The vix is finally starting to track higher, but we would anticipate it to get in the low thirties before a bottom in stocks was in; the current price is just under 28.
Bonds: With both the CPI and PPI out this week, watch for the debt markets to look for guidance from inflation expectations in addition to how the government chooses to deal with Fannie and Freddie. Rumors are flying on whether the Fed will allow them to access the discount window or a capital injection. Either scenario would be bearish for US debt. It is evident based on the action late last week, that yields could climb and prices may well retreat. September bonds only lost 6 ticks last week but the momentum has shifted and prices look like they will move lower. We see resistance around 116’16 with support at 114’20. The same goes for 10-yr notes with resistance at 115’00 and support coming in at 113’16. On the short end of the curve we are also looking for prices to retract for the Euro-dollar looking for last weeks highs to serve as resistance. We bought edu8 puts for clients looking for prices to come off 25-30 points and double our premium for 9700 put options over the next 3-4 weeks.
Currencies
Statistics Canada said the unemployment rate increased from 6.1% to 6.2% in June and showed a net loss of 5,000 jobs, weaker than expected. The September Canadian dollar ended just about 1 cent higher on the week but below recent resistance. If prices move higher in energies and metals, the Loonie could be pulled higher, but we would expect selling to emerge close to par and we will be shopping for a short entry on that move.
The Australian economy is in the midst of a sustained commodity boom which has unemployment at its lowest level since the mid 70’s. As we have voiced in recent commentaries buy dips here as a trade to par should happen. Last week we made a new all-time high and ytd prices have advanced almost 13%. For
now stay long, we should still see prices track higher, but if you start to see an indication of dollar strength the Aussie could get hit hard, so trail stops.
For weeks now the September yen has been basing out trading between .9300 and .9500 collecting steam for what we believe will be a move higher. We would continue to advise buying dips closer to .9300 and it appears the yen will continue to have an inverse relationship with equities. Being that we are looking for a bounce in stocks, this should allow a better long entry from lower levels. We need to see a settlement above the 50 day moving average at .9500 to see a shift in momentum. We see the Bank of Japan holding rates where they are this week.
Last week we were not looking for much out of the Swissie, but we did issue a short recommendation in September with stops just above .9900 and if you took the trade you should still be short. Nothing has changed; we are still looking for prices to make their way back to .9600 in coming sessions. This is more so a trade off the charts as there is no fresh news fundamentally.
Last week the Euro traded up almost 2 cents and got within a few ticks of the highs from mid-April largely supported by hawkish ECB comments. We used that as an opportunity to get short futures for clients and with any luck this week we will use strength as selling opportunities. The closer you can sell to 1.5900 in September the better. If futures are not for you, we also like the September 150 put that is currently valued at $450.
Last week the British pound ended marginally higher just below the 200 day moving average. We will continue to look for opportunities from the short side as we sense prices are moving lower. Assuming the highs from 2 weeks ago serve as resistance at 1.9900 we should see a trade back to 1.9450/1.9550 in coming weeks. The bank of England kept rates unchanged on fears that their economy may slip into a recession as inflation rises. Inflation is expected to rise to over 4.0% later this year which would be double their target.
The dollar pared losses last week as prices retreated 65 ticks making its way towards contract lows at 71.76. We did see some buying late in the week, but we think it may have been short covering as opposed to long entries. The path of least resistance remains down and for now 72.90 should serve as resistance with support coming in at 72.00 followed by 71.75. Continue to monitor movement in the dollar as many of the commodities we trade have an inverse relationship to the dollar and are being influenced. As a contrarian play you could get long with stops below lows, but there may not be much profit in this trade. If you want to feel patriotic as opposed to buying dollars look to sell the Pound or Euro.
Grains
Corn: Weekly export sales showed 337 t.m.t. of corn was sold last week. Friday’s USDA monthly crop report put ending stock at 833 million bushels vs. 673 the month prior and the average guess of 820 m.b. It‘s all weather and its impact on determining the final yields. We will need ideal growing weather to not drive ending stocks to crop rationing levels. The government cut expected yields to 148.4 b.p.a. vs. 148.9 last month. Because of late plantings and reseedings, a report on August 12th will have final planted acreage numbers. Traders should be acquiring longs ahead of that report. If we see rain, December futures could pull back to 6.75 which would serve as the 61.8% Fibonacci retracement. A close on December under 7.00 sets up a test of 6.75 and potentially 6.50. On the daily charts we are oversold and it would not take much to see this market reverse and track higher. We are buying $8 calls for clients and lightly getting long the futures; first we expect to see the gap filled from last Monday’s open at 7.47 and then a trade back to the highs. We still expect weather to be an issue and think that the report in August will give corn one more push before the highs are in.
Beans: Weekly export sales showed 66.4 t.m.t. of beans were sold last week. Friday’s USDA crop report showed 2008 ending stocks at 125 m.b.
