As 2013 rolls in, so do many questions about the course of futures markets. Is crude oil set for a breakout? Will gold end its bull run? Will it be another year of lack lustre performance for equities? Will supply concerns squeeze prices in agricultural markets? The answers are not simple, nor are they straightforward. Global markets are still feeling the rippling effects of quantitative easing, Euro zone woes and weakened demand, while strengthening US fundamentals is providing support for the bulls. RJO Canada Account Executives have provided you with their market outlook so that you gain valuable insight into the futures markets for the coming year. FUTURES MARKET OUTLOOK FOR 2013
Transcript
As 2013 rolls in, so do many questions about the course of futures markets. Is crude oil set for a breakout? Will gold end its bull run? Will it be another year of lack lustre performance for equities? Will supply concerns squeeze prices in agricultural markets? The answers are not simple, nor are they straightforward. Global markets are still feeling the rippling effects of quantitative easing, Euro zone woes and weakened demand, while strengthening US fundamentals is providing support for the bulls. RJO Canada Account Executives have provided you with their market outlook so that you gain valuable insight into the futures markets for the coming year.
FUTURES MARKET OUTLOOK FOR 2013
RJO Canada | Futures Market Outlook for 2013 | page 2
CRUDE OIL MARKETCrude oil looks range bound, with a slightly narrowing trading range — a trend that may continue through 2013. Looking at the weekly continuous crude chart there is a huge drop off in 2008/2009. If a Fibonacci retracement is applied to that entire downward move, there is a 50% retracement at approximately $90/bbl. Over the last two years trading has been roughly at a $30 range on either side of this retracement. Also, during this time crude markets have had consistently lower highs and higher lows. There leaves no doubt that our trading range is narrowing, which is generally considered a continuation pattern.
There seem to be at least three quarters before the support and resistance intersect and crude is forced to break out one way or the other. Either way, the technical breakout of this given pattern would be about $35-$40 in either direction. If the breakout is projected from the 50% retracement, the price would be at around $130/bbl on the upside or about $50/bbl on the downside.
By applying the same support and resistance lines, and retracement of the 2008 move to the monthly continuous chart, a similar pattern emerges. Applying a candle stick chart, as seen here, allows the pattern to become more apparent. The support and resistance lines are drawn using the closing prices, similar to the weekly chart however the retracement levels include the intra-month highs. By using this technique, a 50% retracement lines up with approximately $90/bbl. The narrowing pattern is visible, which is consistent with the weekly chart and with similar projections. Based on where the support and resistance intersect, it seems as though a breakout would only begin after the third quarter of 2013.
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There seems to be no strong indicator of the direction of the break out. Crude supplies are high which is overall bearish; however heating oil supplies are low. If refineries ramped up production to replenish the heat supplies that could end up being supportive for the crude price, although there is no guarantee that will happen. Positive news out of Europe is supportive for prices impacting daily news rather than overall market fundamentals. The crude oil market is simply range bound for now.
CURRENCY MARKETEuroWhen recalling all that’s transpired in the Euro zone over the past year or two, it is a bit of surprise to see that the Euro finished the calendar year near the yearly high. It seems almost forever ago that amidst a summer full of negative headlines, the Euro traded in the low 1.20’s. Much has changed since. The Euro is now continuing to surprise most who continue to look for the right spot to resume short positions. However, those traders would be wise to exercise caution, as it seems that there could be a few factors that lend more support to the Euro bulls moving into 2013.
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Looking at the weekly continuous Euro chart, showing roughly the last five years of trade, you can see that the lows that were made this summer actually matched lows in mid 2010, and late 2008. Both times prior (as well as before 2007), these lows were followed by a significant one and a half year rally. When assessing the prevailing range, one can see that there’s far more upside than downside. Also, lending support to bulls is that there appears to be a reverse head and shoulders pattern pretty much in place, as the last shoulder forming in the mid 1.26 level. If the pattern completes according to theory, you could see a dramatic run, even from current levels with the highs potentially matching the 1.50 level marking the top of the range. Keep in mind, there are still very few traders out there who are not bearish this currency, and consider that it’s usually those who bet against the masses that come out on top.
Canadian DollarAfter starting the year around the 0.98 level, the CAD has seen a strong year. The year’s high was made at 104 in the fall, and its closing out the year around the midpoint of the upwards trending channel. In the past few years, Canada and its currency has been a shining star among world markets. Banks have been kept alive, the real estate markets have so far held firm, the employment situation remains strong compared to other developed nations, interest rates are still not at rock bottom levels, and the country continues to diversify away from its previously handicapping reliance on its neighbors to the south. What’s there not to like moving forward? That is still much to be seen as there have been some cracks showing this year, specifically the heavily criticized real estate market that continues to defy gravity, as well as some fears about employment (though as of late those fears have been quieted). However, when in comparison to other currencies and considering all factors, the CAD could continue its decade-plus trend of averaging higher.
