Crude oil touches nearly every part of our lives throughout the day. The more we do, the more we use. This is what makes crude oil such a valuable economic forecasting tool. This week, we’ll look at the big picture in crude oil using technical, fundamental and spread data to explain what the market is telling us as we head into the summer months.
There are times in any endeavor when the stars align and the proper course of action is as clear as a bell. We’ve all had our moments when even we knew we, “were on a roll.” However, most of life’s endeavors and their eventual successes come simply from the honest trudge of hard work and dedication to a specific task. This explains the late 2015 early 2016 success as many of the commodity market were displaying classic commercial trader group clues which we discussed frequently in our Commitment of Traders analysis. This led to catching several of the market rallies like the metals, energies and grains. However, as these moves have disconnected over the last month or so, the next set of predictions becomes much more difficult. This week, we’ll look at the issue of profitable trading via mechanical programs while using the interest rate sector as a barometer for the general markets’ confusion as the global rate picture remains one of the biggest variables.
We’ve been tracking the interest rate complex even more closely since October when we saw the commercial traders beginning to place their bets ahead the Federal Reserve Board’s (FRB) December meeting and while we’d like to take credit for the predominantly correct calls in the interest rate sector through 2015, we really have to chalk it up to knowing who to follow. The commercial traders have done a great job of anticipating both the FRB’s actions and the market’s reactions. Join us as we determine how their recent actions have affected the bond markets and what the spread movement in this market sector could mean to the broader economy going forward.
Our theme continues, the Treasury Bond market spreads will set the tone for 2016. We wrote here at Equities.com on January 5th that, “US Bond Little Changed in Spite of Chaos.” The chaos has certainly continued with the S&P 500 off nearly 5% since then and China’s issues are anything but settled. It’s not very often that the workings of the global economy can be examined in real-time through the lens of a daily chart. We think the congestion in the U.S. interest rate markets is providing us with this rare opportunity as we speak and that its forecasting abilities could set the tone for the rest of the year.
Global protein demand has been one of the primary drivers of grain prices as meat consumption over the last 15 years has increased by more than 13% in the same period. Soybean meal is a primary ingredient in protein production, primarily as feed but also as a meat substitute for people. As a result of this demand, soybean meal prices have gotten out of whack compared to its brother, soybean oil. This week will be a chart intensive study on the impact a slowing global economy will have on soybean meal’s multi-year trend. Finally, we’ll address some of the issues associated with trading the soybean crush spread or simply, the bean meal versus bean oil spread.
The crude oil sell off has been vicious both in its depth and its speed. In fact, the market has been so negative that we last wrote about it this past June 11th. The market had provided a bit of a rally in the face a growing and overwhelmingly bearish commercial trader position which led to our headline, “Sell Crude at $65 Per Barrel.” Our primary focus is based on the Commodity Futures Trading Commission’s weekly Commitments of Traders report. We use the actions of the commercial traders to help us determine value in the commodity markets like the buying opportunity in gold that we published in Futures Magazine on august 7th. Bringing this back to crude oil, here are three charts that show the crude oil market is nearing a bottom.
Obviously, China has dominated the news this week. There has been rampant speculation regarding the, “first roach” philosophy which suggests there’s much more to come in the way of Chinese Yuan/Renmimbi devaluation. I’m not very good at projecting political developments along an investment front. However, I do know enough to hunt down the information no one is talking about amid the hyperbole. What follows are a few actionable ideas based on the historical context of recent US economic developments and the transference of these principles to the Chinese economy’s cyclicality.
Currency destruction usually usually places a sovereign national bank at the pointed ends of its citizens’ collective swords. The country’s citizens watch helplessly as they wake up each morning less financially secure than they went to bed the previous night. This general sentiment is why the Japanese Prime Minister, Shinzo Abe’s popularity is counter intuitive. His political platform has been based on the public destruction of the Japanese Yen in a last ditch effort to end 25+ years of secular deflation. As a result of Shinzo Abe’s platform and with the help of the Bank of Japan’s Governor Harihuko Kuroda, they’ve driven the Yen down approximately 20% versus the U.S. Dollar in the last year. Commercial traders are making a strong case that we may be nearing the end of this decline.
Two weeks ago we detailed the issues facing the Fed’s seeming inability to get the notion of higher rates going forward through the thick skulls of the interest rate market’s participants. Specifically, we referred to Janet Yellen’s approach at the International Monetary Fund’s meeting in Washington two weeks ago. It appears that her primary purpose was to make clear to world leaders what data she would use in determining when the US would raise interest rates. The new era of Fed transparency left the attendees in good spirits and high hopes that they were all on the same page. Until….
We began this week by revisiting the sugar futures market. We started talking about it a couple of weeks ago for Equities.com in, “Time to Sweeten on Sugar.” We updated this outlook Monday for TraderPlanet.com. This trade finally triggered on Thursday and currently sits above the $.1310 level that we believe will induce some speculative short covering. See, “Sugar Prices on the Decline.”