- 1999: Volume 8, No. 4 What's Hot and What's Not

Some commodity markets settled into the summer doldrums but quite a few stayed in major trends. This is the time of year when agricultural markets often turn volatile and corn, cotton and soy markets fell sharply due to favorable weather and the outlook for bumper crops. Other strong moves occurred in the U.S. dollar, copper, gold, lean hogs and the energy complex. And the bull move in stocks appears unstoppable.

What's Hot

Corn, Cotton and Soybeans—Favorable growing weather across most of the U.S. triggered sharp declines in corn, soybeans and cotton. There have been the usual assortment of minor crop concerns, conditions are never perfect, and parts of the Midwest are getting a bit dry as of this publication, but it looks like bumper crops are on the way. As things stand now, the corn crop may approach a near record 10 billion bushels, soybean production is projected at a record 2.95 billion bushels, and cotton output is expected to recover sharply from last year to around 18.7 million bales. Add to that sluggish soy and grain exports due to struggling Asian economies, plus big carry-in stocks, and supplies should remain ample through next season. Even strong export bookings in cotton aren't likely to prevent prices from staying weak since next season's carry-over supplies are forecast to nearly double. Barring some adverse late season weather (heat and dryness or an early frost in the case of corn and soybeans), prices are likely to stay at low levels. Demand will most certainly pick up over the long-term, but it will probably take South American crop troubles to trigger a sustained rally.

Copper—The copper market's strong surge began in early June on technically based fund short covering, then accelerated in early July in response to mine closures (caused by low prices). There was also the bullish notion of improved demand from a turnaround in the global economy. On the other side of the coin (you knew there had to be one), current warehouse stocks are huge, meaning supplies might remain burdensome even with reduced mine production; also other producers might increase output due to the recent sharp price rise. In addition, it remains to be seen whether economic recoveries in Asia and Japan will boost demand since growth remains stagnant. Also Europe's economy is weak and the U.S. appears to be slowing a bit. Basically, since prices have jumped about 30 percent in less than two months, and there's no sign that supplies have peaked, we'd be careful about jumping on the bull bandwagon.

Petroleum Complex—Crude oil and gasoline continued to trend higher, dragging heating oil along, discounting recent OPEC production cuts and expectations of improved demand over the remainder of the year. Support has also come from a larger than usual number of refinery snags this year, particularly in California, that have driven gasoline prices sharply higher. On top of that, gasoline demand is bigger than expected due to the strong economy and favorable travel weather thus far this summer. However, crude has risen enough that OPEC officials have begun dropping hints that production cuts could be relaxed if prices get too high, possibly at the September OPEC meeting. In addition, that gives quota cheats like Venezuela and Iran a green light to overproduce. Because of that, we have a feeling the up move will level off soon.

Lean Hogs and Pork Bellies—Hog and belly prices collapsed in response to the late June pig crop report that showed larger than expected supplies. Basically, producers just haven't liquidated enough hogs. On top of that stocks of frozen pork are at a record level, meaning there will be abundant supplies through year end. Lately there's been talk that prices have gotten low enough, but we doubt that's the case and would expect further declines as producers cut their losses by sending more hogs to market.

Gold—Gold has been in a steep downtrend in anticipation of sales by the U.K. (a July 6th auction was not well received) and other European and South American central banks. Of course, this market has been hamstrung for quite some time by the lack of inflation and the rising U.S. dollar. And since inflation is likely to remain low and the dollar strong, further weakness in gold is favored. The only plus is that the funds hold a massive net short position which increases the potential for a sharp corrective rally at some point.

U.S. Dollar—The outlook for higher U.S. interest rates and the potential for steady to lower European rates kept the dollar in an uptrend versus the euro. And that's likely to continue since the U.S. economy should remain strong and Europe relatively weak. The only change in the fundamental story was a bottom in Japan's economy which is likely to keep the yen gaining on the dollar in spite of Bank of Japan intervention.

What Might Get Hot

U.S. Treasury Bonds—T-bonds had fallen sharply in anticipation of multiple Fed rate hikes totaling 75 to 100 basis points by year-end. But after last month's 25 basis point tightening move, the Fed shifted to a neutral policy stance, implying no further rate hikes for a while. In addition, benign PPI and CPI inflation numbers in June plus signs of a minor slowdown in the economy further reduced the odds of higher U.S. rates, meaning the bond market is probably overdone on the downside, opening the door to a sizable up move.