Archive for month: August, 2013

Commodities were up big Tuesday (DBC up 1%) as worries over Syria resulted in big rallies in the precious metals and energy. Another piece of stronger-than-expected Chinese economic data (industrial profits were better than estimates) and a weaker U.S. dollar also helped push commodities higher, but really yesterday was all about Syria.

And, showing the benefits of diversification: Although commodities have lagged badly this year, I want to point out that while most major global stock markets are down around 2% so far this week, the commodity ETF DBC is up 2.3%, to a 4+ month high.

Since Syria was behind the moves in commodities, instead of recapping the moves in the energy and metals markets (energy, including oil, was up about 2.5% yesterday, while gold rallied 1.5% and silver 2%), it’s more useful to explain exactly why Syria matters, and whether it’s going to be an ongoing positive for the commodity markets.

First, we’ve got to think about Syria in the context of everything else going on in North Africa and the Middle East.  Egypt, which continues to teeter, has been pushed to the back burner, but the debate about whether to suspend U.S. aid is still ongoing.  If the U.S. suspends aid, that’s a serious blow to the military-controlled government.  The Saudis, the world’s No. 2 oil producer, have expressed support for the military rulers, so if the U.S. does suspend aid, we can assume the Saudis will be none too pleased.

Now let’s move on to Syria, where we are considering a military strike.  The Russians, the world’s No. 1 oil exporter, support Syrian President Bashar al-Assad’s regime. It’s very safe to say that they will be upset by any U.S. military strike, as they want to see the current administration stay in place.  And, the Syrian conflict has further cooled already-frosty U.S./Russian relations. (Russian Deputy Prime Minister Dmitry Rogozin said on Twitter yesterday that “the West behaves toward the Islamic world like a monkey with a grenade.”)

So, there are two situations where U.S. interests seem, potentially, at odds with the world’s two largest oil producers.  Point being, while it’s unlikely that either situation will escalate too much further (even if we strike Syria it’s likely to be very limited, which will result in Russian criticism in the press but little else), the potential fallout, if either one does escalate significantly, is serious with regard to the world’s immediate energy needs.  That is why Syria, a country of approximately 145K bbls/day of oil production, is causing so much consternation right now.

WTI crude yesterday broke through resistance at $108/bbl and hit a new high for the year, as geo-political premium is pumped into the contract.  Gold also rallied through resistance at $1,400/oz. and silver traded through the $24.43 level, breaking a downtrend in place since last fall.

The rules of technical trading say that we should buy gold, silver and oil here, as they’ve broken through resistance and made new multi-month highs.  But, I have a very hard time buying anything when an extraneous event like Syrian military conflict is behind the move. That’s because in reality we’re just guessing, as we’ve got no edge or insight as to when and how the U.S. will strike Syria, and what the reaction will be.  And, guessing with no discernible edge in this business inevitably leads you into trouble.

So, if you’re long commodities and made the good buy back in June and July, I think you enjoy this rally. However, just realize it’s fickle and that, if the global macro backdrop settles down, we’ll see WTI and gold give back yesterday’s gains.

But, more importantly, looking beyond Syria, I believe both gold and oil are seeing the environment get more-bullish for the remainder of the year. If we see continued progress in the global economy, expect consistently higher prices once all this Syria turmoil settles down.

And, I think the commodity space in general, while a bit overbought, continues to offer an attractive place for incremental capital and potential outperformance between now and the end of the year.  If you’re not long commodities already, though, I’d be inclined to wait for a pullback before getting broad commodity exposure via DBC or a similar ETF.

Last Week

Economic data last week was largely supportive of the current market trends (improvement in global economic growth & tapering of QE in the U.S. to begin this fall). But the one glaring exception was Friday’s new home sales report, which implies higher mortgage rates are indeed acting as a headwind on the housing recovery.

FOMC minutes from the August meeting was the most-watched item last week, although they failed to provide any insight into when the Fed might taper QE or how they might do it (size of the taper and split between Treasuries or mortgage-backed securities).  The minutes showed a divided Fed that lacks consensus on every aspect of tapering QE … other than the fact that they all agree QE does need to be tapered starting this fall.

