Bobby Coats and Bert Greenwalt attend Ag council of Arkansas meeting
Bobby Coats and Bert Greenwalt, agricultural economists with the University of Arkansas and Arkansas State University, catch up at the Agricultural Council of Arkansas annual meeting in Little Rock.

Managing potential global equity bubbles weighing heavy on commodity prices

The current U.S. business cycle is becoming very mature, raising questions about where we go from here.

U.S. and global governments and central banks face a dilemma.

Note: To see Dr. Coats commodity price charts, click on the download button at end of file.

How do they continually intervene through fiscal, monetary, trade and regulatory policy to sustain their defined levels of global growth in an extended business cycle, which continues to be dominated by varying levels of growth uncertainties without creating larger equity asset bubbles throughout the world?

The current U.S. business cycle expansion began in June 2009. This ongoing U.S. business cycle is now eight-plus years old and counting. Historically U.S. business cycles have averaged five-plus years. The length of an optimum modern business cycle is up for debate, but since this business cycle is now the 3rd largest in history many are increasingly wondering about the economic, social and political impact of an anticipated U.S. business cycle contraction, which would undoubtedly lead to a potentially dangerous global recession.

The current U.S. business cycle never really had an expansion phase, where robust economic activity turned into an inflationary period. The current U.S. business cycle has been more of a maintenance cycle not an expansionary inflation cycle. In the current business cycle, problematic business deflationary headwinds have continually undermined domestic and global economic activity. Most in the farm business sector can identify with the deflationary business challenges.

Justifiably so, given the chronic slow global growth of the current business cycle, global governments and central banks would like to extend the current business cycle, due to the dangerous economic unknowns associated with a domestic and global economic contraction, which would simply fan the deflationary forces.

Therefore global governments and central banks find themselves trying to have influence into a broad array of currency, bond, equity and commodity markets to minimize deflationary forces impact of economies, consumers, businesses and commodity markets.

To be very simplistic, equity markets more or less globally need a period to consolidate gains before likely moving higher. Through intervention, governments and central banks globally are trying to do their part in engineering a consolidation or corrective period for many U.S. and global equity markets, thus limiting equity bubble concerns.

Some commodity markets near term have benefited from intervention, like copper and base metals in general as can be seen in the accompanying chart pack, while the remaining commodity markets to varying levels have struggled, due to a combination of fundamentals, risk event concerns with the latest being North Korean nuclear concerns, and fiscal, monetary and trade uncertainties.    

What to expect from the markets this week, Aug. 21

Market “Near Term” Snap Shot

  • Rice: Slight bullish bias remains
  • Cotton: Price needs to confirm that a bottom is in place, otherwise some serious price weakness could emerge given the current global economic setting
  • Soybeans: Soybeans enter the week cautiously bullish
  • Corn: Closing the week below $3.55 requires consideration be given to prices moving to their previous 2016 lows of $3.15
  • Wheat: Wheat needs to hold $4.39 this week. Otherwise some serious weakness could emerge taking prices to $3.90 or lower
  • 10-year Treasury Yield: We enter the week with the 10-Year US Treasury yield slightly bullish or lower yield or interest rate
  • S. Dollar: Corrective activity of the recent ongoing decline is underway, before likely resuming its downside move to 87 or lower
  • Oil $WTIC: A market that appears to be headed back into the $52 to $55 area
  • $CRB Commodity Index: The question in search of an answer: What is the near term impact of government and central bank intervention globally? Do not rule out a revisit to previous lows during this period of global equity consolidation. That said, this index is building a base to move higher
  • S&P 500: A cautionary time period with momentum waning
  • Global Equities: Likely consolidation period, remain cautious of this index
  • Feeder Cattle: Consolidating before moving higher   

In addition to the following “Expanded near Term Market Outlook Considerations for Week Beginning August 21, 2017”

  • Download Slide Show for charts and expanded details, Click Download Link

 

This Week’s Select Summary Considerations:

 

10-Year US Treasury Yield:

  • We enter the week with the 10-Year US Treasury yield slightly bullish with a potentially lower yield as many U.S. and global equity markets consolidate or correct for a period, North Korean nuclear uncertainties and other potential flash-point anomaly events
  • What could take the yield lower? Demand, Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors could take yields lower to 2 or below before significant move higher
  • S. Dollar Index:
    • Corrective activity of the recent ongoing decline is underway, before likely resuming its downside move to 87 or lower
    • Given global macro considerations coupled with no significant global anomaly event moving forward this index may have some serious weakness
  • CRB Index:
    • The question in search of an answer: What is the near term impact of government and central bank intervention globally? Do not rule out a revisit to previous lows during this period of global consolidation. That said, this index is building a base to move higher
    • Bigger Picture: Though dangerously spastic, global macro and growth forces in general remain supportive of the commodity sector
  • $WTIC Light Crude Oil:
    • A market that appears to be headed back into the $52 to $55 area
    • North Korea, market structure, geopolitical considerations and building possibilities of a Venezuelan civil war are just some of the supportive factors
    • A complex, volatile and an uncertain market that deserves a great deal of respect in a world with building economic, social, political and homeland security uncertainties
  • Soybeans:
    • Soybeans enter the week cautiously bullish
    • That said, given complex global macro challenges assume until price action proves otherwise that the bottoming process has not yet completed, and a retest of the $9.00 area or potentially lower into the $8.35 area is still a possibility
  • Corn:
    • Closing the week below $3.55 requires consideration be given to prices moving to their previous 2016 lows of $3.15
  • Long Grain Rice:
    • Interestingly the bullish bias remains, but potentially near term uncertain global economic crosscurrents related to currencies, bonds, equities and commodities are rebalancing markets
  • Cotton:
    • Price needs to confirm that a bottom is in place, otherwise some serious price weakness could emerge given current global economic uncertainties
  • Wheat:
    • Wheat needs to hold $4.39 this week. Otherwise some serious weakness could emerge taking prices to $3.90 or lower
  • SPY SPDR S&P 500 ETF:
    • A cautionary time period with momentum waning
    • Allow price action to provide guidance
  • QQQ NASDAQ Power Shares:
    • Near term remain cautious of this index
    • Allow price action to provide guidance
  • EFA iShares ETF - Global Equities Excluding U.S. and Canada:
    • A cautionary time period
    • Allow price action to provide guidance
  • EEM iShares ETF, Emerging Market Equities:
    • A cautionary time period
    • Allow price action to provide guidance
  1. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]

 

DISCLAIMER-FOR-EDUCATIONAL-PURPOSES

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish