May 8, 2018
Currency, interest rate, equity and commodity markets remain in a multi-month period of realigning with periods of risk-on and risk-off and choppy chart activity. Markets are mixed.
Bullish – Corn, Cotton, Wheat and Oil
Price Firmness – Dow, S&P 500, and NASDAQ Composite
Price Momentum Waning – Rice and Soybeans
Bullish Trend – Dollar
Defining a Trading Range – 10-Year U.S. Treasury Yield Ongoing Global Market Realignment is the set-up for a pickup in global growth, commodity demand, inflationary forces and equity price strength in the second half of 2018.
Fed Fund Rate Increase: The Fed is highly likely to raise their fed fund rate to 2 percent in June, to 2.25 percent in September, and if economic growth and inflationary pressures are sustained through year’s end, a rise in the fed fund rate to 2.5 percent in December. The Fed raised their fed funds rate one time in 2014, 2015 and 2016; three times in 2017 and likely three times in 2018 and possibly a fourth time.
Retirement Plans at Risk. The Fed has no option but to start a process of gradually moving toward normalized interest rates for shorter and longer duration interest rates. Holding rates artificially low or at historic lows guarantees an accelerated move toward an even larger pension fund crisis.
Balancing the Yield Curve. The Fed is into a multi-year process of raising their fed funds rate and reducing their balance sheet, which will contribute to a slow and gradual move toward rate normalization for short and longer term interest rates. There’s much discussion about a flattening yield curve where the spread between the short end of the yield curve or short duration interest rates and the long end of the yield curve or longer duration interest rates decreases and sometimes evens flattens or inverts. Domestic and global growth, developing and emerging market’s ability to manage dollar denomination debt obligations, etc., will define the Fed’s intervention activities as it manages the structure of the yield curve. The Fed in part will use the Fed Funds rate to define short term rates and balance sheet reduction to regulation longer term rates.
The Week Ahead May 7, 2018
10-Year US Treasury Yield: The 10-year treasury yield likely continues correcting some of its recent gains this week. On April 25, 2018, the 10-year US Treasury Yield broke the 3 percent barrier. For a multi-month period, this market likely trades in an interest rate range of 3.3 on the upside and the downside to 2.66. (Charts A1-A4)
U.S. Dollar Index: With the dollar index presently at 92.4 (Charts A5-A8) and off its low of 88.15, the index is due some minor correction or consolidation. Beyond any near term corrective activity, the dollar has entered a possible one- to two- or more months of more strength than weakness with an upside target of 96 to 98 before returning to dominate downside trend.
S&P 500: Likely a week with more positive than negative price action. Price moving through and holding 2720 would be near term bullish and prices falling through 2560 would be near term high-anxiety, but probably a certain degree of market cleansing. The trend in this market remains up, but one should anticipate an additional one to three or more months of potentially stronger corrective activity, so exercise caution and at least consider the potential of a 20 percent correction from the high. Just let price action provide guidance. Note a collection of Equity Charts A14 to A28.
NASDAQ Composite Index: This high visibility market where speculative interest, high frequency traders, passive investors, etc. dominate price action absorbs its energy and leadership with the likes of Facebook, Apple, Google, Amazon, Netflix, Microsoft, etc. These high tech giants will continue experiencing on-again and off-again headwinds on a number of different fronts extending beyond consumer privacy rights. Just let price action provide guidance and be an active risk manager.
$WTIC Light Crude Oil: This is a market that appears to be in Breakout Mode.
Some would suggest that President Trump is positioning to take a hard stance against the current Iranian nuclear deal and exit the agreement as early as next Saturday, May 12, 2018, and re-impose sanctions on Iran, which in theory would lead to a major impact on open market Iranian oil exports. A continuation of the oil breakout will be more positive than negative for the commodity sector as speculative and value investors scan the commodity complex for speculative and value investments. An interesting array of factors, from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties keep this market at elevated levels and they do not appear to be losing their influence anytime soon.
CRB Index: Ongoing global stimulus driven growth, coupled with geopolitical concerns, appears to be near term supportive of the commodity sector. With ongoing global equities realigning with global currency, bond and commodity markets, near term the index needs to push through resistance at 205 (currently at 203); the CRB Index needs to hold near term support at 195, and longer term support at 180, otherwise major, across- the-board commodity weakness could emerge. Ag Sector and Trade: The lack of Chinese respect for intellectual property rights and rule of law, and their aggressively building authoritarian leadership, show a real reason for concern and the need for major diplomatic trade negotiations. Pragmatically, the U.S. agricultural sector must be concerned about near term market negative price impacts of ongoing trade positioning with grain producers, especially the soybean sector at the top of the list.
BEIJING (Reuters) - China state media sees positives in trade talks with U.S. by Reuters Staff
“Chinese state media struck an optimistic note on trade talks between Chinese and U.S. officials after U.S. President Donald Trump threatened to impose tariffs on up to $150 billion in Chinese goods over allegations of intellectual property theft. The English-language China Daily saw a “positive development” in the two days of talks in an agreement to establish a mechanism to keep the dialogue open, despite “big differences,” as part of an effort to resolve trade disputes. The newspaper said the biggest achievement was “the constructive agreement between Beijing and Washington to keep discussing contentious trade issues instead of continuing the two-way barrage of tariffs, which pretty much brought the two countries to the brink of a trade war.”
The People’s Daily said the talks “laid solid foundation for further talks on trade and economic cooperation, and for ultimately achieving benefits (to both countries) and win-win results.”
Rice, Grain and Cotton Charts B1-B28 in Chart Book
Soybeans: Caution is advised. The week of May 7, 2018, soybean prices first need to hold $10.15 per bushel, otherwise this market could be facing some serious weakness. Ending the week above $10.80 and holding will be near term bullish. Reality is, this market has spent almost three months moving sideways without a bullish or bearish commitment, so we sit back and watch the price action.
Corn: If corn prices can hold $3.95 per bushel, the price has potential to move to its June, 2016 high of $4.39 per bushel and a possible secondary target of $4.83 per bushel.
Wheat: If price holds above $5.18 per bushel, an advance to $5.83 per bushel is possible.
Long Grain Rice: Caution is advised. If U.S. long grain rice producers can limit production to the March 29, 2018, USDA Planting Intentions Report, this should be a reasonably good year for our long grain rice producers. Planting for the present global long grain rice market demand is very important to the economic health of the U.S. long grain rice sector in 2018.
Cotton: Cotton prices remain strong with the objective of moving to and possibly through the 89-cent area.
Interesting Read: Argentina pushes interest rates to 40% to defend the peso
“Argentina’s central bank raised the country’s interest rates to 40% on Friday, the third hefty increase in eight days in a continuing attempt to defend the slumping peso and put a lid on soar-away inflation.
“The peso has suffered with foreign investors moving their money from emerging market currencies into the dollar to benefit from the recent rate rises by the US Federal Reserve. However, in recent days, nervous Argentinians have also been cashing in their pesos for dollars.”
“The country is in the middle of a pro-market economic reform programme under its president, Mauricio Macri, and after the latest rate rise the Treasury minister, Nicolás Dujovne, stood by the government’s plan to cut inflation to 15% this year.” Read more
Worth Noting: Federal Reserve FOMC Statement
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected].
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