- 1997: Volume 6, No. 6 What's Hot and What's Not

Economics and currency troubles in southeast Asia triggered sharp moves in various financial markets. However, most other commodities were relatively subdued or plagued by mixed fundamental factors. The result is a short list of "hot" markets followed by some that are at best described as hot market "wanna-be's."

Hot Markets

Stock Market—The domino theory might not have been valid in southeast Asia during the Vietnam War era, but it certainly has been at work over the past six months. The currencies of Thailand, Singapore and Indonesia toppled one by one under an onslaught of speculative selling sparked by overvalued financial and real estate markets. Governments of those countries decried the speculative assault, but were powerless to shore up financial institutions that had become inflated by years of questionable finances fostered by lax regulatory and monetary policies. While the summer currency turmoil initially left U.S. markets unscathed, an assault in late October on the Hong Kong dollar triggered a meltdown in Hong Kong's Hang Seng stock index and a spillover crash in global stock markets including the U.S. Although the Dow suffered its biggest one-day decline (544 points), the percentage loss from the August high to October low was much less than the 1987 crash-16 percent versus 38 percent. In addition, U.S. stock indexes quickly recouped most of the loss as investors fearlessly jumped back into the market, triggering a record one-day Dow rally of 337 points.

Of course, the big question is whether the "correction" is over. Since the southeast Asian financial crisis is likely to drag on well into next year and might spill over into Latin and/or South America (Brazilian and South Korean currencies are under attack and pressure is likely to redevelop in Hong Kong), it's too early to assume the U.S. stock market is out of the woods. Also, the economic slowdown in Asia will weigh on the U.S. economy, and any problems south of the border could significantly hurt earnings of U.S. multinational companies. Despite the unparalleled resiliency of the U.S. stocks, we have a feeling the market has established a major top and will try the downside again.

T-Bonds—Bonds jumped sharply higher on flight-to-quality buying in response to the sharp drop in global stock markets, then stayed firm on the notion that the Federal Reserve Board won't raise interest rates for fear of triggering another decline in equities. However, we wouldn't classify this as a "hot" market since the fundamental story is mixed. If not for southeast Asian financial market concerns, bonds no doubt would be substantially lower due to consistent signs of a strong U.S. economy. At this point, it looks like a standoff and bonds are likely to keep moving inversely to stocks.

U.S. Dollar—The dollar took a drubbing verses the D-mark and Swiss franc but stayed strong against the Japanese yen due to the southeast Asian financial crisis. European currencies garnered safe haven support on ideas Europe would be least affected by problems in southeast Asia. However, like bonds, we'd hardly consider the currency markets "hot" despite recent high volatility and wouldn't be surprised to see a period of two-sided action as traders digest the situation. The only reasonably safe bet seems to be that the yen will stay under pressure since Japan has the most to lose from Asian economic turmoil.

Markets That Might Get Hot

Crude Oil—Any threat in the Middle East holds the potential to trigger a sharp rally in crude oil. However, prices stayed in a range despite saber rattling by Iraq due to the outlook for crude oil supplies to remain ample. Even if Iraq's expulsion of UN weapons inspectors results in suspension of the UN food-for-oil deal or sparks military action by the U.S., crude oil supplies aren't likely to be threatened. And Saudi Arabia, who was pushing to increase the OPEC production ceiling in order to regain market share, no doubt would quickly make up for any lost production. Because supplies are likely to remain ample, what might have become a "hot" market should remain in a sideways range.

Sugar—Lower Cuban and Russian crops plus ongoing El Niño concerns kept this market in an uptrend. However, prices have the potential to make a big move to the downside due to a massive fund long position. Any negative turn in the technicals could trigger a steep fund sponsored washout, even though the fundamental story is bullish for the long-term. Traders should be on the lookout for any sign of a chart breakdown since the funds might make a run for the exit.

Live Cattle—This market is a sleeper of sorts. Even though beef supplies over the next few months are likely to be ample due to big on feed numbers and heavy slaughter weights, placements of cattle on feed appear to have peaked setting the stage for higher prices down the road. Traders should be on the lookout for the cattle market to put in a bottom and trend higher late this year.

Soybeans—El Niño concerns and strong demand have already triggered an impressive contra-seasonal rally in soybeans, led mainly by fund buying. Unfortunately, the fundamental story is not clear cut bullish. For one thing, demand is "front loaded" and is likely to tail off as the season progresses, particularly due to the southeast Asian financial crisis. Also, despite planting delays in key southern Brazil growing areas due to El Niño generated rain, another record South American crop is still likely. Finally, even though U.S. farmers have been slow to let go of the just harvested record U.S. crop, carry-over supplies are projected to almost double to an ample 225 million bushels. For soybeans to sustain a major bull move and become a "hot" market would require significant Brazilian planting delays or a drought later in the growing season, neither of which appear very likely; the latest forecast calls for a period of favorable planting weather while El Niño favors above normal precipitation over the next several months. We have a feeling this market will go lower before it goes higher.

Silver—This market fell sharply in October but appears to have entered another bull phase this month supported by tight deliverable supplies which set the stage for a further upward squeeze on prices. Although silver stocks aren't always a good indicator of demand (i.e., at times the big players move them around or lease them out making supplies appear tight), it might be enough to trigger a rally to the 600 level.