February 8 – Fear is the dominant theme to start the week, with safe-haven buying pushing gold to fresh three-month highs overnight. Stocks sold off around the world overnight, although China is closed for its Lunar New Year holiday this week. The rush to safe-haven buying pushed German 2-year yields to -0.517% in overnight trade as investors simply seek someplace “safe” to put their money. The talk of negative rates continues to spread around the world, after Japan followed Europe’s lead by instituting them last month. Former Fed Chair Ben Bernanke stated in an interview last month that the U.S. Federal Reserve should consider it as a tool for stimulating the economy, with the markets suggesting that such is a possibility at some point down the road.
Gone are the days of encouraging saving so that the economy can weather the storms by dipping into the reserves. The focus increasingly is to punish saving in order to encourage spending. Perhaps the focus should be on removing those obstacles and fears in front of investors that provide a disincentive for spending, but central banks have limited powers in that area and lawmakers have seemingly less interest in doing so, lacking the understanding and/or conviction of foundational economics to do so. As such, lawmakers join traders around the world in putting their trust in central bank activism to turn their individual, as well as the corporate global economy around. Unfortunately, the negative side-effects of their efforts are becoming increasingly evident even as the positive impacts are diminishing. Rather, negative rates incentivize bad loans in the banking industry while hurting seniors.
West Texas Intermediate crude oil hit sell stops below $30 per barrel this morning, although it’s already uncovering buying interest and is back above $30. The broader commodity sector is under pressure this morning on fears that a sluggish global economy will mean lower demand, although traders continue to monitor crude oil and its ability to hold support just above $29 that has held the market since January 21st. Low prices continue to hurt the U.S. oil industry, with the rig count now at its lowest level since 1999.
U.S. stock futures suggest a sharply lower open here this morning, following through on Friday’s sell-off. Friday morning’s jobs report showed a 0.5% hike in wages in January, likely impacted by minimum wage hikes in more than a dozen states, that raises the fear of wage inflation. That opened the door again for a possible rate hike from the Federal Reserve. That in turn supported a rebound in the dollar from three-month lows, with follow-through buying seen this morning. Again, that adds further headwinds for the broader commodity sector. An individual commodity can rally in the face of those headwinds, but it needs to have a compelling story to do so and such simply doesn’t exist for the major commodities at this point.
The grain and oilseed complex exemplifies that point, with prices sinking below chart support this morning. Prices are giving way to the downdraft in the broader commodity sector, lacking that compelling story needed to move against the tide. Good rains fell in Argentina over the weekend, meeting or exceeding expectations in most areas. The moisture will go a long ways toward bringing crops toward maturity, considering that more rains are expected by this weekend, late in the 10-day period and again in the 11- to 15-day period.
As such, market bulls will likely need to hang their hopes of a sustained rally on a 2016 U.S. Midwest weather threat. The risks of a legitimate weather problem are certainly elevated in a year of transition from a strong El Nino to a La Nina pattern, but they are still believed to be below 50%. As such, early February is a bit pre-mature to be banking on such a problem with forecasters still in disagreement over the growing season pattern. That leaves the grains monitoring the crude oil market.
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