All things considered, the Canadian dollar will probably not be a dramatic mover this year compared to the Euro. The positives currently outweigh the negatives, which should at minimum provide the currency some support. Looking at the chart, if one ignores late 2008 – early 2009, which was a period of unprecedented panic and uncertainty in the world markets, the CAD has defined a very clear support line. Traders continue to buy this uptrend and are rewarded for doing so. Barring a major event similar to 2008, this should persist into the New Year. A boring prediction is for the CAD to forge a range between 98 – 1.06, unless severe negative market conditions arise.
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GOLD MARKETThe coming year will start with a crucial battle for the gold bulls. Despite failing to break above $1,800/oz three times in a 12 month span, gold has still managed to end the year positive year over year. The end result has much to do with the fact that gold ended 2011 roughly $350/oz off the highs of that year, which was roughly $1,550/oz. That level was tested once more in June 2012, before the commodity made its latest unsuccessful test of $1,800 in the fall. The wild swings have left the precious metals markets in a fairly unique situation entering the New Year. Despite 2012 being the 12th straight up year for the metal, it appears to be the first time in a while that many are questioning gold’s ability to continue its bull market run. Though it can be argued that the channel marked by the 1550 low and 1800 high is a drawn out consolidation following a major overshoot in 2011, for the second time this year, gold is trading very near an uptrend line that has held firm since late 2008 (see weekly continuous chart below).
If gold persists to trade in its presently defined channel, it risks breaking this uptrend. In the event this occurs it still would not ‘officially’ mark the end of gold’s long term shine. It would however continue to shake up gold bulls’ collective confidence by potentially looking lower to revert to a longer term trend line (much lower) as the next key support levels. Taking a look at a longer term monthly chart, it is tough to define where the longer term uptrend line would be, should this three-plus year trendline fail to hold.
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Facing 2013, the gold market has the potential for a major move in either direction, and for the first time in a long while, there is less certainty that this market will close this year higher once more. gold bulls will argue that gold is the oldest currency, and can only strengthen in value during times of continual monetary easing. The story for this coming year in the precious metals market will be whether the bears continue to weaken the bulls stance enough to break the key psychological $1,550 low, or whether this was the perfect entry point into a market that eventually makes a successful push past a resistance point three times.
STOCK MARKET INDEX FUTURES2012 has come to a close and US stock indices are close to the year’s highs, up about 190 points for the year. The S&P traded in a very narrow range during 2012, approximately 216 points and the volatility index traded in a range of about 14 points finishing the year near 15.50%. The narrow ranges are the exception and not the norm as seen in the chart.
The main reason for this trend may be that the Fed has embarked on its policy of quantitative easing by buying up billions of dollars of US debt and keeping interest rates artificially low. In effect, the Fed is influencing the cost of money and causing bond investors to seek a higher yield in the riskier stock market. This strategy has worked reasonably well over the past three years; however stock market returns over the past 13 years have been very poor. The S&P 500 index was at 1450 in 1999, which is the same as today’s level. After all of the bond buying the Fed has done, the stock market is back to where it was 13 years ago.
The Fed’s balance sheet is over two trillion dollars, which is historically very high and is unsustainable as the US government is using the Fed to fund its deficits. The Fed will face a huge challenge finding buyers when they will want to liquidate their bond portfolio in a rising interest rate environment. If the economy improves in 2013, interest rates could rise, which would make equity ownership less attractive. If the economy slows down, corporate profits will mostly likely miss expectations, which could put pressure on equity prices.
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The S&P has had a difficult time staying above 1500 over the past 13 years and 2013 may be no exception, with levels staying in a similar range. A defensive strategy could be employed by selling call options against an investment portfolio of stocks and or put options bought to protect the portfolio in case of a sell off.
NATURAL GAS MARKET The major story for 2013 on natural gas should be on the demand side; however this commodity could also be impacted by the export story. Several US companies have applied for export permits from the Energy Department. Another shift on the demand side for 2013 could be the substitution for gasoline. According to studies conducted by NGV America (an organization representing 150 companies in the natural gas vehicle industry) a field price of $3 translates to $0.38 per gallon of gasoline equivalent. As a result, switching to this cheap resource makes a lot of economic sense however it represents a massive shift in the demand context that should take more than a year to materialize. Supply side still dominates and prices are under pressure. Natural gas rig counts are down 45% from the start of 2012, yet storage levels are right in line with last year’s levels.
Currently, the February contract is testing the $3.05-$3.00 key technical and psychological support level. If that level is broken Nat Gas could test the $2.55-$2.60 lows on the continuous chart made in August. This seems to be a major support level and buyers could step in at these prices. There is not much evidence pointing to the fact that Nat Gas would test the 2012 low due to the much cooler weather forecasts for the Midwest and the Northeast for 2013. Last year’s winters were extremely mild and provided downward pressure to prices. A number of analysts are looking for a major bull trend for natural gas to begin but their analysis is based on a “how low can it go” theory. 2013 will not be the year for a major bull story and Nat Gas should remain range bound with $4.00 being the top end of the range.
CORN MARKET North American corn supplies are comfortably tight. From the latest monthly USDA supply demand report, stocks are at 647 million bushels, a use ratio of 5.8%. It remains to be seen if current prices have done enough to curb demand. Canadian export demand has certainly been affected by high prices, however thanks to domestic feeding and ethanol usage the situation has remained quite tight.
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The South American corn crop is off to a mixed start. Argentina had had an abundance of rain, which had delayed their planting. The Rosaria Grain Exchange has pegged their crop at 24 mmt versus the latest USDA estimate of 27.5 mmt. Brazil has had good weather so the USDA number looks plausible, but still below last year. China’s estimate is quite a bit larger but many grain traders view this number as too high—accurate data from China remains a challenge.
The one factor that remains certain is that North American supplies will not be built until next year’s harvest. At present the North American plains are still suffering from the last year’s drought, so once again it boils down to the weather variability as it does most every year.
What will the corn supply look like heading into second quarter of 2013? No clear indication, however it will be exceptionally difficult to push prices sharply lower. Where is a fair price? Current estimates for the first half range from $7.50 to $8.50.
For producers it is time to use price strength to sell old crop and for new crop, consider looking to sell December 2013 anywhere over $6.40 and as much as 25% to 30% of expected production for 2013. Leave the rest until the forecasts for spring weather start coming in.
CANOLA MARKET There are near term concerns about supply tightness as the industry adjusts to recent lower than anticipated production estimates from Stats Canada.
Canola yields have been trending down notably this past year, which could be attributed to producers planting canola on the same field more often than the recommended one out of every four years. With needed rotation, new crop canola looks undervalued.
Into 2013, expect new crop canola to appreciate in value from both a fundamental and technical perspective.
CATTLE MARKET For 2013, it is anticipated that the cattle numbers will be reduced for North America and Europe, however, this should be offset by increased production in South America.
The biggest question mark may come from the demand side, where countries with slower growing economies are spending less on meats for human consumption in comparison to countries where the economies are still doing well. At this point in time, the demand is still strong for beef so prices could continue to rise in the near term.
The cattle on feed numbers for October 2012 indicate a decrease in the feedlots of 2.6% from a year ago October. This is only the 3rd time in the last 29 months that the cattle on feed numbers have dropped from year ago levels. The USDA said placements for cattle over 1000lbs into large feedlots was 18.8% lower this Sept 2012 compared to 2011. This drop in part is due to the increased costs of feeding cattle this year with the higher feed costs attributed to the drought in the US in 2012. The number of cattle placed on feed weighing less than 600 lbs was down 24.8% from Sept 2011. Feeders weighing 600-700lbs was down 14.5% from Sept 2011, those weighing 700-800 lbs were down 11.9% and those over 800lbs were down 20.2% from one year ago levels. The calculated average weight of cattle placed on feed during September was 0.3% heavier than in September 2011.
All of these factors should continue to support higher price levels in the coming year.
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SOFTS MARKET Cocoa
Cocoa prices near the end of the year have the tendency to put in a bottom. During this time 80% of all cocoa has been harvested, which puts downward pressure on prices due to the increased supply.
After three years of record production, this year, near term supplies from the Ivory Coast and Ghana are coming in below previous year’s pace. Amazingly these two countries produce 60% of the world’s Cocoa supply. Perhaps the negative effect of years of civil unrest in the Ivory Coast may be starting to effect overall yields as older trees are not being replaced or possibly they are being badly neglected. With Europe stabilizing, USA and China rebounding, demand could take prices higher in the next few months from these harvest low prices.
Speculators thinking the price of Cocoa will appreciate could consider buying a March futures at 2360 with a stop loss on a close below 2320 looking for upside in the area of 2600. This type of trade could yield a gain of approximately $2400 per contract if March Cocoa prices reach 2600.
Sugar
Seasonal supply pressure from the sugar beet harvesting in the northern hemisphere in the fall has the tendency to create market lows in prices, when sugar supply is peaking. Historically this has caused sugar prices to rally into the New Year.
Improving global economies should also help push prices higher into 2013.Technically this move down from 25.40 cents is roughly a 63% retracement of the previous move higher from 17.70 to 25.40
Speculators could buy March sugar at 19.10 cents looking for upside to 21.00 cents with a Stop Order risking a close below 18.30. The potential gain for this trade would be approximately $2000 per contract.
The content and opinions expressed within this commentary are solely those of the author(s) and are not necessarily shared by R.J. O’Brien & Associates Canada Inc. The data and comments provided herein are for informational purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. There is a substantial risk of loss in trading commodity futures and options on commodity futures and is not suitable for all investors. Contact your account representative for more information on these risks. Information and opinions contained herein come from sources believed to be reliable but are not guaranteed as to accuracy or completeness. Please carefully consider your financial condition prior to making any trading decisions. R.J. O’Brien & Associates Canada Inc. is a member of Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF).
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