Ag price falls slow, despite China weakness

by Agrimoney.com

The sell-off triggered by the US Federal Reserve's threat to pull back on ultra-easy monetary policy waned a little on Friday.

Indeed, London shares rebounded 0.6% in early deals, and French stocks 0.9% after Tokyo equities recovered 1.7%.

But for agricultural commodities, many of which were late into this week's asset sell-off, the opening was less promising.

'Improved demand'

Kuala Lumpur palm oil, for instance, which hit its highest in nearly three months in the last session, gapped lower to stand at 2,441 ringgit a tonne at 09:45 UK time (03:45 Chicago time), a drop of 0.9% for the benchmark September contract.

This despite hopes for Malaysian palm exports raised by cargo surveyor data on Thursday, when SGS pegged shipments up 13.6% month on month in the first 20 days of June, and Intertek saw a 16.2% rise.

"The good export figures from cargo surveyors likely confirmed that the weak ringgit has improved the demand for palm oil," Singapore-based broker Phillip Futures said.

Meanwhile, in Tokyo, rubber - which had also gained some comfort earlier in the week from being a non-dollar commodity, so not losing competitiveness as the greenback soared – hit a nine-month low of 228.00 yen a kilogramme before closing down 0.7% at 236.30 yen a kilogramme.

Chinese weakness

However, a standout underperformer was a geography, China, which remained under a cloud following a weak reading from a flash HSBC survey on manufacturing activity.

Shares fell 0.5% in Shanghai, while hitting a six-month low in Hong Kong.

Among agricultural commodities, which also played catch-up from losses in US markets in the last session, soymeal for January tumbled 1.7% to 3,168 yuan a tonne on the Dalian exchange, recording a 2.7% drop at one point, while soybeans ended down 0.6% at 4,636 yuan a tonne.

On the Zhengzhou exchange, sugar tumbled 1.8% to 4,963 yuan a tonne.

Russia upgrade

One agricultural commodity which did manage gains was wheat, which added 0.4% to 2,730 yuan a tonne on the Zhengzhou for January delivery.

Which boded well for the talk of Chinese imports spurred by the purchase of 200,000 tonnes of the grain from France earlier in the week, and with rumours of purchases from Australia and Canada too, besides interest in US supplies.

Nonetheless, Chicago wheat for July eased back a little, by 0.4% to $6.97 ¾ a bushel, undermined by hopes for the world harvest stoked by an upgrade by Russia's agriculture ministry by 2m tonnes to 95m tonnes its forecast for the domestic grains harvest.

This includes a figure of 54m tonnes for wheat, in line with the US Department of Agriculture estimate.

This after Russia's Grain Union on Thursday pegged the country's exportable wheat surplus in 2013-14 at 18m-20m tonnes, up from some 11m tonnes in 2012-13.

"Cheap global offers and few concerns about global production will limit the ability of the wheat market to sustain rallies," Brian Henry at Minneapolis-based Benson Quinn Commodities said.

Egyptian u-turn

Furthermore, Egypt, the cash-strapped wheat importer, which on Thursday raised hopes of a return to markets when its supplies minister said that it would "of course" import before the end of this month, reversed course.

The supply ministry on Friday said that the country had enough wheat stocks to last until the end of 2013, and would not buy abroad "until the end of the current year".

Nor could spring wheat post gains for the best-traded September lot, despite more moisture delaying the last North Dakota sowings, with Canadian farmers, who have enjoyed better conditions, keens to sell.

"Contacts indicate continued selling by Canadian producers on higher trade, while domestic producers are only willing to take advantage of sharp moves higher," Mr Henry said.

Minneapolis-traded spring wheat for September eased 0.2% to $7.92 ¾ a bushel.

'I can see the poor condition'

With wheat, which has been something of a prop of grains the last few sessions, in retreat, that cut the chances of corn firmness, especially with fears of excessive Midwest heat in retreat.

Indeed, Luke Mathews at Commonwealth Bank of Australia quoted forecasts indicating "that most of the Midwest and northern US Plains will have a timely mix of rain, warmer temperatures and sunshine, boosting crop development that has been curbed by late planting and cool temperatures in the past six weeks".

Not that this has erased all crop concerns.

