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| Daily Jurojin - Thursday, April 30, 2009 |
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Thursday, April 30, 2009 Bonds down - grains up!We noted yesterday that U.S. bond prices were looking heavy and that yields were pushing against the ceiling as they edged towards a near-six month high. Wednesday's data included a larger than expected slump in GDP, but as we noted in Monday's commentary, an inventory washout might set the stage for better prospects for the remainder of 2009. In the event investors were treated to a larger than expected 6.1% contraction for the first quarter as opposed to a 6.3% contraction to close out 2008.While the reading was undeniably anemic, the fact is that the drawdown in inventories or stockpiles of goods used to meet final demand subtracted around 2.2% from growth. Based upon recent evidence that the slide in the slowdown has begun to abate, it's logical to conclude that the current quarter ending in June will not show a contraction of similar magnitude. According to Bloomberg News, the two quarters now behind us comprise the worst six months performance in over 50 years. Later in the day the Federal Reserve delivered its synopsis of current affairs. Hardly surprisingly it showed caution on the realities of any budding recovery. It held interest rates steady and stated that it was keeping a beady eye on credit markets in assessing whether or not it needed to purchase more government debt or mortgage paper. In March it announced a war on yields when it agreed to step up its purchases in order to drive yields down so as to spur lending. As a result of its failure today to announce a hastening of the pace of buying, bond prices breached the floor sending yields through that ceiling created during the last six months. Yields spiked to 3.12% after the announcement. Subscribers to Jurojin Weekly will be pleased, given the fact that they have been sitting short of June notes for a couple of weeks simply waiting for this perspective to unfold. Alas, German bonds failed to follow suit, which was the expectation we left you with as we signed off yesterday. On Thursday the ECB will reveal whether it will follow the Fed's lead and start up the monetary printing presses. Business and consumer confidence also turned the corner across the Eurozone according to Wednesday's data helping shore up the euro. As that happened, more investors lightened the boat somewhat on their safe-haven purchases of Japanese yen. We're not making the claim that the swine fever threat is hogwash, we're simply reiterating what we said earlier this week in that the initial reaction to the Mexican outbreak, serious though it could be, is overdone in financial markets without a severe human casualty count. The yen lost ground across the board and our recommendation to our subscribers this week to sell short the yen for precisely such reasons is currently looking like a healthy plan. With equity prices surging in Europe and the Americas on such a relief rally, other commodity prices were sucked in too. While the dollar responded negatively to the Eurozone confidence reading and the lower risk aversion requirement, gold began to rally. Sadly it was too late to help subscribers to our view who we urged to buy gold on Tuesday, having seen our risk tolerance tested that within that same session. Gold jumped on Wednesday back above $900 per ounce. Our initial target for the price of June gold is $922 per ounce. Nevertheless, we also argued that they should buy soybeans and following Wednesday's rally they are sitting on handsome paper gains for now as agriculture and livestock prices came back from the dead as sense prevailed. Some market participants, farmers amongst them, had urged the government to drop the moniker of "swine flu" to describe the epidemic. The inference that people could contract the infection from pigs is simply wrong. As a better understanding of the problem shifts so too does traders' sentiment towards understanding final demand. While hog futures rose for the first time in six days, pork belly futures rebounded from a limit-down scenario to close with moderate losses on the session. While investors probably don't care much now, the fundamental situation for medium term prices is improving. A bigger picture supply overhang has reduced farmers' willingness to breed pigs causing a near 3% reduction of the breeding herd size by March 1, according to USDA data. Despite a couple of rather negative sessions, the price of pork is still nearly 3% higher so far in April. Corn futures rallied almost 5% as investors bought the grain lowering their expectations that demand would be slashed. A 4.3% rise in July beans almost wiped out current losses on the week as a result of La Grippe. Boosted by a decline in the value of the dollar grains saw speculative buying on hopes of an economic rebound. Faced with the prospect of supply reductions from Brazil, the U.S., Argentina and Paraguay - the world's largest producers, soybean's prospects fell squarely under the spotlight on Wednesday as investors mulled the chance of a short squeeze made possible through the sudden decline earlier this week. Already the Chinese, the world's largest importers of soybeans, have stepped up demand from the U.S. since September 1, last year by 37% according to USDA data. Meanwhile, expected supplies held by the U.S. at August 31 ahead of the new year crop will be one-fifth lower than in 2008. This entire swine flu situation is throwing up opportunities as well as pitfalls at every turn, which leaves us glued to the market for light relief. Stay tuned. The Supreme Council of the Secret Order of Jurojin |
