Crude oil supplies fell this week, while distillate production is rising above estimates, suggesting demand is beginning to wane in this sector. A fall in the stock market is likely to pressure oil prices, especially if the foundation for the fall is based on a weakening economic outlook for the U.S. Rising interest rates in the U.S., which can be one of the resulting effects of a credit drop sparked by this debt ceiling issue, would be an unintentional monetary tightening that would curb spending and disrupt growth. Even the potential for this, let alone the reality of it, should be enough to pressure crude oil prices to test and break recent lows.
Stocks should see a wild week ahead, a pretty immediate confirmation of the forthcoming volatility that I anticipated in Tuesday's Mega Mid-Year Commodities Forecast. The focus of the debt ceiling issue should now turn to a credit downgrade and interest rate increase issue, which will then become a growth restricting monetary tightening issue. The short term volatility aside the stock market is overbought and likely to see a volatile correction while bonds could diverge from its inverse correlation to stocks if the reason for a stock decline is due to the credit rating drop which would pressure treasury prices on rising interest rates. The dollar remains a buy on dips on its way to a critical resistance level just below 80. The euro, pound, peso, and Canadian and Aussie dollars are all sells. The Japanese yen is on a fast track to test the highs and a break above 130 could catapult the yen into a massive rally to my 140 target, hitting my forecast that:
The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.
Hot and dry weather versus collapsing economy and strengthening U.S. dollar - and the winner is...(hint: not grains). I anticipate strong selling in grains in coming weeks, focusing on beans as it approaches the tipping point of a consolidation pattern.
Hot and dry weather, Japanese radiation hay, and a spike in global demand - surely enough to push cattle to fresh highs, but is it enough to keep it there? I believe this is a critical turning point for cattle and the market has penetrated support. Sell. Sell. Sell. Hogs on the other hand are in breakout rally mode, but are getting close to a put buying opportunity, if they are not there already.
Gold and silver remain a flight to quality safe haven during this debt ceiling crisis (I think we can call it a crisis at this point) but without a real fundamental logic. Sure if stocks selloff and confidence in the U.S. crumbles then investors may flock to these safe havens, but the reality is a higher interest rate means monetary tightening and less inflation risk. Metals are a sell across the board using a defined risk options play.
Coffee broke key support and should see significant liquidation and a move to 220 relatively quickly. Cocoa remains a sell with some volatility and momentum on its side after coming back into a channel following a bull breakout. Cotton is in a freefall but I would avoid it. OJ and sugar are both riding high and both worthy of put buying accumulation.
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