HELPING FUTURES TRADERS SINCE 1997

Crude oil fell sharply in NY trade on Wednesday after Germany was unable to find buyers for 35% of a ten year bond auction. The result of the bond auction took many by surprise. Market observers paid special attention to the comparison of yields between the German 10 year and the US 10 year note. As interest rates continue to edge higher in the Euro Zone, the likelihood of a credit event in Europe gains greater probability. Previously, German bonds were thought to be a safe haven from the crisis. Without forceful action by the ECB, deleveraging will only increase and economies will contract to the point of recession, not a positive for crude oil and its products. Another negative was a second quarterly drop in demand for durable goods. Selling pressure moderated though when the Department of Energy reported that stocks for the latest reporting week fell by a greater than expected amount. Crude trading was mostly correlated with declines in stock markets and increasing concern for the economic health of the Euro zone. So far, the solution that is being offer to the zone by the ECB is austerity instead of a program which combines fiscal responsibility and growth. Another negative for the crude oil market was a reading of 48 for the Chinese purchasing managers’ index indicating economic contraction in that country. Foe the latest reporting week, crude stocks fell by 6.22 million barrels to 330.8 million barrels. This is the lowest level since January 2010. Stockpiles in Cushing, Oklahoma fell by 13,000 barrels to 32 million barrels. Gas inventories were higher by 448 million barrels. Distillate stocks were lower by 7770,000 barrels. Consumption fell by 3.8% to 18.6 million barrels, a negative demand metric. January crude at a discount to deferred months is a sign of near term economic weakness.

As for the charts… without clarity in Europe, supply/demand considerations are tilted in favor of demand and lower prices. Again crude is the strongest of the three charts.

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METALS

Gold was lower over the past five sessions based on dollar strength. Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010. This action has reinforced the dollar as the world’s preeminent reserve currency. Forty seven non US banks have balances in excess of one billion dollars at the Fed. At the end of 2010, just 22 banks had such balances. This action is a flight to relative safety and a currency flow away from the Euro zone. Oddly enough, since S+P cut the credit rating of the US, the dollar has actually appreciated by 7.2%. Even with a lack of political leadership in the US and a breakdown and ultimately a failure by the super-committee to agree to spending cuts and short term interest rates at basically zero, the perceived risks to the Euro zone have pushed currency flows to the dollar. With a stronger dollar, it takes fewer dollars to buy an ounce of gold. Previously, the Swiss Franc and the Yen had been currency havens in times of turmoil but those central banks have intervened, sometimes aggressively, whenever their currencies have appreciated. Also, weakness in key commodity markets such as grains has been expressed by lower prices for gold. There’s also the belief that an eventual rescue package for the Euro zone will involve the International Monetary Fund and that they will sell gold to create liquidity to join the ECB in providing a reserve facility that guarantees all aggregate Euro debt. It can’t be underestimated that there’s a heightened regulatory emphasis being placed on financial institutions globally by the Bank for International Settlements to hold assets with a high degree of liquidity. That asset is the dollar. Money flow for both gold and silver remain negative.

Coffee has been suffering its biggest price decline in over three years. Some market observers believe that decline may be in the process of ending as weather damage in Columbia and Indonesia begins to take its toll on inventory. Inventories on balance may decline for a fourth consecutive year. Some market watchers believe that prices may increase by 15% by the end of Q1 2012. Coffee retailers have recently cut prices by as much as 6% after 4 consecutive increases totally approximately 38%. Global production is expected to drop about 4% to 127.4 million bags. Traders also expect declines in production from India, Indonesia and Vietnam. It’s also expected that drier than normal weather will cut production in Brazil. After the increase in the first quarter of the new year, prices are projected to fall back from March to May.

Sugar output in Brazil’s Center South which is the world’s largest growing region will jump to record levels next year as crops recover from drought conditions of past years. Sugar has dropped 9 percent this month on the idea that India, the world’s second largest producer, will allow an increase in exports.

A stronger dollar and increased macro considerations pressured prices for grains. A weaker Chinese Purchasing Manager’s Index, the lowest reading in three years, and an undersubscribed German bond auction synergized to pressure prices across the complex. A “risk off” mentality is another negative. Soybeans flirted with lows seen last year at this time. Actual export sales are lagging behind US Department of Agriculture estimates. As long as the dollar remains strong, the competitive edge of US grains for export diminishes.

Chuck Kespert from NY/NY

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.