Mike Mawdsley at Iowa-based broker Market 1 said that he was "sitting on the fence at this moment" as regards price forecasts.

"I can see the poor condition of the corn out my window - it is hard to gauge soybeans yet as many are just being planted - but I also realise there are plentiful world supplies," he said.

"A lot of weather premium worked in'

Another broker said noted the impact of strong summer corn prices in 2011 and 2012 in discouraging farmer selling."

"Producers who have sold early over the past couple of years are reluctant to continue pricing corn/soybeans, especially when different sections of the country have had poor weather to start the growing year," the broker said.

"Of course we can't predict the weather in July and August but that will ultimately be the main deciding factor.

"However, we can agree that a lot of weather premium is likely worked into the market prices."

There was a little less on Friday, with the December corn lot shedding 0.9% to $5.55 ¼ a bushel, while the old crop July lot dropped 0.6% to $6.69 ½ a bushel.

Pull from futures

Soybeans did better this time, easing only 0.5 cent to $14.97 a bushel for the July contract, and in the new crop November lot by a relatively low 0.5% to $12.78 a bushel, despite the setbacks to Chinese soy values.

Options may be playing a part, with the expiry of July contracts today, and Benson Quinn noting "heavy open interest at the $15.00-a-bushel strike price, for both puts and calls".

Also crush margins improved, with the July soymeal contract adding 0.1% to $446.20 a short ton in Chicago, where soyoil, the other main product of processing soybeans, gaining 0.1% to 48.45 cents a pound.

Softs rebound

In New York, some soft commodities, which suffered particular drops in the last session, staged some early recovery.

Arabica coffee, which suffered its biggest fall in nearly a year last time, rebounded 1.1% to 119.65 cents a pound for September delivery.

Raw sugar for July added 0.4% to 16.44 cents a pound.

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All About the Pullback from SPX 1687

by Bill Luby

Today the S&P 500 index fell 2.5% and at its low was more than 102 points lower than the all-time high of 1687.18 from May 22^nd. At times like this I am amazed by how many requests I get to update the table of pullbacks I have been posting periodically since the current bull market began in March 2009.

As the table below shows, the current peak-to-trough decline represents a 6.1% pullback from the all-time high and ranks tenth of twenty-one pullbacks during this period. The mean pullback during this bull market is 7.0% and would suggest a bottom of SPX 1568. The median pullback is only 5.6% and would have brought the index down to 1593.

This is not to say that there is a specified amount of suffering that the bulls must be subject to before stocks should feel to rebound or that there is a certain amount of time that the bulls should spend in the penalty box (the mean peak-to-trough decline lasts 18 days, while the median is 7 days), but at some point the severity of the pullback will begin to attract more buyers and increase the odds that the tide will turn.

[source(s): CBOE, Yahoo, VIX and More]

For those who prefer their data crammed into one graphic, I have also updated an annotated plot in which the y-axis captures the magnitude of the peak-to-trough decline (inverted) and the x-axis records the duration of that move. I have also included the peak VIX during the pullback as a red label for each dot and a long dotted black line as the best linear fit of all the data points.

Note that the current pullback is already the fifth longest in four plus years and while it has made quite a splash so far, there is only a 3.87 point cushion from today’s close to the intraday low before the pullback officially becomes longer in the tooth and more severe.

[source(s): CBOE, Yahoo, VIX and More]

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Every Asset That Depends on Cheap, Abundant Credit (Housing, Bonds, Stocks) Is Doomed

by Charles Hugh Smith

Four words: financialization, debtocracy, diminishing returns.

About a month ago I asked What If Stocks, Bonds and Housing All Go Down Together? (May 24, 2013). Why would such an outrageous thought even occur to me?

Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo.

I have long endeavored to explain the harsh reality of neofeudal, neocolonial financialization: Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012) and the neofeudal debtocracy that depends on low yields (interest rates) to enable enormous deficit spending: Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy (April 24, 2013).

The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this:

1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value

2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff

3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity

4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.

Let's take a look at four charts about housing and household net worth. For the middle class, the home remains the key asset, so housing and household net worth are correlated.

Here is a chart of mortgage rates since 1970. Rates were pushed to 17+% to snuff inflation in the early 1980s, and they've dropped over the past 30 years to historic lows: the rate for a fixed-rate 30-year conventional mortgage was about 3.5% a few weeks ago. It has now risen above 4%.

