TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.
To QE3 or not QE3?
Next Wednesday will certainly not be lacking of market moving news. First up will be the Monthly USDA Supply/Demand and Crop Production report. Obviously this will have the potential to move grains significantly, but I will focus on my expectations for the USDA report in my post next Tuesday. Also next Wednesday we have a Federal Open Market Committee meeting. Normally the FED decision has some influence on grains as it effects commodities as a whole but it is not usually a game changer. This time I believe it has a much greater impact on grain pricing because the expectations on the FED this time are very high.
For much of the last month there has been a component of all commodities markets that has been adding support to prices. This has been most evident in precious metals and energies but has not been limited solely to the two market sectors but rather blanketing physical commodities as a whole. The expectation of many traders for the FED to go along with Europe on coordinated easing has been growing as we approach the September 12th FOMC. The trade feels that the most likely way the FED can participate in coordinated easing would be a third round of quantitative easing or QE3. As such it seems that the market has spent time and energy factoring in a high chance of the FED announcing QE3 on Wednesday.
If the Fed were to go forward with QE3 it would put significant pressure on the US dollar and in turn be supportive of commodities prices. Gold and Silver would benefit the most as traders search for quality, but all commodities would see a benefit. So, QE3 could serve as the bullish fodder needed to get grains to new highs.
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The issue as I see it is that right now would seem like a rather unlikely time to move forward with QE3, at least from a logical perspective (and I sure know that the government is not always making decisions of the logical variety). The first two rounds of QE were largely disappointing in their results. QE2 in particular did very little of what it was intended to as the law of diminishing returns kicked in. In the 2008 banking crisis QE1 did serve as a physiological band aid and eased some of the rampant fears of a complete collapse however, the tangible results were no where near what we had hoped. As it turns out, QE does put inflationary pressure on the economy and pushes people to get back into the stock market out of necessity because the US dollar is getting weaker and stocks can gain value even if the fundamentals are no more bullish then the day before. So, QE did help inflate the stock market and it did add money into the economy but the banks were and still are very reluctant to lend money for private or business investment so the intended effect of creating jobs was never really realized, or at least no where near the target.
Furthermore, I see QE3 as being the "last bullet" in the FED's arsenal. And now that we know how QE3 effects the economy I don't see the need for it at this time. It would serve us better to save this option in case we get another sharp break in the stock markets. Right now the US dollar is off highs and stock indexes are strong so to me QE3 would just add inflationary pressures to our economy with little or no benefit. In the end QE3 has the potential to be a very, vary bad thing and I believe that the FED knows this. They also know that every time they talk about it they get a positive reaction from the market. So, for now I believe the FED keeps QE3 in their pocket for a rainier day and says that they are still considering it, maybe they say they are looking at it with careful consideration to appease the global easing party.
If the FED goes through with QE3 I do think it is likely that it will send all grains to new highs. However, if the FED chooses not to move forward with it at this time then it could mean a sharp rally in the US Dollar and a fair amount of pressure applied to commodities markets. Also, I am estimating that the trade has factored in about a 65-70% chance that QE3 will be announced and if it is not then there are some long positions that were bot in front of this that will be quick to come out.
It is certainly possible that the USDA report is enough to outweigh whatever the FED has to say hours later, but it will take a big surprise from the USDA. Either way, Wednesday should be interesting.
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***Also interesting of note is that the November-May soybean spread narrowed by 30 cents in the last 3 days reeling in a wildly inverted market. This inversion is common in a strong bull market but the narrowing could be bearish. It could also simply be the market adding incentive to store soybeans rather then sell on harvest. Either way I think the November-May soybean spread will continue to narrow and this is a great way to get short soybeans if you feel the need. The great thing about it is that this spread could narrow quickly if the soybeans sell off because the November has the potential to sell off more then the May, but if today is any indication even on a rally the May might still gain on November to entice storage. I will be looking to add to my position here if there is a small correction of the last week's sharp move.
With high volatility in a market, option strategies may be a good tool for hedgers and specs alike.
December Corn Daily chart:
November Soybeans Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have new crop corn above $8.00 and new crop soybeans above $17.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent.
Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs.
Ted Seifried (312) 277-0113 or [email protected]
Please check out my Blog at: http://tedseifriedfutures.com/
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?rid=Seifried
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION