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Date: Monday 07-26-2010

CURRENCIES AND FINANCIALS

The dollar declined against all of its major counterparts as a bigger-than-forecast increase in U.S. new home sales in June and a boost in FedEx Corp.’s earnings prospects made riskier assets more attractive. Sterling rose to a three-month high against the dollar after the U.K.’s major banks passed European Union stress tests. The dollar dropped for a third day against the euro on reduced demand for the greenback as a refuge. “We’re seeing some risk as the equity markets are up, which is positive for the euro,” said Brian Taylor, chief currency trader a Manufacturers & Traders Trust Co. in Buffalo, New York. “Data is coming in decently.” The dollar depreciated 0.6 percent to $1.2991 per euro at 4:21 p.m. in New York, from $1.2909 at the end of last week. The shared currency traded within a cent of the 10-week high of $1.3029 reached July 20. The euro was at 112.82 yen, compared with 112.90, after reaching 113.48, the highest level since June 3. The dollar fell 0.7 percent to 86.86 yen, from 87.46. South African’s rand gained as much as 1.3 percent to 7.3407 per dollar and the New Zealand currency advanced as much as 1.1 percent to the six-month high of 73.55 U.S. cents as the rally in U.S. stocks spurred demand for currencies linked to global economic growth. The Dow Jones Industrial Average erased its 2010 decline, advancing 1 percent on the U.S. housing data and FedEx’s profit outlook, while the Standard & Poor’s 500 Index climbed 1.1 percent.

The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding. After tracking the euro’s slide from about $1.45 at the beginning of 2010, the median forecast of currency strategists has stayed within two cents of $1.20 since the start of June, according to data compiled by Bloomberg. Goldman Sachs Group Inc. and Wells Fargo & Co. raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro. While the euro weakened 15 percent in the first half as the region’s debt crisis threatened to tear the currency union apart, investors have shifted their focus to the U.S. as the dollar depreciated 8 percent from a four-year high in June. U.S. economic data fell short of economists’ estimates this month by the most since March 2009, while euro-region reports exceeded forecasts since April, according to Citigroup Inc. indexes. “People got a bit too excited about the idea the euro-area was going to break up and forgot that the U.S. has a whole load of problems of its own,” said David Bloom, global head of currency strategy at HSBC in London, who has predicted since the start of June that the euro would end the year at $1.35. Confidence in the euro returned after the most-indebted countries in the region announced budget cuts and the European Union crafted a 750 billion-euro ($970 billion) financial backstop in May to forestall defaults. Spain, Portugal, Ireland and Greece successfully auctioned more than 17 billion euros of bonds and bills since July 13.

STOCKS

U.S. stocks rose, erasing the Dow Jones Industrial Average’s 2010 decline, after FedEx Corp. boosted its profit forecast and a report showing improved new- home sales eased concern about the economy. FedEx and United Parcel Service Inc., package-delivery companies that are considered harbingers for global growth, gained at least 1.9 percent. Pulte Group Inc. and Lennar Corp. jumped more than 3.2 percent. Genzyme Corp. rallied 7.8 percent to the highest price since February 2009 amid speculation the drugmaker will become the target of a bidding war. The Standard & Poor’s 500 Index rose 1.1 percent to 1,115.01 as of 4 p.m. in New York. It’s down less than 0.1 percent in 2010 and closed above its average price from the last 200 days, a bullish sign to some analysts who use charts to make forecasts. The Dow gained 100.81 points, or 1 percent, to 10,525.43, and is up 0.9 percent in 2010. “Stocks are going to move higher,” said Philip Orlando, a New York-based chief equity market strategist at Federated Investors Inc., which manages about $350 billion. “When a bellwether like FedEx boosts its forecast, it’s not just about the company, but about the implications for the global economy. In addition, the home sales number was much better than we thought it would be.”

