- 2000: Volume 9, No. 5 What's Hot and What's Not

Over the past month many commodity markets have begun to shake out of the summer doldrums. The energy complex resumed its up trend, the dollar embarked on a major up phase, and the sugar market extended a big up move before settling into a trading range. In addition, soybeans, cattle, and hogs staged significant price moves.

What's Hot

Crude oil—Crude oil, unleaded gasoline and heating oil resumed their major up trends in early August, still propelled by supply concerns even though OPEC raised output another 500,000 barrels per day in July. OPEC officials keep saying that global supplies are ample, outstripping demand, and that high prices are due to speculation and supply bottlenecks. However, U.S. stocks of crude and refined products remain low, and distillate supplies (heating oil) may not build to an adequate level (130-140 million barrels versus 113 currently) prior to winter. In addition, another 500,000 barrel per day hike in OPEC output expected at a meeting on September 10 has already been declared inadequate by the experts. Until product supplies begin to rise, particularly heating oil, petroleum prices are likely to remain strong.

The U.S. dollar—The U.S. dollar began a major bull move in response to rising U.S. interest rates, and stayed strong even when it became apparent the U.S. economy was slowing and the Fed wasn't likely to tighten monetary policy any further. It appears that the smart money hedge fund crowd feels the U.S. is "a good place to invest," probably due to the potential for rising euro-zone interest rates to hurt the European economy. The dollar is likely to keep moving higher versus the euro.

Soybeans—Soybeans have rallied sharply over the past few weeks on concern that hot, dry weather in the Delta region and southwestern corn belt hurt yields, which meant that crop size peaked with the August USDA estimate of 2983 million bushels. And since hot, dry weather is forecast to continue in those areas through mid-month, the crop is likely to decline further. Despite that, it's doubtful this market will enjoy a major bull move since current supplies are ample and the U.S. crop will still be large by historical standards. We have a feeling the mid- area is about all this market can attain.

Cattle—Cattle stayed in a downtrend due to record supplies of cattle on feed. Strong demand offset big beef supplies earlier this year, but that's changed over the past few months, and demand is likely to keep falling short of supply resulting in further declines. The hog market also fell sharply for a few weeks, discounting larger than expected hog marketings and the outlook for hog producers to boost output due to cheap feed grain prices. Hog prices recently grabbed hold, but the outlook for increased production is likely to keep a lid on things.

What Might Get Hot

Sugar—A shrinking global surplus triggered a big up move in sugar early this year. The trading range over the past month, however, implies that the bullish fundamental story has been discounted. This market is also vulnerable to a downside washout if the technicals deteriorate since the managed funds hold a huge long position and might liquidate, which could result in a sharp decline.

Silver—After trending lower for most of the year, silver recently rallied enough to hint that a bottom may be forming. The fundamentals don't seem bullish, e.g., a slower U.S. economy may hurt silver demand, and Comex stocks of about 100 mln ounces are more than ample. However, this market can go a long way on the technicals alone, and they're starting to point higher.

Japanese Yen—The yen was pressured all summer by concern that Japan's economic recovery would falter. And last month's Bank of Japan rate hike appeared to be the last straw. However, the yen not only recovered but jumped sharply higher on ideas Japan's economy is strong enough to weather higher interest rates. In addition, there's the potential for Japan's economy to improve over the next two years if Japanese consumers spend some of their massive savings that are locked up in postal savings accounts which begin to roll over late this year. As we all know, perceptions are everything, and if foreign investors decide Japan is the place to be, the yen could embark on a major up phase.