As the global economy continues to slow, investors throughout the world are increasingly seeking the U.S. Dollar, U.S. government securities, and U.S. equities as safe haven investment alternatives to many other global investment options.
Unfortunately, a slowing global economy weighs on the commodity sector, which becomes highly personal for those of us in agriculture.
The U.S. and global business cycle is extended. The U.S. is now in its longest business cycle in history. The likely plan is to extend the current U.S. and global business cycle for multiple years into the future.
What does this mean for markets?
U.S. Dollar. The U.S. Dollar is void of any significant global competition, so the dollar will remain sideways to up with corrections along the way, especially during periods of slow global growth and evolving global economic uncertainties.
A slowly strengthening U.S. dollar tends to limit U.S. exports; therefore, U.S. businesses should be given additional tax relief to enhance their global competitive position and expand business opportunities.
U.S. Interest Rates. The U.S. Federal Reserve lost the battle to continue raising the Fed Funds rate, due to a dangerously slowing global economy. This has two key implications: first, if the Fed could have continued raising rates another one to two percentage points, this would have provided much needed relief from low interest rates to the fixed income sector. Second, this would have allowed the Fed to continue preparing for the next economic downturn.
What does this mean to the investment community? Going forward, the private interest rate will be increasingly decoupled from the public rate or U.S. Treasuries rate.
- Fed Rate. The U.S. Federal Reserve is on course to lower the Fed Rate from today’s 2.25 percent, by possibly: another ¼ percent to ½ percent in September 2019, or another ¼ percent before the end of 2019. Also likely is another ½ percent or more in 2020.
- Today the world is awash in at least $14 trillion in negative rate bonds, mostly government. This was totally unthinkable only a few years ago.
- When will interest rates start rising again? Public debt or government debt will rise with the next major wave of inflation, which I would guess emerges in 2021. Private debt interest rates from financial institutions will rise with their risks and/or their ability to pass increases along to their borrowers.
U.S. Equities. The U.S. equity market is the beneficiary of a world awash in money with limited investment options, due to a slowing global economy and limited global fixed investment options.
- What is the outlook for U.S. equities? Speaking generally, one outlook would be for many U.S. equities to consolidate, possibly into next year, with stronger equities and indexes potentially moving sideways to up.
U.S. Commodities. Elevated anemic global growth and burdensome supplies relative to demand are limiting this sector’s ability to move from a bear market to a bull market. This will change but will remain a near-term problem for 2019 and maybe 2020 unless supply disruptions emerge.
Final Thought. Given the previous discussion, we knew 2019 was going to be a challenging year for currency, bond, equity, and commodity markets globally. As we have discussed before, global markets are rebalancing as they ready for another major period of stimulus-driven growth from the world’s financial engineers (governments, central bankers, etc.). The next major period of significant driven U.S. and global growth will start emerging in 2020 and likely finish an economic and monetary base building process in 2021.
Market Outlook for the Week Beginning September 2, 2019
Soybeans. Larger Price Trend Remains Down. The August 30, 2019 close was $8.69 per bushel, up 12.50 cents on the week or up 1.46 percent. Closing below $8.50 per bushel would open the possibility of a revisit to the $8.00 per bushel area. Soybean prices likely remain in the 2019 trading range of $7.95 to $9.39 per bushel, Charts B10 to B13.
Long Grain Rice. Near Term, Price Resumes Bullish Path. August 30, 2019 November futures close $11.96 per cwt. or $5.38 per bushel. Acreage, yield, and production remain unknowns and supportive of price, Charts B18 to B20.
Corn. Larger Price Trend Remains Bearish. Corn closed the week of August 26, 2019 at $3.70 per bushel, up 2 cents per bushel for the week or up 0.54 percent. Expect more price weakness than strength until fundamentals are more supportive of higher prices. If corn ends the week of September 2, 2019 above $3.78 per bushel, I will consider a near-term bottom possibly in place, Charts B14 to B17.
Wheat. Near-Term Price Trend Remains Down. Wheat closed the week of August 26, 2019 at $4.63 per bushel, down 15.25 cents on the week or down 3.19 percent. Wheat prices need to end the week of September 2, 2019 above key resistance of $5.08 per bushel for me to favor additional price strength, Charts B25 to B28.
Cotton. Price weakness remains problematic. The August 30, 2019 close 58.83 cents per pound, up 0.62 cents on the week or 1.07 percent. Cotton prices need to end the week of September 2, 2019 holding above 55 cents per pound or serious price weakness could emerge, Charts B21 to B24.
Interest Rates. 10-Year U.S. Treasury Yield: August 30, 2019 close 1.50, down .02 on the week or down 1.32 percent, Charts A1 to A4. We see little support for the 10-Year Treasury Yield until the previous low made in 2016 is reached at 1.37, and, given time, further downside to 1.00 or lower now becomes a real possibility. The November 2018 high was 3.24 percent.
U.S. Dollar Index. The U.S. Dollar Index increased 1.36 percent the week of August 26, 2019, up 1.33 to close at 98.86. Dollar Bulls see global money flow into the U.S. increasing as a safe heaven. Dollar Bears are anticipating lowering of the Fed Rate at the September Federal Reserve FOMC meeting and providing the dollar with some potential weakness, Charts A5 to A8.
Much of the world’s debt is dominated in dollars, especially frontier countries and emerging markets. Thus, a lower dollar is supportive of U.S. economic activity and global economies in general. A lower dollar may also be supportive of a number of building global asset bubbles.
$WTIC Light Crude Oil. Prices Trading in a Range. August 30, 2019 close $55.10 per barrel, up $0.93 per barrel or up 1.72 percent for the week. Present near-term trading range $52.03 to $58.12 per barrel, Charts B6 to B9.
Geopolitical uncertainties, political dynamics, coupled with possible supply disruptions, make this market unpredictable for the world’s most talented analysts, so, be highly respectful of price action. Do not try to outthink this market, just follow the price action.
$CRB Index. Sideways with Downside Bias. August 30, 2019 close 170.36, down 1.75 on the week or down 1.04%. This index needs to close above 183 to regain a bullish bias. The index remains extremely weak.
Why is the &CRB Index Weak? First, global deflationary forces are limiting global growth and demand for commodities; second, many of the world’s commodities remain surplus burdened; third, the ongoing US-Global Fiscal, Monetary, and Trade Policy realignment is presently limiting commodity demand. Therefore, limitations remain to this index’s near-term upside, unless oil prices regain an upward advance, Charts B1 to B5.
No Crystal Ball
Since no one has a crystal ball or knows the future, always consult an investment professional or professionals before making investment decisions. The world’s most talented speculators, investors and money managers are challenged by today’s global business environment.
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