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Date: Wednesday 07-28-2010

CURRENCIES AND FINANCIALS

The dollar dropped from the highest level in almost two weeks versus the yen as orders for U.S. durable goods unexpectedly fell last month and the Federal Reserve said economic growth slowed in some areas. Australia’s dollar slid against all of its major counterparts as the nation’s consumer prices rose in the second quarter less than economists forecast, raising speculation that the central bank will keep borrowing costs unchanged. The yen advanced against the New Zealand dollar and South African rand as a drop in U.S. stocks discouraged demand for riskier assets. “Growth for the U.S. for the balance of the year is going to expand but at a slower pace,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “That’s just another weight on the risk rally.” The dollar decreased 0.5 percent to 87.45 yen at 4:01 p.m. in New York, from 87.90 yesterday, after touching 88.12, the highest level since July 15. The euro slid 0.6 percent to 113.57 yen, from 114.24, after rising to 114.74, the highest level since May 18. The euro traded at $1.2986, compared with $1.2996. New Zealand’s dollar fell 1.2 percent to 63.69 yen and South Africa’s rand slid 0.8 percent to 11.89 yen as the drop in orders for durable goods deterred trades in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s target lending rate of 0.1 percent makes the yen popular for funding such transactions.

STOCKS

U.S. stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, after orders for durable goods unexpectedly decreased and the Federal Reserve said economic growth slowed in some areas. Boeing Co. fell 1.9 percent, while WellPoint Inc. slumped 3.7 percent as second-quarter sales missed analysts’ estimates. Eastman Kodak Co. tumbled 15 percent after reporting a wider- than-projected second-quarter loss. Nine of 10 industries in the S&P 500 retreated after government data showing orders for goods meant to last at least three years declined 1 percent. The S&P 500 lost 0.7 percent to 1,106.13 as of 4 p.m. in New York. The Dow Jones Industrial Average fell 39.81 points, or 0.4 percent, to 10,497.88. About three stocks declined for each that rose on U.S. exchanges. “Most people feel that the economy is in a soft patch and the latest data points have been showing that,” said Mark Bronzo, an Irvington, New York-based fund manager at Security Global Investors, which oversees $23 billion. “The earnings season has been good. However, investors will probably sit back and wait until we get more clarity.”

ENERGIES

Oil tumbled to a one-week low after the government reported an unexpected increase in supplies as imports jumped to the highest level in almost four years. Crude inventories climbed 7.31 million barrels, or 2.1 percent, to 360.8 million in the week ended July 23, the biggest increase since March 19, according to the Energy Department. Analysts forecast a drop to a four-month low in a Bloomberg News survey. Imports climbed to the highest level since August 2006. “This is huge, and it’s knocking prices down,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “It’s only adding to an environment in which we saw a drop in consumer confidence yesterday. We also recently saw oil reach the top of its range. You put all these things together, and it looks like oil will be going to the low $70s.” Oil for September delivery fell 51 cents, or 0.7 percent, to settle at $76.99 a barrel on the New York Mercantile Exchange. Futures touched $75.90, the lowest level since July 20, after the report was released at 10:30 a.m. in Washington. Prices have dropped 2.9 percent since settling at an 11- week high of $79.30 a barrel on July 22. Futures have risen 15 percent in the past year. Oil supplies were forecast to drop 1.73 million barrels, according to the median estimate of 16 analysts in the Bloomberg News survey.

METALS

Gold futures edged higher Wednesday, rising above three-month lows on bargain buying but showing little direction as demand for refuge assets remains low. The most actively traded contract, for December delivery, settled up 60 cents, at $1,162.40 an ounce on the Comex division of the New York Mercantile Exchange. "We could see gold stabilize here," said Ralph Preston, senior market analyst with Heritage West Financial in San Diego, Calif. But "unless markets get spooked again," gold is not likely to sustain a rally, he said. Gold rose to record highs in May and June on worries about euro-zone sovereign debt and a slowdown in the economic recovery. Precious metals are sometimes bought as a hedge against uncertainty or inflation on the belief that they hold their value better than other assets during economic turmoil. Recent stability in U.S. and European markets have pulled support out from under gold prices. The most-active gold contract is down 6.7% in July and is on pace for its steepest monthly decline of 2010. Gold found some support Wednesday from buyers looking to enter a market at a discount from June's highs, and some signs of physical demand. But gold's relative stability doesn't suggest a new upward trend, analysts said.

GRAINS

U.S. rice futures climbed Wednesday, ending higher amid widespread gains in agricultural commodities. September Chicago Board of Trade rice ended up 13 1/2 cents, or 1.3%, at $10.14 1/2 per hundredweight. November CBOT rice ended up 13 cents, or 1.3%, at $10.39. Grains in general surged Wednesday, led by wheat, which is rallying on concerns about the Russian crop. Wheat's gains are supportive for rice, because both are key world staples, although analysts differ on the extent of the relationship between the two markets. "It's indirectly supportive," firstgrain.com analyst Ed Taylor said of wheat's rally. The market throughout July has held above the fresh 44-month low set June 30, but traders and analysts say the market's trend has remained sideways. Global supplies have been ample and demand for U.S. rice has been weak. While Taylor said the market is unlikely to set any new bearish milestones soon, "on the flip side it's really hard, unless something happens overseas, [for prices] to go anywhere."

