Rising tide?

Published on: 14:24PM Nov 04, 2015



Shhh, don’t look now as we do not want to spook them, but the S&P 500 is once again within shouting distance of poking into new record high and this after teetering on the edge of breaking very long-term uptrends a little over a week ago.  For us in the commodity market this is really a two-edged sword.  Growing up in the grain business I often heard the off the cuff comment that if the equities were higher, grain markets would be lower, which to a certain extent you could validate with the idea that money flows to the market that is showing the greatest growth potential.  That said, theoretically if equity markets are pushing higher should that not be a reflection of a strengthening economy, which in turn will lead to greater demand for commodities? For now we will ignore the fact that the zero interest rate policy by the Fed and other central banks have left few alternatives for investors and will take the more optimistic viewpoint that yes, indeed a number of economies around the world are growing which in turn will be longer-term bullish for commodities as well. Problem is, we have to work through the current supply swoon first. 

Corn and wheat were able to bounce very nicely yesterday while the bean market struggled but we appear to have reversed those roles overnight.  Very typical action for sideways markets and we suspect we shall see more of the same through the balance of the week and potentially right into the crop report on the 10th.  Informa released their estimates yesterday and so far appears to receive the award for predicting the biggest numbers.  They have boosted the corn yield up to 170.1 with production at 13.718 billion and a bean yield of 47.8 with production of 3.952 billion.  Bloomberg news also released an industry survey (which we participate in) and finds an average corn yield of 168.2, production of 13.564 and a carryout of 1.597 billion.  For beans, the average yield came in at 47.5 with total production of 3.914 and a carryout of 435 million. 

It would appear that the CFTC is serious about cracking down on “funny business” in the electronic realm of trading.  Yesterday a high-frequency trader was found guilty of disrupting commodity markets.  It only took a jury one hour to convict the individual of 12 counts of commodity fraud and spoofing which can carry up to 25 year in prison for each count and fines that range from $250k to $1 million each.  Evidently this individual would place large orders in an effort to spoof the market into thinking they were legitimate and then cancel them within milliseconds.  Undoubtedly there will be others like this that try to “game” the system for any advantage as realistically there always have been.  Actually, just a few weeks ago I heard an interesting recap from the 1950’s when a farmer/trader from the Northeast cornered the onion market, which ultimately led to the demise of that contract.     

Macros are mixed with equities higher, energies lower, and both the dollar and metals higher.  For now, we continue to tread water.