that the economy continues to stumble. Some might suggest that markets like crude oil, natural gas, cocoa, sugar and the precious metals markets might be short-term overvalued.
Another issue that might be taking the legs out from under some physical commodity markets is the recent sprinkling of international rate hike threats. Even the US saw a call for sharply higher interest rates from a major weekly business publication, but that threat was quickly put down by a series of US Federal Reserve promises to hold US rates at low levels for a long period of time.
In the short term, we would expect some temporary counter-trend action in many physical commodity markets, especially since the markets are also likely to see some fresh news on the attempt to regulate or limit the amount of speculative interest. It would also seem like European over-the-counter regulation is due to come out at any time, and that might also prompt a near term washout in some commodity markets. In our opinion, the market is expecting to see some form of position limits in specific commodity markets, but once the “limits” fail to kill the upward bias in prices, the regulators are sure to ratchet up their efforts, which could logically result in a look at some of the “leveraged” ETFs that are based on physical commodities.
In the end we suspect that the US economy will regain its footing and that the markets will shake off the temporary adjustment in speculation. Furthermore, what the regulators won’t be able to do is discourage or kill a global wave of investment interest in commodities. During the Lincoln Administration, US Government decided to squelch speculation in the price of gold by enacting an anti speculation bill which then caused such significant upside volatility that the law had to be killed just 12 days after it was enacted. In the current environment the idea that the US government can “do anything” and knows more than the markets do in terms of what is considered “fair value” for specific commodities looks to provide a possible downside volatility event.
In the event of a washout in prices off macroeconomic events, regulatory changes or simple technical issues, we will continue to suggest that traders look for long term value in such markets as copper, natural gas, sugar, cattle, cotton, wheat, silver, palladium and corn.