Bullish projections that a Russian drought will shift export demand to the U.S. pushed U.S. wheat futures to fresh 13-month highs Wednesday. September wheat on the Chicago Board of Trade reached an early high of $6.23 1/4 a bushel, the highest price for a front-month contract on a monthly continuation chart since June 2009. The contract ended up 20 1/2 cents, or 3.4%, at $6.15 1/2. The markets took their cue from a rally in European wheat futures, which touched a fresh two-year high on concerns about reduced production and export prospects in the Black Sea region. Countries in the region, such as Russia and Ukraine, compete with the U.S. and Europe for export business on the world market. Traders continued to talk about the potential for Russia to limit grain exports to protect domestic supplies. Restrictions on Black Sea wheat exports in 2008 helped propel prices to record highs amid global crop failures.

U.S. corn futures rallied Wednesday, as a surging wheat market pulled the market higher and prompted a wave of short-covering, traders said. September Chicago Board of Trade corn ended up 13 1/2 cents, or 3.6%, to $3.76 1/4 and December corn closed up 13 3/4 cents to $3.90 3/4. The market was higher throughout the session, and actually gained more, on a percentage basis, than wheat, although traders said wheat was the clear driver. Problems with the wheat crop in Russia have prompted concerns about its exports, and traders say that could lessen available feed-quality wheat supplies, a main competitor for corn. Mike Zuzolo, president of Global Commodity Analytics & Consulting, added that a widening wheat-corn spread will make corn more attractive price-wise to end-users. "The corn is stealing demand from the wheat right now in my opinion," he said. Traders said corn's strength was aided by short-covering or the buying back of previously sold positions. Fundamentally, they said, there is little support for the corn market, as weather remains benign, or bearish. Forecasts call for warm temperatures but enough rain to prevent significant heat stress to the crop.

Soybean futures ended higher Wednesday, reaching a new high for the week on spillover strength from wheat futures and the uncertainty of 2010 production potential. Chicago Board of Trade August soybeans finished 12 1/2 cents or 1.3% higher at $10.10 1/2, and November soybeans, the most-active contract, ended 12 1/2 cents or 1.3% higher at $9.78. Speculative funds were estimated buyers of 5,000 lots. Fund activity is a measure of investment money flow in the market. The strength of wheat futures on concerns about lower overseas production due to the adverse affect of weather on production sent bullish waves filtering through the CBOT Ag complex. Speculative buying was featured, with traders adding premium to prices despite favorable near-term crop conditions. The market is taking into account the risks associated with a long growing season, particularly with U.S. soybeans heading into their key development stage. August is a critical time for soybeans because that's when the plant sets pods and the beans within them grow, ultimately determining the yield. "Uncertainty surrounding crops produce fear, and the market trades fear with higher prices," said Tim Hannagan, analyst with PFG Best in Chicago.

MEATS

Optimism about near-term market fundamentals sent Chicago Mercantile Exchange hogs to a higher settlement for a second straight session Wednesday. Lean hogs initially traded mixed after buying from futures' run-up Tuesday tangled with profit-taking. Early steady-to-higher cash hog quotes also ran into August's bearish price premium to CME's hog index. Tepid buying interest caused August and October to slip beneath Tuesday's lows that touched off sell orders. Despite negative midday direct cash hog returns, front hog contracts mounted a comeback, fueled in part by talk that tight hog numbers should lay a foundation beneath cash hog values and pork prices well into next week. Upward momentum carried August beyond 100-day moving average resistance to a 4 1/2-week top which caught the attention of fund buyers. August and October ignited buy orders soon after both months surpassed Tuesday's tops. Spot August led the way, backed by spreading into that month out of October. Spreads consist of trading two or more contracts simultaneously while taking advantage of the price differences between them.

CME live cattle posted a firm settlement on short covering and front months' bullish price discounts compared with last week's cash cattle trade. Packers last week purchased cash-basis cattle for mostly $95 per hundredweight. Packer bids so far this week were reported at $93 versus $96 to $97 asking prices. Mixed boxed beef prices and unprofitable beef packer margins might bridle packer spending for supplies this week. The U.S. Department of Agriculture's Wednesday afternoon boxed beef data, which tracks beef prices at the wholesale level, showed choice down 34 cents per hundredweight, but select cuts rose 82 cents. Operating margin index for beef packers for Tuesday was minus $3.28 per head, compared with minus $4.20 Monday, as calculated by HedgersEdge.com. Bullish traders took a breather at first, which caused front months to drift below Tuesday's lows and trip sell orders. Fund buying later kicked in, which helped land contracts in positive trading territory. CBOT corn's sharp rise motivated distant cattle month speculative buyers. Cattlemen may avoid increasing the size of their herds because of higher corn costs that could underpin cash prices.