ENERGIES

Crude oil closed unchanged in New York trading as sales of new U.S. homes rose more than forecast and Tropical Storm Bonnie dissipated without damaging production platforms and refineries. Crude rebounded from an early decline after the Commerce Department said home purchases climbed 24 percent in June to an annual pace of 330,000. Equities advanced on the increase, which followed a May slump triggered by the end of a tax credit. Oil workers returned to the Gulf after storm evacuations. “We had a housing number that wasn’t as bad as some guys have been looking for, and that was somewhat bullish for equities, which dragged oil up,” said Rich Ilczyszyn, a senior market analyst with broker Lind-Waldock in Chicago. “We sold off pretty good overnight as the storm turned into nothing.” Oil for September delivery settled at $78.98 a barrel today on the New York Mercantile Exchange, unchanged from July 23. It was the first day since September that oil closed unchanged. Prices are down 0.5 percent this year. Oil reached $79.30 a barrel July 22, the highest level since May 5. The Standard & Poor’s 500 Index rose 1.1 percent to 1,115.01 as of 4:01 p.m. in New York. The Dow Jones Industrial Average rose 1 percent to 10,525.43. “It’s going to take better macroeconomic news or perhaps storm activity in the Gulf of Mexico to spring prices from their narrow trading range,” said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. Front-month futures prices haven’t settled below $70 since May 25 or above $80 since May 4. The 30-day range is $71.09 to $79.60.

METALS

Gold fell for the second straight session as the euro climbed against the dollar, eroding demand for the metal as a haven amid waning European-debt concerns. Platinum rose to the highest level in almost four weeks. Most European banks passed stress tests designed to show their ability to withstand a financial crisis, lenders and regulators said on July 23. The euro gained for the third straight session against the U.S. currency. Gold has dropped 6.6 percent from the June 21 record of $1,266.50 an ounce. The metal priced in euros also reached an all-time high last month. “There are no horror stories out of Europe at the moment, so gold is in a holding pattern,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “The traders are quick to take their profits and just as quick to get back in.” Gold futures for August delivery fell $4.70, or 0.4 percent, to $1,183.10 on the Comex in New York. The metal was little changed last week. Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, advised clients to reduce holdings of gold to an “insurance” position. Gartman had advocated selling euros and buying gold earlier this year as some European countries struggled with budget deficits. “Those who wish to hold their gold positions, against our wishes, should keep a very wary eye on the euro,” Gartman said in his newsletter. Gold may trade from $1,175 to $1,205 this week, said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

GRAINS

The absence of any significant weather threat to U.S. Midwest crops based on weather forecasts through mid August pressured corn futures prices Monday. Nearby Chicago Board of Trade September corn settled 7 1/4 cents or 2.0% lower at $3.64, and December corn ended 6 1/2 cents or 1.7% lower at $3.78 a bushel. The lack of a weather concern forced market participants to reduce risk exposure, as current weather forecasts support good crop production potential. Corn futures had previously rallied on outlooks for hot, dry weather and excessive rains in other parts of the U.S. crop belt to potentially undermine crop yield potential. However, extended weather forecasts do not pose a threat to production potential, enticing traders that previously bet on weather producing bullish price action to cover some previously bought positions, said Shawn McCambridge, senior grains analyst with Prudential Bache in Chicago. Speculative funds were estimated sellers of 11,000 lots. Fund activity is a measure of investment money flow in the market. The improved weather outlook keeps the potential for record production in market discussions, but a bit of uncertainty in regard to crop yields reaching U.S. Department of Agriculture's current forecast of 163.5 bushels an acre limits downside price potential.

Losses in neighboring markets and expectations for strong crop ratings kept a lid on U.S. rice futures Monday. September rice on the Chicago Board of Trade settled down 10 1/2 cents, or 1%, at $10.17 per hundredweight. November rice slid 11 1/2 cents, or 1.1%, to $10.42. The losses were a turnaround from gains Friday. Rice crumbled with CBOT corn, wheat and soybeans. The market seems to have found an area at which it does not want to break through to the upside, a CBOT floor trader said. Before weakening, nearby September rice matched Friday's session high of $10.39, which was a one-month high. Market participants were waiting to see the U.S. Department of Agriculture's weekly crop progress report, due at 4 p.m. EDT. Rice condition ratings should be strong and "unfriendly" to prices, a trader said. A week ago, USDA rated the crop 75% good to excellent, up from 61% a year earlier.

