COMMODITY PRICES TAKE A DIVE -- AGRICULTURAL MARKETS ARE MAIN REASON WHY -- INDUSTRIAL METALS REMAIN FIRM -- A BOUNCING DOLLAR MAY HAVE CONTRIBUTED TO PROFIT-TAKING IN PRECIOUS METALS -- MOST OF THE DOLLAR STRENGTH IS COMING FROM A WEAK EURO
COMMODITIES TAKE A SLIDE... Commodities were the strongest asset class during the first half of the year. That's no longer the case. Chart 1 shows the DB Commodities Tracking ETF (DBC) tumbling since mid-June to the lowest level in five months. It has also fallen below its 200-day average. [The DBC is comprised of 14 of the most actively traded commodities]. Most of the damage, however, has been seen in the agricultural group. Chart 2 shows the DB Agricultural Fund (DBA) losing 6% during the same month,. It's down much more since the start of May. The biggest losers in the DBA have been corn, soybeans, wheat, coffee, sugar, and cotton. The biggest reason for those losses was better weather conditions in the U.S. and Brazil which will result in larger crop sizes. They have little to do with economic trends. Energy prices have also lost ground. Chart 3 shows the DB Energy ETF (DBE) losing 5% over the last month. Increasing energy supplies in Europe and the U.S. have pushed energy prices lower during the month. That may carry good news on the inflation front. Metals prices have held up much better -- especially industrial metals.
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Chart 1
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Chart 2
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Chart 3
PRECIOUS METALS SLIP WHILE INDUSTRIALS SURGE... Up until this week, precious metals had been doing much better. Chart 4 shows the DB Precious Metals ETF (DBP) tumbling on Monday and Tuesday, as gold and silver prices fell sharply. The DBP is now in the process of testing its 200-day moving average. I've heard lots of explanations as to why they dropped so sharply. One report said that Portugal was selling some of its gold holdings. Another is fears that Janet Yellen was going to sound more "hawkish" in her testimony before Congress. The threat of rising rates is normally bearish for gold. Another possible reason is the recent selloff in European stocks and a weaker Euro. That's giving a boost to the dollar, which is bad for gold. [More on the dollar shortly].
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Chart 4
COPPER AND ALUMINUM REMAIN STRONG... Industrials metals remains the strongest commodity group. Chart 5 shows the DB Base Metals ETF (DBB) rising to the highest level in more than a year. [The DBB is made up of aluminum, copper, and zinc]. This is actually a reversal of what we saw earlier in the year when commodity prices first started rising. I pointed out at the time that agriculatural prices were leading the rally, while industrial metals were lagging behind. That situation is now reversed. In my view, economically-sensitive industrial metals tell us more about the health of the global economy than commodities tied to weather patterns. The current juxtaposition of the commodity groups may be offering the best of both worlds -- more growth (rising industrial metals) with low inflation (lower food and fuel).
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Chart 5
DOLLAR BOUNCES ... Chart 6 shows the PowerShares US Dollar Index ETF (UUP) jumping over the last two days. It is now trading at a four-week high. It would still need to clear its 200-day average (red line) and its June high to turn its trend higher. Most of the dollar buying is coming against the Euro. Chart 7 shows the Euro falling to the lowest level in a month. That may be tied to weak economic news from Europe this week, and the selling of eurozone shares.
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Chart 6
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Chart 7
EUROZONE STOCKS TUMBLE... Eurozone stocks have had a bad July. Chart 8 shows Germany iShares (EWG) falling to a two-month low last week and remaining below its 50-day average. Chart 9 shows France iShares (EWQ) testing their 200-day average. The main reason for the European selling was fears of a bank failure in Portugal. The solid line in Chart 9 shows the Dow Jones Portugal Stock Market ($PTDOW) plunging 10% since the start of July. The good news that it appears to be rebounding. After stabilizing over the last week, oversold Portugal stocks are up more than 3% today. That bounce is coming at a good time. The weekly bars in Chart 10 show the Portugal stock index bouncing off a rising support line drawn under its 2012/2013 lows. A rebound in Portugal would no doubt take some pressure off other euzozone stocks.
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Chart 8
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Chart 9
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Chart 10
BRITAIN IS STRONGEST COUNTRY IN EUROPE... One glaring exception to the weaker trend in Europe is Britian. That can be seen the stronger performance of its currency and its stock market. The British Pound has emerged as one of the world's strongest currencies. It is trading at the highest level in six years against the U.S. Chart 11 plots sterling relative to the Euro and shows a rising trend over the last year. The Pound is now at the highest level relative to the Euro in two years. The main reason for sterling strength is a stronger than expected inflation report for June, and the lowest unemployment numbers since 2008. That increases the odds for a British rate hike later this year. Chart 12 is a ratio of United Kingdom iShares (EWU) divided by EMU Index iShares (EZU). The rising ratio shows that British stocks have been doing better than eurozone stocks since the spring. Since the start of April, UK ishares have gained 7%, while eurzone stock are flat. [The UK has even done better than the U.S. over those four months]. That makes Britain not only the strongest bet in Europe, but one of the strongest bets in the world.
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Chart 11