In the golden age of growth from 1991 to 2002, mortgages rates bounced between about 7% and 9%. The band from 1970 to 1979 was about 7.5% to 10%.

In other words, in eras of strong growth and low inflation, mortgage rates have been around 7% to 9%. So what happens to the monthly payments when the mortgage rate doubles from 4% to 8%? The payments double, too. And what happens to the price of houses when rates double? They fall to the point that households borrowing money at 7.5% - 8% can afford to buy a house, i.e. a price much lower than today's Housing Bubble 2.0 prices.

Here's mortgage debt. If mortgage debt had expanded at the previous rate, total debt would be closer to $5 trillion instead of $10 trillion.

You see what happens when debt becomes cheap and abundant: debt rises faster than wages or assets.

But hasn't household wealth increased mightily in the past decades? Here is a chart that plots the relationship of household net worth and total credit owed, i.e. debt:

Household wealth may be rising, but what this chart reveals is debt is rising even faster--that's why the line is declining. Put another way, every dollar of new debt is generating less and less wealth.

You might think that The Federal Reserve's policy of making credit cheap and abundant would goose people to consume and invest more money. Alas, the velocity of money is hitting historic lows: the Fed may be creating credit but people and enterprises aren't putting that money into circulation.

It's called diminishing returns: every dollar of debt creates interest payments, but it's no longer doing households or enterprises any good. The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013).

That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes.

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Correlation between equities and treasuries turns positive

by SoberLook

The last time short term correlation between treasuries and US equities turned positive was at the beginning of Fed's QE2 in 2010. At the time both equities and treasuries rallied in anticipation of the new stimulus. Now we are back to positive correlation, except this time the reverse is taking place (at least in terms of expectations). Treasuries no longer provide the hedge for equities portfolios that the markets have become accustomed to (see discussion). It may take another crisis to send the correlation back into negative territory.

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Equity volatility surges globally amid Fed speculation

By Cecile Vannucci and Nikolaj Gammeltoft

Stock volatility jumped around the world, with the U.S. benchmark gauge surging the most in two months, after speculation the Federal Reserve will cut stimulus sent futures trading to an all-time high.

The Chicago Board Options Exchange Volatility Index, which tracks options on the Standard & Poor’s 500 Index, climbed 23 percent to 20.49 today. Europe’s VStoxx Index, a gauge of Euro Stoxx 50 Index derivatives, gained 16 percent to 23.61, and Hong Kong’s HSI Volatility Index, based on Hang Seng Index contracts, rose 7.7 percent to 22.72, near a one-year high. About 218,000 futures tracking the U.S. VIX changed hands each day on average in June, 49 percent more than the previous month, data compiled by Bloomberg show.

U.S. stocks dropped, with the S&P 500 down more than 3.8 percent since June 18, after Fed Chairman Ben S. Bernanke said the central bank may “moderate” its pace of bond purchases later this year as economic risks subside. Equity swings are getting bigger and the Dow Jones Industrial Average has posted triple-digit moves for the past seven days, the longest streak since October 2011.

“The activism of the Fed can’t go on forever and people try to be ready for it going the other way when the cracks start showing up,” Justin Golden, a partner at Lake Hill Capital Management LLC, said in a phone interview yesterday. The New York-based hedge fund trades options on equity indexes and commodities. “People are anticipating a shift in the market and they are using VIX products to get in front of it.”

VIX ETN

Speculation the central bank will begin withdrawing its stimulus measures has boosted trading in an exchange-traded note tracking U.S. volatility. The iPath S&P 500 VIX Short-Term Futures ETN was the third most-active ETF in the U.S. yesterday, with 86.7 million shares changing hands, according to data compiled by Bloomberg.

Options outstanding on the iPath VIX ETN have jumped 34 percent this year, reaching an all-time high of 3.48 million on June 13, the data show.

The S&P 500 lost 1.4 percent to 1,628.93 yesterday for the biggest drop since May 31. The VIX climbed 0.2 percent to 16.64. The two gauges move in opposite directions about 80 percent of the time.

