- 2001: Volume 10, No. 2 What's Hot and What's Not: Energies Run Out of Steam While Eurodollars Take Off

Some markets quieted down, notably the energy complex, while others stayed in or embarked on major trends, including cotton, Eurodollars, Japanese yen, cattle, hogs, and the stock market. In addition, a few, such as gold and wheat, showed signs of breaking out of the doldrums.

What’s Hot

Stock Market—After a brief and unspectacular rally in January in response to a Fed rate cut, the stock market embarked on another down leg, still pressured by poor earnings and concerns that the economy may be slow to recover. The Federal Reserve Board is expected to cut interest rates another 50 basis points at the March 20 FOMC meeting. Whether that will be enough to spark anticipation of an improving economy later this year (many Fed officials have voiced the opinion that the growth will do better during the second half) and boost investor confidence remains to be seen. And the recent breakdown in the S&P 500, despite a stronger than expected February employment report, indicated that further declines are on the way.

Eurodollars—Interest rate futures, particularly the short end of the curve, stayed in a strong up trend in anticipation of more Fed easing. And further gains are favored until something comes along to dispel concerns of a slowing economy. It’s possible a widely anticipated 50 basis point Fed rate cut at the March 20 FOMC may do it by sparking anticipation of an economic recovery later this year. But it would probably take a string of solid economic numbers to erase the outlook for further Fed easing.

Live Cattle—Last fall’s outbreak of mad cow disease in Europe got the ball rolling to the upside in cattle by boosting the outlook for increased U.S. beef exports to Asia and elsewhere (but not to Europe where U.S. beef is banned due to the use of hormones and antibiotics in U.S. feed). The rally accelerated in January and February when the panhandle region was hit by numerous severe winter storms, stressing cattle and curtailing weight gains, resulting in reduced beef output. Then prices really exploded in response to the outbreak of foot and mouth disease in the U.K. and threat of a spread to Europe, which reinforced the strong U.S. export potential. And since there’s no sign that high prices are hurting demand, it’s best to look for the up trend to continue.

Lean Hogs—After languishing in a trading range, the hog market took off last month in belated reaction to the outlook for increased U.S. pork exports due to mad cow disease in Europe and the outbreak of foot and mouth disease in the U.K.. Hog producers can respond to higher prices more quickly than cattle feeders, and it’s a good bet there will be big expansion in hog numbers. However, the favorable export outlook is likely to keep prices in an up trend into early summer.

Japanese yen—The yen recently broke down from a trading range for the same old reasons of a struggling Japanese economy and little chance for Japanese structural reforms needed to turn the economy around. In fact, Japan is in a recession and Japan’s finance minister said that Japan’s fiscal structure is near collapse. Because of that, further declines are favored.

Cotton—This market began to collapse in December when the USDA forecast ample global and U.S. carry-over stocks due to slowing demand and increased production (Australia, Argentina). The price slide worsened in January and February when it became obvious that, due to a slower global economy, consumption wouldn’t attain the pared down targets. On top of that, it appears that U.S. cotton acreage will increase sharply this spring. And even though prices have already fallen a long way, the path of least resistance remains to the down side.

What Might Get Hot

Gold—After spending more than a year in a down trend, the gold market is showing signs of life. Higher lease rates indicate that gold demand is on the rise. The reasons, however, are murky. While it’s true that gold prices are at an historically low level ($250 per ounce has often provided a floor), the slowing U.S. economy, recession in Japan and slower Asian economy don’t bode well for demand. In addition, central banks are expected to keep unloading gold, e.g., the U.K. extended its auction schedule into next year. Furthermore, inflation is likely to remain under control, notwithstanding last month’s jump in the U.S. PPI and CPI. In any case, gold has lost its appeal as an inflation hedge; it’s better to use the energy markets since energy costs make up two-thirds of CPI inflation. Despite that, the buoyant undertone and increasing volatility imply that prices are itching to move higher. Technically, the chart shows a possible major double bottom at 250, and a close above resistance in the 270-280 area would break the major downtrend and signal the start of an up phase.

Wheat—Even though wheat prices have struggled over the past six months, there is the potential for a big rally. Pressure has stemmed from the sluggish U.S. export pace and sizable Southern Hemisphere production, notably in Australia. However, the global stocks to use ratio is at an historically low level meaning any crop problems this summer in the Northern Hemisphere could spark a significant up move. And U.S. hard red winter wheat acreage is down substantially. The crop got off to a poor start due to a late planting and slow growth caused by drought. As things stand now, ample late winter moisture has boosted production potential, but crop ratings remain low. A damaging spring freeze or trouble with the U.S. spring wheat crop would most likely tip the balance to the bull side. In addition, there’s also the potential for crop problems in Europe or China. We have a feeling this market will move higher.