- 1998: Volume 7, No. 1 What's Hot and What's Not

The Clinton sex scandal added a new dimension to trading and temporarily replaced economic woes in southeast Asia as the major market mover, triggering a jump in financial market volatility. Unfortunately, the added uncertainty has made price trends in many markets anything but clear. However, various markets have made big (if unpredictable) price moves, falling into the "hot" category.

Financials

T-bonds: After a sustained bull run on safe haven buying due to the southeast Asian financial crisis and long hedging triggered by a surge in mortgage refinancing, the bond market fell sharply in sympathy with a crash in the U.S. dollar on nervousness over the Clinton sex scandal. It remains to be seen whether the bullish fundamental story in bonds has changed all that much. It's too early to tell if Asia is on the road to recovery or if the Clinton Administration may be unable to muster the Congressional votes for further U.S. aid to Asia. This sets the stage for continued financial problems which in turn could trigger further safe haven buying of bonds. In addition, inflation should remain subdued and the U.S. economy is likely to slow significantly due to Asia keeping Fed monetary policy on hold and leaving the door open for a possible rate cut down the road. Because of that, bonds are likely to remain in a major uptrend.

Stock Market: In spite of several major moves over the past six months, the S&P stock index has basically gone nowhere reflecting uncertainty over the U.S. economy, Asia, corporate earnings and, lately, the Clinton sex scandal. From a trading standpoint the protracted sideways action has either formed a base to support another major up leg or is a massive top formation. We have a feeling the latter is the case since it's tough to justify lofty stock prices amid the outlook for a slower economy. Even if stocks managed to break out to a new high, we'd be on the lookout for a rally failure.

U.S. Dollar: The dollar remained "hot," falling sharply over the past two weeks and erasing more than half of the bull move that began last November. The bearish excuse was nervousness over the Clinton sex scandal, but the real culprit was overly bullish dollar sentiment and a massive speculative long position built over the past several months in response to the overwhelming bullish dollar fundamentals which still remain in force. Concerns over a weakened Clinton Administration and the possibility that he might leave office may keep the dollar in a two-sided phase over the near-term, but the long-term bullish dollar fundamentals of a solid U.S. economy, balanced budget, low inflation and steady monetary policy are likely to keep it moving higher over the long-term.

Commodities

Petroleum Complex: Crude oil, unleaded gasoline and heating oil fell sharply when it became apparent that supplies would remain ample despite Middle East tensions tied to the Iraq-U.N. weapons inspections dispute. Heating oil was also pressured by the mild winter across the northern Midwest as a result of El Niño. However, the down move probably ended with the recent short covering rally and prices are likely to level off into a trading range.

Silver: This market has been all over the map. Prices rallied sharply several times due to tight deliverable supplies. They also fell sharply on rumors that exchange warehouse stocks were being moved to non-reporting positions to make supplies appear tight and a lawsuit claiming price manipulation has been filed in New York. Because of the supply uncertainty we'd expect the whipsaw action to continue.

Gold: After a prolonged downtrend, gold showed signs of life jumping higher in response to the steep drop in the U.S. dollar. However, much of the support is coming from fund short covering, not a bullish shift in the fundamentals. In fact, the outlook remains bearish since inflation should remain under control and central banks are likely to do more selling this year. Because of that, even though this market has heated up, the main downtrend is likelyto remain intact.

Sugar: Fund liquidation of a massive long position finally kicked in resulting in a steep decline. The long-term fundamental story remains arguably bullish due to the outlook for deficit crop production this season despite slower demand in Asia. However, that won't matter for awhile if the funds keep shedding longs.

Markets That Might Get Hot

Soybeans: Prices have been weak due to the outlook for a record South American crop. However, demand is so strong, despite economic troubles in Asia, that weather concerns should remain a major factor. Since traders always seem to expect the worst and there's talk of weather problems in the U.S. this year due to El Niño or its cousin La Nina (colder than normal water in the equatorial Pacific that is linked to drought in the U.S.), there's the potential for soybean prices to move higher once Brazilian harvest pressure is out of the way and the U.S. planting season approaches. Certainly any crop problems in South America or indications that a La Nina weather pattern might develop could send this market soaring.

Cocoa: It's too early to tell whether current dryness in cocoa regions of west Africa is merely part of the seasonal weather pattern or the start of an El Niño induced drought. However, since markets usually discount the worst case scenario, we wouldn't be surprised to see cocoa prices move higher to establish a weather premium.

Cotton: Although near-term cotton supplies are adequate due to last year's big world crop, there's the potential for a sustained rally due to a big speculative short position (mainly held by the funds), potential for stronger than expected demand (in spite of the Asian slowdown) and outlook for reduced U.S. and global cotton acreage this spring. The nearby futures could easily recover to the 7,000 level.