Economic Outlook

Risks to the economic outlook and the labor market have diminished, the Federal Open Market Committee said at the conclusion of a two-day meeting yesterday, repeating that it’s prepared to reduce or increase the pace of bond purchases depending on the outlook for jobs and inflation. U.S. equities and government debt extended losses after Bernanke said the central bank may begin tapering bond purchases this year if the economy continues to improve.

Fifteen of 19 participants on the FOMC expect the first rise in the federal funds rate to occur in 2015 or later, forecasts released yesterday showed. That exceeds the 14 of 19 who projected in March the first rate increase would happen after 2014.

Ramon Verastegui, a derivatives strategist at Societe Generale SA in New York, said an increase in equity volatility will follow from fluctuations in the rates market as the Fed reduces the pace of bond purchases in an improving economy.

MOVE Index

Bank of America Merrill Lynch’s MOVE Index rose to a one- year high of 86.89 yesterday, up from a 2013 low of 48.87 in May. The gauge, which measures volatility based on prices of over-the-counter options on Treasuries maturing in two to 30 years, has averaged 62.2 in the past year.

“Volatility in the bond market will translate into equities and the VIX as we begin to leave QE behind us,” Verastegui said by phone. “The VIX market is much more liquid so when people want to play a scenario of less monetary easing and rising rates, they drift into equity volatility.”

The Fed isn’t likely to make any sudden changes to its bond buying program during the next four months, according to John Manley, chief equity strategist for Wells Fargo Funds Management. The central bank repeated yesterday that it will keep buying assets “until the outlook for the labor market has improved substantially.”

‘More Calm’

The U.S. unemployment rate climbed to 7.6 percent in May from a four-year low, above the Fed’s goal of 6.5 percent for the central bank to consider raising interest rates.

“We will see more calm,” Manley, whose firm advises $222.7 billion in Wells Fargo Advantage Funds, said in a telephone interview. “It’s just another example about how nervous Wall Street is about everything and it will gradually fade back to a more normal level of implied volatility.”

The VIX has surged 47 percent from a six-year low in March. The volatility gauge is still 33 percent below its average from the past five years.

Traders are boosting bets that U.S. stock-market volatility will increase during the next three months, sending options prices to the highest levels in 1 1/2 years relative to six- month contracts.

Implied volatility for three-month contracts has climbed 26 percent to 14.7 from its March 14 low, according to data compiled by Bloomberg on options with an exercise price near the S&P 500. That compares with a 17 percent increase to 15.5 for six-month contracts. The ratio between the two measures reached 0.98 last week, the highest since December 2011.

“The Fed’s stimulus actions have absolutely suppressed equity market volatility and a reversal of those actions is likely to increase volatility,” Michael McCarty, managing partner at New York-based Differential Research LLC, said in a phone interview yesterday. “That’s why people are going into the VIX and the volatility products.”

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Stock market price action creating rare setup

By Rod David

If there were ever an opportunity for rare setups… then it would be this environment of trending sharply, to new lows, into expiration. One such setup is a three-day trend reversal, trending through a prior extreme. Two days were just spent reversing back under recent lows. The rare third consecutive day would be very powerful. That is, if rare setups are in vogue.

Pattern points… (Setups and technicals)

Sellers were strong-handed Thursday afternoon. Its bias environment was exited under the noon hour’s low and the final hour was entered lower still. Then the 3:10-3:20 window trended down, producing a fresh low.

But the fresh low was relatively shallow compared to its prior low, its break was hardly aggressive. Oh, and it retraced all of the 3:10-3:20 window downtrend, back to the bias environment’s low. The final hour’s entry was recovered through the close.

While a late short-squeeze was avoided Thursday, selling pressure has been thinning out. That’s not necessarily bullish, and could be caused by the test of long-outstanding “lower prior highs.” But the decline probably can’t absorb a bounce before resuming the decline.

The weekend’s impending illiquidity and Quadruple Witch expiration will exacerbate volatility. That volatility will leave make any trending vulnerable to reversal. Whether an early rally attempt, or a gap down, look for wide opinion shifts intraday.

What’s Next… (Outlook and opportunities)

The 1575.50 target was attacked to within 2 points at Thursday’s low. There is room for noise under it down to 1567.50. No rally attempt would be considered durable until recovering 1598.00-1600.00.

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.

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