Presently, markets participants are anxious about the dynamic and uncertain nature of the ongoing equity and commodity price correction. Is it over or still ongoing?
On the one hand, market participants are anticipating a sustained period of global growth and demand for equities and commodities, and, on the other hand, they realize the immediate need for an extended corrective period before moving higher.
The global government and central bank-orchestrated commitment to stimulus-driven global growth continues to bear fruit by extending the U.S. business cycle and extending global growth expectations; therefore, the investment and speculative demand for equities and commodities globally is on the rise.
What to expect?
Global Expansion Continuance: A sustained period of expansion with equity and commodity markets is setting the stage for a slow sideways to up-grind with consolidation and/or correction periods along the way. The immediate question: Is the current equity and commodity corrective period over or is a deeper correction or an extended period of consolidation likely? History suggests at least a retest of previous lows, or, at the very least, an extended period of consolidation at these levels.
Assumptions: A period of global growth is possible in 2018 and beyond if one assumes a period of managed global social, political, financial and military stability with no major disruptive anomaly event. This will allow for global governments and central banks to continue extending global growth until the world’s global economies are financially healthy enough to weather a global recession. These assumptions imply market participants’ peripheral vision needs to be highly sensitive to their emergence as a disruptive problem and take appropriate risk management actions if needed.
Market Volatility: Moving forward, expect a rise in market price volatility, misdirection, and uncertainty. Why? Stimulus driven global growth will tend to over inflate asset bubbles and warp fundamental relationships, generating elevated levels of market volatility as markets go through corrective periods to remove excess valuation.
U.S. Dollar Index: The U.S. Dollar Index is likely sideways-to-down to possibly 78.
10-Year US Treasury Yield: If the S&P 500 revisits previous lows or makes a deeper 15 to 20 percent correction, then the 10-Year US Treasury yield would likely turn bullish with a lower yield for a period. A further rise in the yield will increasingly become dangerously problematic for global growth.
S&P 500: I am bullish on this equity market, but presently I assume this correction is not complete; therefore, I anticipate this market will do one of the following: Further correct in time by simply moving sideways for multiple weeks; Retests its previous low; or, Has a total 15 to 20 percent decline or correction.
CRB Index: The commodity bulls are focused on the weakness or strength of this index. How the major U.S. equity markets end the month of February likely provides real insight into near term strength or weakness of this commodity index. Since I am bullish global growth, then for several reasons I am bullish demand for commodities globally as the year progresses.
$WTIC Light Crude Oil: An interesting array of factors from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties keep this market at elevated levels, and do not appear to be losing their influence on this market anytime soon.
Soybeans: Bottom-Line - 2018 is likely a good year for grain and cotton prices. That said, presently assuming the global equity correction and/or consolidation period is incomplete, without soybeans having a near term price moving above $10.61, then prices retesting previous lows is a real possibility.
Corn: We need to end the month above $3.63 and hold that price level, otherwise some additional price weakness should be expected.
Long Grain Rice: Old crop long grain rice needs a new demand source for additional sustained price strength, and September futures likely have more weakness than strength as market participants digest the potential of a significant expansion of 2018 U.S. long grain rice planted acres.
Wheat: This market needs to close and hold above $4.70 to regain bullish momentum
This Week’s Select Summary Considerations
- 10-Year US Treasury Yield: Closing above 3.00 starts the process of considering a 36-year trend reversal. Higher yields have been in part a function of U.S. and Global market stimulative intervention activities designed to extend domestic and global growth and the world’s collective business cycles. A full 20 percent correction in the S&P 500 would likely move the U.S. 10-Year Treasury Yield lower.
- U.S. Dollar Index: Consider the possibility of a continuing correction with a downside move to possibly 78. Given ongoing global policy drives impact on the global macro setting coupled with no significant global anomaly event moving forward this index could have some serious weakness. Unless Middle East, North Korean, European, Venezuelan or other anomaly events start to dominate market participant decisions, then we are still in search of a major low for the dollar.
- CRB Index: How equities and commodities end the month likely provide real insight into near term strength or weakness of this index. Assume a possible retest of the previous low or lower, also assume the possibly of a deeper global equity correction over the next 3 to 6 weeks, which would likely weigh heavy on commodity prices in general. On-going policy intervention will be supportive of the general commodity sector. Global Government and Central Bank actual and anticipated intervention imply a building fruit bearing process will emerge.
- $WTIC Light Crude Oil: This is a market that likely needs to redefine its near term 2018 trading range, given both global growth expectations and uncertainties. A complex and volatile market focused on global uncertainties like Saudi Arabian and Iranian building friction, other Middle East challenges, North Korea, market structure, geopolitical considerations and building possibilities of a Venezuelan civil war are just some additional considerations, all deserve heightened respect in a world with building economic, social, political and homeland security uncertainties. Expanding global demand, Saudi Arabia, Russia, OPEC, other oil producers, and other factors have a major role in limiting price downside.
- Soybeans: 2018 is likely a good year for grain prices, presently assuming the global equity correction and/or consolidation period is incomplete, then currently pushing above 10.61 may have some challenges. A world awash in liquidity, building economic momentum and many hard assets seemingly overvalued, be careful not to overlook the possible attractiveness of this asset to speculators, investors and end-users.
- Corn: Ending the month above $3.63 and holding would be highly supportive of potential price strength.
- Long Grain Rice: Old crop rice needs a new demand source for additional sustained price strength and September futures likely have more weakness than strength as market participants digest the potential of a significant expansion of 2018 U.S. long grain rice planted acres. Remain aware of potential near term uncertain global economic crosscurrents related to currencies, bonds, equities and commodities as they go through a rebalancing process.
- Cotton: Cotton prices still appear to be in a slow grind to the upside, but current price levels need to hold.
- Wheat: This market needs to close and hold above $4.70 to regain bullish momentum.
- SPY SPDR S&P 500 ETF: Assume correction is incomplete. Allow price action to provide guidance.
- $COMPQ Nasdaq Composite: Assume correction is incomplete. Allow price action to provide guidance.
- EFA iShares ETF - Global Equities Excluding U.S. and Canada: Assume correction is incomplete. Allow price action to provide guidance.
- EEM iShares ETF, Emerging Market Equities: Assume correction is incomplete. Allow price action to provide guidance.
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]
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