March 7th, 2014 - Issue #727

In This Issue

1. March -April outlook by Trade The News
2. Hot Market Review: Lean Hogs
3. Economic Calendar

1. March -April outlook by Trade The News

Wed, 05 Mar 2014 22:38 PM EST 

The year got off to a rocky start as the impending end of the Fed's quantitative easing program led to a minor retrenchment in the markets. After a blockbuster year for stocks in 2013, major US indices fell in January for the first time in four years. Emerging markets took the brunt of the tapering impact, exacerbated by political problems in places like Turkey, Venezuela, and most recently the Ukraine. Some worse than usual winter weather in the US piled on (literally and figuratively) leading to some re-pricing of risk. Three US Treasury note auctions in last week of February showed strong demand, indicating the bond market also has some reservations about the economic outlook.

But investors cast aside early doubts, and markets came back with guns blazing like an action movie hero in the second act. The S&P500 dipped only single digit percentages in January before rebounding smartly, and European indices largely followed suit, though Japan's Nikkei and many emerging market indices are lagging behind. 

Whatever caused the stock market swoon earlier this year, investors have chosen to accentuate the positives like solid Q4 earnings reports, and eliminates the negatives like slow retail sales and industrial production data. Much like the Academy Awards broadcast , the markets only really seem interested in presenting the best picture. Some new MacGuffins may yet emerge to reverse plot of the market's risk-on sentiment, but so far even the Russia heavy (Putin) has failed to changed the course of the story.

American Hustle

In the US, the major question continues to be how markets will respond to the Fed tapering quantitative easing. The Fed has taken the last year to carefully frame tapering not as the beginning of the end of accommodation, but merely as the withdrawal of additional stimulus, and has indicated that barring a disruptive new trend in the data, the QE rollback will stay on its $10B per meeting pace and wrap up in late 2014. So far US markets have bought in to that script, continuing to set new record highs on the S&P and Dow, but as the end of QE approaches there could be some renewed jitters, and the equities could get more skittish. Already some chartists note that the most recent highs are getting narrower in breadth, based largely on a few outsized winners (like Tesla), and the doomsayers keep pointing to stock index charts that suggests an eerie similarity between the last year and the lead up to the 1929 crash.

Brazen predictions aside, the end of QE is being absorbed without too much tumult, but eventually forward looking markets will start to model what comes after QE has ended. Fed Chair Yellen and her cohorts have stated publically that they are looking to retool forward guidance, taking it away from quantitative measures like the 6.5% unemployment threshold and back to the more qualitative guidance seen pre-crisis. Given the broad range of opinions expressed by FOMC members on this subject, it could reasonably take the rest of the year for the Fed to craft their new forward guidance, but we will continue to see glimpses of its evolution in "rushes" of Fed speeches and minutes in the months to come.

Things are clearer than they have been for a long time on the US fiscal front. After producing nothing but political cliff hangers over the last few years, Washington has finally made some progress toward reducing uncertainty. Congress has cleared the decks for 2014, settling the debt ceiling issue as well as funding the government through the mid-term elections and into early next year. The politicians are now discussing less pressing issues like raising the minimum wage and extending unemployment insurance (UI). The minimum wage is a perennial football in Washington, while the expiration of UI benefits for millions of Americans could hurt consumer spending at a sensitive moment of the recovery, and play more havoc with unemployment figures that have already been skewed by structural changes that have noticeably shifted the workforce participation rate.

Aside from the jobless rate falling faster than expected, US economic data has been largely disappointing for a couple of months. It is yet unclear, however, whether its root is a cyclical slowdown or just that the data has been tainted by the worst winter weather in decades. The weather may give us a free pass for Q1, but heading into the spring the data needs to shake off those temporary factors.

A worst case scenario for the Fed would be payroll and housing numbers failing to pick up in the spring, testing the central bank's resolve to finishing tapering. Though the FOMC policy statement leaves nominal flexibility, bank officials have made it clear that it would take a significant outlook change to deviate from the current path of tapering. So if the cuts in QE are paused, then the market reaction could be exaggerated. Central bank officials are also keenly aware that a mid-course shift in tapering could further chip away at Fed credibility that has been eroded by dodgy economic forecasts and the communications bobble in mid-2013 that led to the 'taper tantrum'.

A spring thaw in US data could be led by a snap back in housing. Already the January new home sales reading came in at a 7-month high, despite the cold weather woes. If other indicators like building permits and existing home sales start to confirm an improvement in the housing market, they could in turn lead other economic data higher, perhaps shaking the winter malaise off of consumer spending and industrial production numbers. Better numbers in the next two months could still salvage a decent rebound in growth when the advance Q1 GDP data is released on April 30.

Brussels Buyers Club

After many years of struggle, the European economy is starting to show some renewed signs of life. Unemployment has stabilized, Ireland is exiting its extraordinary support program followed closely by Portugal, and there are no new sovereign financial crises on the radar. Sovereign bond yields between peripheral nations and the German bund are at their narrowest in years, indicating cohesion is returning to the euro zone after it was nearly spun apart. Within the zone the only current political drama is in Italy, where an ambitious young party boss has pushed out Prime Minister Letta, though it remains unclear if this will be a setback for Italy's economy which just scored its first quarterly growth reading in over two years.

Lately, the chief concern for Europe has been persistent low inflation. The European Central Bank, which has tried get out in front of some previous policy hazards, has had a more difficult time taking a decision on this matter. Officials have been jawboning the issue, never missing a chance to note "inflation expectations are well anchored", but they seem to be hesitant to pull the trigger on the next evolution of policy accommodation. 

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2. Hot Market Review: Lean Hogs

From our friend Jim Wyckoff

Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at www.jimwyckoff.com click on image below to enlarge

April lean hog futures have seen a parabolic price move the past couple weeks, and in the process have set a new all-time record high for nearby futures. A very bullish fundamental picture has helped boost this rocket shot. However, the fact that prices have gone parabolic does suggest a major market top is now not far away.

3. Economic Calendar

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!