Soybean futures finished lower Monday, stumbling to their lowest level in nearly two weeks on improved crop outlooks, technical selling and spillover weakness from soymeal. Chicago Board of Trade August soybeans finished 18 3/4 cents or 1.8% lower at $9.98 1/4, and November soybeans, the most-active contract ended 15 1/2 cent or 1.6% lower at $9.66. Speculative funds were estimated sellers of 4,000 lots. Fund activity is a measure of investment money flow in the market. The absence of a crop threat in mid range weather forecasts coupled with recent rains shrinking the size of Midwest areas faced with dryness issues enticed traders to reduce risk premium in the market. Futures had previously rallied to 6-month highs on the threat of hot, dry weather stressing soybean plants heading into their key development phase. Traders had built up large price premiums on the potential for yield-robbing heat to adversely impact crops. 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. Timely rains and the lack of stressful heat improves production potential, as favorable weather will allow soybean crops to fill out nicely, said Mike Zuzolo, president Global Commodity Analytics and Consulting in Lafayette, IN. Meanwhile, slowing old crop demand reflected in weakening spot cash prices, slumping soymeal prices and crush margins added fundamental pressure to weigh on old crop prices, Zuzolo added.

MEATS

Pit-traded Chicago Mercantile Exchange lean hogs posted triple-digit losses in most contracts Monday, pressured by profit-taking, a lack of buying interest and failed chart-support levels. In the other markets, pork bellies were lower, live cattle were down and feeders ended narrowly mixed. Brokers and analysts said some traders took profits on contracts that were purchased last week or earlier when the market was climbing. August hogs hit nearly a four-week high Friday but opened slightly weaker Monday before breaking further throughout the session. A broker said selling was initiated in electronic trading which then pulled down prices in the pit as well. August-through-December hogs filled chart gaps that were formed on Thursday's steep gains. Sell stops, or previously placed sell orders, were tripped as key support levels were broken. August fell through its 100-day moving average then penetrated the 50-day line as well before coming off its session low to close just above the 50-day average.

Pit-traded CME live-cattle futures closed lower Monday after what was supposed to be a mixed trade following the U.S. Department of Agriculture's monthly cattle-on-feed report Friday afternoon. The report was thought to be supportive to October and December contracts in relation to the nearby contracts, but traders gave in to concerns about cash-market strength this week and worries about the long positions held by commodity fund-style firms. Brokers said the market also suffered from general selling among investors in commodity markets. Grains, livestock and other commodities felt the pressure. The commitments of traders report from the Commodity Futures Trading Commission last week showed that commodity fund-style trading firms were holding large numbers of cattle futures contracts that they could sell at any time. The large volume of contracts hanging over the heads of the market tended to make investors nervous. In addition, calculations show that some packing plants at least, and maybe all of them, are losing money this week, a broker said. This led to thoughts that packers may be tougher negotiators in the Plains markets this week and that prices could sink $1 per hundredweight in the cash market.

SOFTS

Cotton futures rose Monday, continuing the rally that began last week on bullish chart influences and dwindling U.S. cotton stocks. Most active December cotton on ICE Futures U.S. rose 1.15 cent, or 1.5%, to settle at 76.49 cents a pound, near the session peak and three-week high of 76.53 cents. The outside influences of a weak U.S. dollar and a firm equity market encouraged speculative buying in cotton, with tight warehouse stockpiles of the fiber providing continued price support. Warehouse stocks have fallen to such low levels that traders are uncertain whether ICE supplies--the fallback for cash market purchases--will be available before they can be replenished with the U.S. crop. Rain associated with Tropical Storm Bonnie was not expected to negatively affect cotton since none of the plants in the southern Delta or the Southeast had open bolls, said Sharon Johnson, analyst at First Capitol Group in Atlanta. The boll opening stage occurs when the white fibers of the plant are visible on at least one boll--the rounded bud part of the plant that houses the cotton fiber. Bolls are not expected to open in these regions until early August and then only in small numbers.