The bottom line from the Fed minutes (and the outlook for Fed policy) is that the market “consensus” (and I use that term lightly because it’s not a big majority that see tapering in September) is that the Fed will announce a small tapering ($10 billion-$15 billion) to start in October and it will occur entirely in Treasury purchases. That represents a slightly more “dovish” outlook than we had going into the meeting (the expectation for a September taper was a bit higher, and the amount of tapering was expected to be around $20 billion).  But, the key is that tapering is still on schedule for later this year.

The second big release last week was the flash global PMIs, and they were universally better than expected.  Importantly, China’s flash manufacturing PMI got back above 50 for the first time since April, and Germany and the EU’s flash PMIs beat estimates.  This data further implies we’re seeing a stabilization of global economic growth, which should continue to benefit European and Chinese markets.

Finally, housing was in focus last week, and here’s where an otherwise good week of data hit a speed bump.

Existing home sales for July largely met expectations, but the new home sales data released Friday was a big miss. Not only did the headline badly miss, but we also saw a revision of negative 64K to the prior three months’ sales data.

While this report doesn’t show the housing recovery has stalled, this report has to make investors and the Fed nervous that higher mortgage rates are indeed acting as a headwind on the recovery. And if the housing data continues to appear to be getting soft, we could see an even smaller “taper” in September than currently expected.

This Week

Although there are numerous releases this week, the data is largely “second-tier” and unless it’s horrid, it shouldn’t really change current Fed expectations.

Revised 2Q GDP is released Wednesday, and there aren’t expected to be any major positive or negative revisions from the 1.7% annual rate that was announced at the preliminary look back in July.

Personal income and outlays is the second most important report this week, but not because of the headline data.  Instead, the core Personal Consumption Expenditure price index, which is the Fed’s favorite measure of inflation, is contained in the report. Markets will be looking to see if we get any uptick in that price index, which would imply we are seeing the seeds of inflation.

Given last Friday’s report, housing also remains in focus this week as we wrap up the July housing data.  Pending home sales is released Wednesday, and this will be a more closely watched report than usual given last Friday’s New Home Sales miss.

India Is Now the Center of the EM Crisis—Watch EPI & ICN as They’ll Bottom First.

The turmoil in India seems to be asserting itself as the tail wagging the emerging-market dog.  The relentless declines in the rupee have been a problem for months, but the acceleration recently has stoked concerns that we may see a full-blown capital flight out of India.  That’s a pretty big concern, because while it is an emerging market, India is also one of the 10 largest economies in the world. A current-account or balance-of-payments crisis in India would have significant ripples across the globe.

Already a problem, the situation in India has been made worse by recent “flip-flopping” by the Reserve Bank of India.  Several weeks ago, the RBI took measures to tighten liquidity and push up interest rates in an effort to stem the slide in the rupee.  Well, it didn’t work, and yesterday the RBI reversed course and provided liquidity to the market (effectively pushing borrowing costs lower) after they realized that the higher rates they manufactured several weeks ago were putting stress on Indian banks and risking a further economic slowdown.

Basically, the market is losing confidence in the RBI. It is becoming clear that they don’t know what they want to do:  hold up the rupee or help support economic growth in the short term.

Bottom line is the rupee is making new lows vs. the dollar almost every day, and it’s becoming more volatile (it moved more than 3% from peak to trough yesterday) as the RBI flails about.

This sounds a bit odd, but I don’t think markets can rally until we get calm in the emerging currency and bond markets, and I don’t think we can get calm in the emerging currency and bond markets until India stabilizes. So, that puts the WisdomTree India Earnings Fund (EPI) and the WisdomTree Indian Rupee Fund (ICN) at the top of our watch list, just above the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the iShares JPMorgan USD Emerging Markets Bond Fund (EMB).

Bottom Line

If you’re looking for a reason to be a bull, there were some anecdotal positives yesterday, but nothing much changed.  If interest rates can slow their ascent and emerging markets can behave (they don’t really have to rally) then, like we saw in July, this market can rally.

But, the bottom line is the global market continues the process of adjusting to the beginnings of a policy change from the Fed, and it’s an adjustment process that will take time and have its share of hiccups.  Although I think the burden of proof remains with the equity bears, I’d be cautious about adding any additional long exposure other than to European equities (EWU, EIRL) so far on this dip.

I will again point out that the much-easier way to make money from the new reality of higher interest rates is by getting positive exposure to higher rates (TBF, TBT, STPP), not by analyzing each and every tick of an equity market in August that is very thinly traded.