The general theme this week could be risk aversion as problems in the U.S. banking system resurfaced after several weeks of hibernation and triggered a massive migration to safe havens such as the U.S. Dollar, U.S. Treasuries, and even gold.
Equity markets are under pressure this morning following the release of earnings reports from five Dow component companies. The real cause of the weakness is the banking sector. Yesterday traders noted that Bank of America still had billions of Dollars of non-performing loans on the books. Investors took a "where there's smoke, there's fire attitude" and sold banking stocks under the assumption that U.S. banks may still have exposure to toxic assets.
After a few days of watching the Treasury yields creep higher while money was redeployed to the equity markets, investors sold stocks and moved their cash back to the safety of the bonds and notes. This trend is likely to continue as banking issues are resurfacing in the U.S. financial system.
June Gold could receive a boost on two fronts. Firstly, investors are moving money back into gold on speculation that the U.S. banking system still faces genuine exposure to toxic assets. Yesterday's Bank of America earnings reports showed about $28 billion of non-performing assets still on the books. Secondly, there is the possibility of an intervention by the Swiss National Bank. Gold should rally sharply higher if the SNB decides to purposely weaken its own currency. July Silver will benefit from a rise in gold. Oversold technical indicators should help provide additional support.
Industrial metals such as July Platinum and July Copper could be under pressure on profit-taking selling. Traders are also factoring in the possibility of less demand from China.
The lack of a unity in the European Central Bank regarding the next interest rate cut is hurting the June Euro. Traders are selling the Euro as it has become unclear as to how much of a cut the ECB will take at its next meeting on May 7. Some policy makers prefer to slash rates to under 1% while others prefer to keep rates at 1%. Furthermore, there is no clear plan as to how to use non-standard means to stimulate the Euro Zone economy. Leadership from Trichet is being questioned and traders prefer the short side until all of the problems are addressed.
The stronger Dollar has been keeping downside pressure on July Corn and July Wheat. These two markets are also feeling pressure because of the recently reported inventory numbers. Low demand and stepped up fieldwork is also leading sellers to keep downside pressure on these markets.
July Soybeans may finally be posting a short-term top. The fundamentals support a rally this year, but the stronger Dollar at this time is likely to keep pressure on the soybeans. Inventories are low so any weather issues this year could trigger a strong rally later in the spring.
The stronger Dollar has also taken its toll on the softs complex. Production issues for cocoa and sugar should provide support for these markets throughout the rest of the year, but if no one is buying then inventories will be allowed to rebuild. It is going to take a combination of stronger demand and low production to drive these markets higher. At this time talk of problems in the global economy is leading to speculation that demand will be down for cocoa and sugar.