World sugar futures rose Monday, buoyed by tight world supplies and supported by a weak U.S. dollar and a firm equities market. Nearby October sugar traded on ICE Futures U.S. gained 0.36 cent, or 2%, to settle at 18.62 cents a pound, just off the session high of 18.63 cents. The contract remained below Friday's four-month peak of 18.66 cents a pound. Global demand for sugar continues to run strong at a time when exports continue to trickle out of top producer Brazil, keeping prices supported near four-month peaks. Rainy weather a few weeks ago delayed shipments out of Brazil, and that has resulted in continued long lines of vessels waiting to load the commodity and transport it to Africa, Asia and the Middle East. "A number of countries continue to tender for sugar, which is a real positive for the market," said Spencer Patton, analyst and chief investment officer at Steel Vine Investments in Chicago. From a chart perspective, December sugar is considered overbought, and traders may begin to take profits off the highs. However, the contract could trade up to 19.00 cents in the near term as the market's momentum carries it higher and as the bullish fundamentals remain intact, said Patton. Others have said the market could reach 20 cents before significant commercial selling is triggered.

Arabica coffee futures for September delivery posted modest losses on chart-based selling as prices retreated slightly from the recent rally. Nearby September coffee lost 0.40 cent, or 0.24%, to settle at $1.6560 a pound on ICE Futures U.S. in New York. September rallied 3% Friday, buoyed by tight supplies. Futures were held to a sideways trading pattern and narrow ranges amid a quiet news front, an analyst said. "The market kind of chugged sideways with Europe just starting their summer vacation season with no real weather concerns coming from South America," said Sterling Smith, analyst at Country Hedging in St. Paul, Minn. The Brazilian coffee harvest continues to progress, with 58% of the crop picked as of July 21, aided by mostly dry weather, agricultural consultancy Safras & Mercado said. This is up from 53% harvested in the comparable year-ago period. Producers harvested 23.9 million bags of arabica beans out of an expected total crop of 41.5 million, Safras said. Robusta coffee, which is often blended with other beans, comprises the remainder of the crop. The Brazilian harvest has also been sped along by high prices that spurred farmers to take advantage of the premiums.

Orange juice futures overcame early losses and posted slight gains as traders kept prices elevated after last week's rally on expectations that tropical storm activity will pick up in August. Nearby September juice added 0.15 cent, or 0.1%, to settle at $1.458 a pound, near the session peak and 2 1/2-week high of $1.459. Orange juice futures have gained 5.3% since July 15 on a combination of chart-based buying and strength related to an expected pickup in tropical storm activity. Tropical Storm Bonnie generated buying interest last week even though it never threatened Florida's orange crop. With no threatening weather currently in the Atlantic Basin, the orange juice market is consolidating and digesting the recent gains, a Florida broker said. Tropical storm activity normally increases in August and September, however, and traders will be on guard for any developments. The speculative buying is expected to keep prices supported near current levels, he said. Florida's new orange crop is approximately golf-ball-sized and is considered to be developing well with adequate moisture to aid growth. A large hurricane headed toward Florida would have the potential to harm the crop, so traders typically build a weather premium into prices ahead of such an event. A significant weather threat would likely take prices back up to the early July highs of $1.516 a pound, a trader said. Total open interest--the number of contracts outstanding between market participants at the close of the prior day's session--rose 227 contracts to total 25,711, ICE data showed.

Cocoa futures for September delivery inched higher Monday after an early rally attempt was thwarted as the contract met chart-based resistance. Most active September cocoa added $7, or 0.24%, to settle at $2,973 a ton on ICE Futures U.S. in New York. Cocoa futures are attempting to rebound from last week's lows as the effect of the warehouse squeeze in London diminishes. The fact that nearly all of the exchange stock on London's NYSE Liffe market was delivered to a large speculative trader instead of a commercial account, or end-user of the commodity, allowed futures to fall nearly 6% last week. The market is now attempting to recover from those losses. The early rally fizzled, however, when speculative buying pushed September to a session high of $3,007, where it met resistance and follow-through buying diminished. The session peak coincided with 100-day moving-average resistance, where selling intensified. Though prices dipped into negative territory for a time, cocoa futures managed to close with modest gains as buying was uncovered near the lows. "There's not a lot of fund activity coming in here to push the market higher. The market is very quiet," said Sterling Smith, analyst at Country Hedging in St. Paul, Minn. While global supplies of cocoa are currently tight, they are deemed adequate as summer is a time of subdued demand for chocolate. Top grower Ivory Coast has already harvested its smaller mid-crop and producers won't begin gathering the much larger main crop until late September or early October.

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