July 06, 2012

Week In Review: Corn & Soybeans Near Record Highs, Gold Falls But QE3 More Likely, NatGas Hits $3

Details

We examine the latest developments in commodity markets and the week's performance.

It was a relatively stable week for most commodities, with most prices fluctuating less than 2 percent in the period. However, the grain complex surged again amid weather-related supply concerns.

The S &P 500 fell nearly 1 percent on the week and is now up 7.4 percent year-to-date.

Macroeconomic Highlights

The holiday-shortened trading week was quite heavy in terms of economic data. Early in the period, ISM said that its U.S. manufacturing index slipped below the 50 level (which separates contraction from expansion) for the first time since 2009. The gauge dropped from 53.5 to 49.7 in June.

Meanwhile, across the Atlantic, unemployment in the eurozone rose from 11 percent to 11.1 percent, a new euro-era record. The region's PMI Manufacturing gauge rose from 44.8 to 45.1, but remains firmly in contraction territory.

In Asia, China's Manufacturing PMI fell from 50.4 to 50.2—the lowest level in seven months.

Then on Friday, the Bureau of Labor Statistics released disappointing U.S. employment numbers for June. Nonfarm payrolls expanded by only 80K in the month, below the 100K that was anticipated. Private payrolls grew by 84K, below the 106K anticipated.

The unemployment remained steady at 8.2 percent, as analysts had expected.

On the whole, this week’s data from around the world pointed to feeble economic growth, though none of the releases deviated substantially from expectations. The tepid pace of expansion has fueled speculation that monetary authorities will step in to stimulate growth.

Indeed, this week we saw such action. On Thursday, the People’s Bank of China unexpectedly cut its benchmark interest rates for the second time in two months. The one-year lending rate was cut by 31 basis points to 6 percent, and the deposit rate was cut by 25 basis points to 3 percent.

The rate cut comes ahead of a host of Chinese economic data next week, including figures on imports, exports, consumer prices, industrial production and second-quarter GDP. China's economy is expected to have only grown by 7.8 percent year-over-year in the second quarter, the slowest rate since the first quarter of 2009.

While China's rate move was unexpected, the European Central Bank also cut rates in a move that was already anticipated. The benchmark overnight interest rate was slashed by 25 basis points to a record-low 0.75 percent to aid the region's economic growth, which has suffered amid the credit crisis.

Meanwhile, the Bank of England left its benchmark rate unchanged at 0.5 percent, but expanded its quantitative easing program by 50 billion pounds, as expected.

After disappointing figures on manufacturing and employment, traders will now closely eye comments from Fed officials to see if the U.S. central bank joins its counterparts in easing policy further. Bulls hope that the next meeting on Aug.1 contains an announcement of QE3.

Commodity Wrap

• It was deja-vu in grain markets, as prices ripped higher once again. Hot, dry weather in the Midwest continues to take its toll on U.S. crops. On Monday, the USDA's Crop Progress Report showed that only 48 percent of the corn crop was in good-to-excellent condition, down from 56 percent the week before. Only 45 percent of the soybeans crop was in good-to-excellent condition, down from 53 percent.
  
  Next week’s Crop Progress Report will obviously be important, but traders will be especially keen to see how much the department adjusts its yield forecasts in its Crop Production Report on Wednesday.
  
  In terms of price action, corn, soybeans and wheat have made parabolic moves. Corn and soybeans are nearing their respective record highs of $8/bushel and $16.66. A pullback is overdue, but given bullish fundamentals and next week’s heavy news flow, the only certainty is volatility.
  
  We continue to favor wheat. The grain hit initial resistance near $8.25, but a break exposes a clear path toward $9.

CORN


SOYBEANS

WHEAT

• Natural gas rose by almost 2 percent this week, a relatively insignificant move for the volatile commodity. But prices did briefly pass the $3/mmbtu mark for the first time since January on Friday.
  
  Like grains, gas has benefited from scorching temperatures across the United States. Those weather conditions are expected to reverse in the 6- to 10-day period, as cooler temps move in, but the 8- to 14-day outlook shows widespread heat spreading back across the country.
  
  We would be wary of chasing natural gas at these levels and would opt to stay on the sidelines, awaiting lower levels to buy.

NATURAL GAS

• Crude oil prices finished the week little changed after rallying initially on the back of supply concerns. As we wrote in this week’s Crude Oil Report, Iranian exports may fall to half their normal levels this month, according to sources. The country is likely to ship 1.1 mmbbl/d of crude in July, down from the 2.2 mmbbl/d average of last year.
  
  In Norway, a strike by oil workers threatened to shut 1.2 mmbbl/d or more of the country’s production. But the Norwegian government was expected to intervene, preventing any significant disruption to output or exports.
  
  As we expected last week, Brent prices eclipsed $100—reaching as high as $102—before falling back on profit-taking. We see this price action as typical within a bottoming process. Prices may continue higher to the next level of resistance at $110 in the coming weeks and months.

BRENT

WTI

• The seemingly never-ending seesaw in gold prices continued this week. In this week’s Precious Metals Monitor, we wrote that we expected gold to break out of its range to the upside imminently, but that call was clearly premature.
  
  A rally in the U.S. dollar, which sent the currency back near two-year highs, sapped investor interest in gold. However, we still see the yellow metal breaking out to the upside eventually.
  
  Indeed, the odds of QE3 have certainly increased this week following weak economic data in the U.S.
  
  For now, gold remains locked in its short-term trading range of between $1550 and $1630 (or $1520 and $1641 more broadly).
  
  

GOLD


SILVER


PLATINUM

PALLADIUM

• Copper was at the bottom of the pack in terms of performance this week, as traders braced themselves for a deluge of Chinese economic data next week. As we wrote earlier in this report, figures on imports, exports, consumer prices, industrial production and second-quarter GDP are due next week.
  
  If next week’s China data disappoint significantly, copper could retest what has become key support at $3.25/lb, but we expect the level to hold regardless, given the country’s willingness to cut interest rates aggressively to spur growth.
  
  Data that are neutral-to-positive may spur prices to break through resistance at $3.50, exposing a path to $4 later this year.
  
  

COPPER