The Hightower Report

The long and winding road toward a global recovery continues to encounter tight hairpin curves and an occasional roadblock. Last week, just when it seemed like most markets were poised to fully embrace a return to double-dip recession conditions, sentiment pivoted and improved significantly. Apparently the mere hope of accommodation from the BOE and the US fed provided the impetus for the recovery in attitudes, but it is also possible that a flurry of mostly supportive US corporate earnings and a further downshift in Euro zone debt fears also contributed to the revival. One might also suggest that a final end to the push for financial reform removed a layer of anxiety that had been hanging over the market for most of the last 6 months. However, until the flow of US scheduled data shows some improvement again, we would label the gains in stocks and certain physical commodity markets as rather suspect. With the renewed concern toward the US recovery and the most recent “quietly orchestrated” push for another extension of US unemployment benefits, it is possible that US financial instruments might be viewed with some suspicion by foreign investors.

With the US Dollar seeing a two-month slide and US Treasuries only able to manage a two month consolidation below contract highs, it would also appear that some flight to quality interests are already pulling away from the US Dollar and US Treasuries. While we don’t see the US credit rating called into question anytime soon, in the event that the numbers remain soft and the next non farm payroll report shows another big loss, the onus could be on Washington to do something other than extend unemployment benefits. While Harvard and other politically correct institutions of higher learning might be able to produce studies that ferret out some abstract stimulus effect from extending payments to the unemployed, to get “self perpetuating” growth might require some tried and true classic stimulus efforts.

While China and other important world entities have signaled their ongoing interest in US Treasuries, it is not a given that another round of deficit spending from the US will go off uncontested. Therefore, we see the potential for even more slowing ahead and a major political/economic decision might have to be made by Congress and the President in the coming month. While physical commodities like oil and metals are sure to be dramatically impacted by the recovery/no recovery situation, we think the tell-tale markets will be the US Dollar and perhaps the US Treasuries.


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For much of the past three years, the copper market has been a very solid leading indicator of where the economy was heading. While some might suggest that the mid July rally points to a possible recovery ahead, it is more likely that the market reached an undervalued level below $2.80 and it needed a corrective bounce. The subsequent rally from the sub $2.80 low to the $3.10 area was accomplished at least partially on the back of a gradual tightening of supply at the exchanges, but it was also partially forged off speculation of a recovery in the wake of a reduction in European contagion fears. In looking at daily and weekly changes in world copper exchange stocks, the LME has shown a very definitive pattern of daily declines. The Shanghai exchange has also seen a tightening of supply. Since March 3rd when LME copper stocks began to decline in earnest, that exchange has lost approximately 131,650 tons of copper and saw declines on 87 out of 97 days.

Some might even suggest that changes in Shanghai copper stocks are even more critical to world copper prices, as China has become a dominating demand force in the market. Therefore seeing Shanghai copper stocks drop in 8 of the last 10 weekly readings for a total decline of 60,902 tons would seem to suggest that China is still growing or that China has for some reason decided to reduce its buffer stock of copper. It should also be noted that the International Copper Study Group last week put the world copper market in a 60,000 ton deficit in the month of April, and that highlights a market that has remained tight even in the face of some rather slow economic activity. In the end, we would suggest that copper is a commodity market that should sense the end of the slowing first and in turn see the biggest reaction to a return to positive growth expectations.

However, with December copper recently climbing back above $3.10 and those prices sitting more than 10 cents off the early July lows, we would caution traders to buy copper cheap and avoid paying up near the upper end of the last two months’ trading range. In our opinion, the copper market is likely to encounter another disappointment in the lead-up to and through the next US Unemployment Report, and the realization of a sluggish US economy is certainly capable of knocking December copper back down to the $2.89 level. While the US and European economies might not be able to return to the robust growth seen prior to the sub-prime crisis, seeing the US and Euro zone become less of a drag on global demand could make a late July or early August correction in copper a chance to get in on what could be a pretty solid uptrend through the end of this year.   

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Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

The impact of the sub-prime crisis continues to serve as a drag on the global economy into the 3rd quarter of 2010. As suggested in our last newsletter, the evidence of slowing in the US economy has become more prevalent throughout a wide range of statistics over the last month and that in turn has created a fresh drag on physical commodity prices.

We also suggested in prior publications that a number of physical commodities like soybeans, sugar, crude oil, RBOB, heating oil and natural gas are pretty flush with supply right now. Fears on the demand side are, therefore, something that should be expected to weigh on price structures.

Ordinarily we would have expected some response from the government to recent evidence of slowing but our Congress gets a full week off for the 4th of July, perhaps so they can take advantage of their superior health care benefits and be fully rested when they get back. Complicating the move toward additional stimulus measures are international concerns toward deficit spending and apparent fundamental differences within the government on what type of stimulus measures actually work.

While the jury is still out on whether extending unemployment benefits is a stimulus, those benefits were included in the original record stimulus package and it doesn’t seem as if the country is garnering a sustained benefit from that spending. However, given that the Democrats have a solid majority and also the White House, we suspect that a noted portion of any additional stimulus will be directed by the California and Nevada Congressional contingents toward unemployment benefits extensions.

We have to wonder if key members of the G20 won’t begin to complain that the US is using borrowed money for suspect programs. Therefore, the international response to an upcoming US stimulus push might serve to reduce the flight-to-quality status of the US Dollar and the US Treasury markets. While we aren’t expecting an all out discussion of a downgrade of the US debt rating, it is possible that money won’t be as aggressive in flowing toward US financial assets.

In the event that the President dares to dream big and Congress puts together another massive pork barrel package, it is possible that global market players might attempt to shape US policy by their investment flows. While China recently suggested that would not abandon US Treasuries, they reportedly held in excess of $900 billion at the end of April. Therefore, they do have the power to influence US policy decisions. We see the prospect of the Dollar weakening ahead but we doubt that factor alone will be capable of turning off a pattern of weakness in physical commodities.