SOFTS

Cotton prices corrected lower Wednesday as traders calculated upcoming supplies from an expected bumper crop. Still, near-term supplies could be tight. Nearby cotton for October delivery settled 0.88 cent, or 1%, lower at 80.57 cents a pound on ICE Futures U.S. The most actively traded December contract ended 0.39 cent, or 0.5%, lower at 76.31. Those contracts backed off of the previous session's gains as traders bought and sold different cotton contracts according to the time that they need the physical fiber. Exchange stocks, which are deliverable against futures contracts in the corresponding months, are at low levels. This makes it unlikely that those supplies, which act as a second source of the fiber aside from the cash market, will be there for willing buyers. ICE daily cotton stocks decreased by 2,490 500-pound bales Tuesday to total 50,825 bales, according to exchange data. "To see [exchange] stocks at 50,000 bales is pretty positive" from a bullish perspective, said Keith Brown, principal of Keith Brown & Co. in Moultrie, Ga. "There's still a very strong undertone of bullishness out there." Cotton is in high demand as textile consumption rebounded in the last year in tandem with the world economy. Despite the U.S. Department of Agriculture's expectations for a 50% year-on-year increase in the U.S. cotton harvest this fall, there is speculation that much of that cotton has already been sold.

Orange juice futures for September delivery fell on a lack of threatening weather in the Atlantic Basin and as prices backed down from chart-based resistance. Nearby September juice lost 1.20 cent, or 0.82%, to settle at $1.4550 a pound on ICE Futures U.S. in New York. Much of the price weakness was attributed to bearish chart signals after orange juice futures had neared overbought conditions on their climb Tuesday to three-week highs, said Sterling Smith, analyst at Country Hedging in St. Paul, Minn. A lack of follow-through buying near this week's highs allowed bearish traders to pressure the market. Mild conditions over the Atlantic Basin are also contributing to the mild pressure in orange juice, a broker said. Dry Saharan air over the tropical Atlantic and much of the Caribbean is preventing weather disturbances from becoming organized. Warm ocean surface temperatures, however, remain conducive to storm development.

Sugar prices rose to their highest levels in 21 weeks Wednesday as a growing line of ships wait at Brazil's congested ports to ship the sweetener to Asia, the Middle East and Africa. Nearby sugar for October delivery ended 0.45 cent, or 2%, higher at 18.87 cents a pound. Wet weather in mid-July hampered loading of bulk sugar at key ports at a time when Brazil--the world's No. 1 sugar exporter--is seeing heightened demand for sugar from world markets such as Asia, Middle East and Africa. As a result, Santos and Paranagua ports are still tackling a backlog of ships needing to collect their cargo. Meanwhile, importing nations are doing their best to refill stocks that have been whittled away following last years' poor harvest. These countries are particularly keen to import sugar ahead of Ramadan, a four-week-long Muslim holiday that begins in August. Its observers fast from sunup to sundown and then feast on foods including sweets in the evening. The International Sugar Organization in May said global sugar demand will outstrip supplies by 8.5 million metric tons in the season that runs through Sept. 30. In the following year, however, supplies may surpass demand by 2.5 million tons, it said.

Arabica coffee futures for September delivery climbed Wednesday, lifted by speculative buying that took nearly all soft commodities higher. Nearby September coffee rose 3.65 cents, or 2.2%, to settle at $1.6740 a pound on ICE Futures U.S. in New York. "The advance was a combination of technicals and the fact that markets like sugar and cocoa also went up, so the soft commodity complex was higher as a result," said Hernando de la Roche, managing director of coffee trading at Hencorp Futures in Miami. Coffee futures continue to derive underlying support from the lack of top-quality arabica beans in the market ahead of the Central American and Colombian harvests, where most of the mild washed arabica beans are grown. Much of Wednesday's trading was centered on charts, however, as bullish participants pushed prices toward the high end of the trading range. Even so, coffee futures remained within recent parameters. September coffee reached a session and 1 1/2-week top of $1.6810 on the buying interest. Prices could gain further, though strong resistance is expected to develop as coffee nears $1.70 a pound.

Cocoa futures for September delivery climbed Wednesday on speculative buying linked to the overall gains in soft commodities, though prices remained in a trading range. Nearby September cocoa added $30, or 1%, to settle at $3,010 a ton on ICE Futures U.S., near the session peak of $3,018. Cocoa prices found support on speculative buying in the soft commodities sector that also took sugar, coffee and cotton higher. Prices remained within recent trading ranges, however, in seasonally light dealings. "It looks like we're seeing some commodity fund money coming in to the cocoa market and lifting us off the lows," said Sterling Smith, analyst at Country Hedging in St. Paul, Minn. "We are now at the top end of our most recent range," he said. September cocoa reached a session peak of $3,018 before the bullish momentum waned slightly. The contract could not take out Tuesday's high of $3,026, however, a nearby chart resistance level where selling is expected to increase.

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