As the end of the first quarter approaches, U.S. equity market participants are in the process of profit taking and adjusting their portfolios for a likely eventful second quarter.
- Given bearish fundamentals for many commodities this ongoing repositioning and corrective activity of the U.S. equity markets is presently weighing heavy on commodity markets like oil, rice, soybeans, corn, wheat and, to a lesser extent, cotton.
For the next one to two months:
- S. equities likely need some minor corrective activity
- Global equities, in general, likely show more strength than weakness
- Dollar more weakness than strength
- 10-year Treasury yield more bullish than bearish with a lower yield
- Oil prices must hold current levels or commodity complex in general faces building headwinds
- Grain price activity should be only corrective
- Rice: Fewer acres from the March 31, 2017 prospective planting report would be supportive for rice prices
- Cotton still has price potential to 84-cents per pound
- Lean hogs and live and feeder cattle all building price strength
- Natural gas prices have found support
To see this week's chart analysis, click on http://www.deltafarmpress.com/marketing/market-price-considerations-week-march-27-2017.
It is critically important to understand the dynamics of today’s reflation trade environment because it will be with us for the next one to two years.
Commodity weakness as defined by the Commodity Reuters/Jefferies CRB Index was dangerously low before U.S. equities started what appears to be a minor correction. Many of the reasons for equity weakness appear to have spilled over into the commodity sector.
This is to be expected, all things equal, because in a reflationary cycle commodities tend to follow the leadership of U.S. equities.
Globally, two of the commodity sector’s biggest enemies are over production and uncertain global growth, and one of its strongest allies is the reflation trade.
Remove ongoing global government and central bank intervention activities to move away:
- From a chronic low inflation to an aggressive stimulative reflation economic setting
- From U.S. Central Bank’s monetary accommodation to managing economic activity in a rising interest rate environment
and you would find global deflationary forces ruling and commodity prices significantly weaker and major adjustments to U.S. acreage.
Near Term Market Summary Considerations Week Beginning March 27, 2017
Download Slide Show for charts and expanded details at the download link.
- Dr.0-Year US Treasury Yield:
- Slightly bullish with a potentially lower yield
- Yield remains in a sideways range between 2.3 – 2.6
- US Dollar Index:
- More weakness than strength
- Trading range developing between 95 -104
- CRB Index:
- Between Fed off-again and on-again accommodation and building uncertainties surrounding fiscal, trade and regulatory policy stimulative activities this key economic indicator has become near term dangerously bearish.
- Bigger Picture: Global macro forces in general remain supportive
- $WTIC Light Crude Oil:
- Light Crude Oil is presently undergoing corrective price action, which will likely define a near term price floor
- Fundamentals are bearish and Macro Forces are bullish
- 2017 – Likely primary range $40 to $60 with possible high in $72 area
- Light Crude Oil prices below current levels is near term extremely problematic for the rice, grain, and cotton sector.
- Corrective price action underway
- Soybean prices the week of March 20, 2017 did not hold above $9.92; therefore, a move to $9.31-area maybe lower is now in play.
- The Fed’s dovish stance March 15, 2107 should have helped support soybean prices, but the potential support was offset by a health-care debate the week of March 20, 2017, which raised concerns about future aggregate fiscal policy momentum. Fiscal policy momentum needs to be regained the week of March 27, 2017 by addressing tax reform to regain waning market and consumer confidence.
- Now couple this with end of month and quarter trading activities, March 31, 2017 USDA Prospective Planting Acreage Estimate and market participants became highly protective or of trading position and selective of their global trading options
- Since February 13, 2017 the bearish news and fundamentals has increasingly outweighed the bullish reflation trade
- Corn prices now have the potential to correct into the $3.25 area before moving higher
- Given fundamentals, price will move in sympathy with grain prices, global economic momentum, and agronomic outlook.
- Lagging demand increasingly problematic
- Overplanting in 2017 given present fundamentals would provide added market challenges
- Rice producers’ overriding consideration for 2017 should be managing for a quality grain kernel
- Complex price action underway with a bullish price objective into the 84-cent area still remains in play
- Corrective price action underway, but bullish price potential to $4.95 still a possibility
- SPY SPDR S&P 500 ETF:
- Corrective price action likely underway for 1 to 2 months
- Price trend remains up
- QQQ NASDAQ Power Shares:
- Trend remains up
- Corrective price action likely beginning
- EFA iShares ETF - Global Equities Excluding U.S. and Canada:
- Building momentum and price strength
- EEM iShares ETF, Emerging Market Equities:
- Momentum remains positive
Dr. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]