Newsom on the Market

Paint it Black

As the Rolling Stones sang, "No colors anymore I want them to turn black." (DTN illustration by Nick Scalise)

My mornings start early -- as most of yours do as well. While researching and writing DTN's Early Word Grains, I scan world news looking for market-moving headlines. Recent events are so dark.

Terrorists struck in Paris and Bali. The escalating global conflict in Syria now has a NATO nation, Turkey, reportedly shooting down a Russian fighter jet for the first time. What was Russia's response? A government official (I forget who now, could have been Putin) said the act was a "stab in the back" and "would not be tolerated."

The cynic in me could argue that this is all part of Putin's master plan. Russia's support of Syria's Assad could continue to destabilize the Middle East, destabilize Russia's constantly fragile relationship with NATO, and possibly put pressure on Saudi Arabia to loosen its grip from around the neck of Russia's all-important oil industry. In other words, business as usual for Mother Bear (just to be clear, Russians refer to their country as the Motherland, its symbol a bear), where global conflict is viewed differently than in the West. How might it end? Boom! Flash!! Thank you for playing.

The markets don't know what to make of all of this.

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Back in the day of humans making trades it was common to see global equity markets tumble and commodities (gold and crude oil in particular) rally as world events exploded. Look at the markets today and what do we see? Over the course of November the Dow Jones Industrial Average, S&P 500, and NASDAQ composite have all challenged record high levels. Meanwhile the spot futures month of gold has slipped to its lowest level ($1,062 per ounce) since February 2010 and shows no sign of life as another dismal month finally draws to a close.

Not to be outdone, crude oil dipped below $40 per barrel earlier this month, challenging its major (long-term) low of $37.75 set as recently as this past August. As stated above, OPEC, following the lead of Saudi Arabia, has made no cuts to production, resulting in increases in supplies outdistancing increases in demand. This has not only been seen in countless headlines, but in the collapse of the West Texas Intermediate (WTI) futures spreads as well. This week has the spot-month January contract priced $1.40 under the February and trending down.

But what about the third King of Commodities, corn? While it hasn't moved below its low from last October of $2.81 (DTN National Corn Index, NCI.X, national average cash price), it hasn't been able to move higher either despite bullish technical signals in both futures and futures spreads. The market just sits, unwilling to go up but unable to go down, as it watches its close associate soybeans move to its lowest level since March 2009 in the futures market ($8.44 1/4) and DTN National Soybean Index ($8.09). If this continues, how long might it be before corn throws in the towel?

The fact is Watson (my name for computerized, algorithmic trade) is looking at two things right now as it continues to pressure the commodity sector: The likelihood of the U.S. Federal Reserve raising interest rates in December and of oversupplies of grains. Regarding the Fed's impending decision (set for December 16), board member after board member has come out saying the markets should expect an increase and not be surprised. On the other hand Janet Yellen, the chairman of the Board of Governors of the Federal Reserve, indicated as late as this past Tuesday that it may be premature to raise rates. The U.S. dollar index, driven in part by interest rate expectations, is sitting near its high of 100.390 from March 2015.

As for supplies, I've already mentioned the oil glut that continues to weigh on world energy prices. In the November round of World Agricultural Supply and Demand Estimates (WASDE) global supplies of the three major grains totaled 2,526.35 million metric tons, easily the highest on record. Not only that but global ending stocks-to-use, the bottom line for any supply and demand report showed all three at bearish levels (corn 21.8%, soybeans 26.5%, and wheat 31.7%). As Watson sees it there is no reason to buy with inflation non-existent and world supplies abundant.

In the face of all this, it's only human to feel that when you think you've hit rock bottom, you'll soon find out you were wrong. No matter how much you thought you did things right, laid out careful plans, had easy-to-follow rules, every day seems to pull you to new, lower levels. Who could blame you for thinking the old saying, "It's always darkest before the dawn" is wrong? Perhaps you think the only thing following the darkness is a darker black.

For me, I'll take my cue from The Rolling Stones song mentioned in the title of this column: "I have to turn my head until my darkness goes."

Darin Newsom can be reached at darin.newsom@dtn.com

Follow Darin Newsom on Twitter @DarinNewsom

(CZ/SK)

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