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In our last issue we predicted a further slowing of the US economy before a transition to a better 2nd half of 2011. However, the stalled US debt ceiling debate that was eventually pushed out to the brink of the August 2nd deadline has probably left US consumer and investor sentiment injured for most of August. Given the ongoing political divide, it is even possible that sentiment will continue to be affected well into September. In looking back at a chart of US Consumer Confidence, it is clear that it was dramatically undermined by the Japanese natural disaster. While we don’t think the US debt crisis created as much raw fear and anxiety, we do think it added to the softening of the US economy. We might also suggest that the divided political arena in the US could ultimately cause US consumer confidence fall more than it did from the Japanese earthquake.
In looking at the historic rally in gold, it is clear that the most recent wave of anxiety was indeed very significant. This is another indicator of the collateral damage done to the US economy. Furthermore, with independent and foreign-based entities advising the US of the need to reduce US spending by $4 trillion and the initial effort from Washington failing to meet even half of that goal, the ability to protect the US from a something similar to the sub-prime crisis has been dramatically reduced. In fact, with both sides of the political battle in the US upset with the debt ceiling extension plan and the anti-spenders promising to battle even more aggressively in the future, it is clear that a major portion of the US populace, government and media have yet to grasp the reality that US government spending is going to come down.
With US economic numbers softening, the US Fed thought to be on hold and the US government “probably” limited in its ability to offer stimulus programs through the end of the year, it could be very difficult to throw off a generally bearish macroeconomic track for the weeks ahead. Expectations of slack US data points have recently had little impact on members of the Fed, with some members steadfastly holding against additional quantitative easing efforts. Certainly the US economy could somehow gather itself and temper macroeconomic fears, but we think that is unlikely until the negative environment of July and early August works through the closely watched US numbers. About the only thing that could alter our negative 3-4 week economic outlook would be a surprise “grand deal” from the super committee, if it were to find the necessary spending cuts from programs that don’t have broad political support.
Therefore we expect to see weakness prevail in US equities, energy prices, sugar, platinum, copper, cocoa and other physical commodity markets that lack the internal fundamental fortitude necessary to stand up against a quasi-deflationary environment ahead. Some markets like corn and hogs appear to have the fundamentals to stand up to some outside market pressure, but it is also possible that weakness in the US Dollar will provide some underpin for physical commodities in the weeks ahead. While Euro zone debt fears have seemingly become entrenched, the capacity to cushion the dollar against its own problems is limited. Therefore, it is possible that further economic weakness in the US economy and the still unresolved nature of the US debt battle will likely leave the dollar in a downward track. Some traders even suggest that interest rate differentials between the US and the euro zone are such that the dollar will remain under pressure from that angle, and that in turn could serve to support certain physical commodity markets.
Cocoa: Breakout Has Technical Support; Vulnerable to Outside Markets
by Dave Hightower on January 27, 2012
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March cocoa continues to build on this month’s sharp rally, with prices rising more than 22% during the past three weeks. In addition to ongoing concern with this season’s cocoa crop in the Ivory Coast, a report that Indonesian cocoa production may decline 10% to 15% from last season’s already below-average levels provided further support for the market as that nation has been a traditional supplier to the US market. Many analysts are forecasting double-digit declines for cocoa production in the Ivory Coast and Ghana this season, due in large part to excessive dry weather over the past few months. The improvement in broad-market sentiment has also helped to underpin cocoa prices at these high levels, although any sort of Euro zone risk flare-up or weak US economic data could erode this support in a hurry. In addition, concerns over global demand have been elevated due to sluggish fourth quarter cocoa grinding data from Europe and North America.
TODAY’S GUIDANCE: With prices rising over $200 during the past four sessions, end-of-week profit-taking could dampen upside momentum later on in the session. The upcoming Commitment of Traders data will reflect any substantial reduction of the non-Commercial net short position during this week’s rally, as fund short-covering has been a major component of this year’s huge rally.
TODAY’S MARKET IDEAS: While this week’s upside breakout to fresh two-month highs should have plenty of technically-based support, prices could be vulnerable to a sharp pullback if outside markets fail to maintain their positive tone.