August 9, 2013 - Issue #697

In This Issue

1. TTN August-September 2013 Outlook: Summer’s End 
2. Hot Market Review - Wheat Market Now Very Mature, Suggesting Downside Limited
3. Economic Calendar

1. TTN August-September 2013 Outlook: Summer’s End 

The Goldilocks environment has persisted into the summer, with central banks further augmenting their dovish talk as tepid data showed the slightest improving trend, not too hot, not too cold. Markets saw a bit volatility in June as Treasury rates popped after some hand wringing about the Feds QE tapering plan, but the worries quickly subsided as the Fed and other central banks went to new lengths to demonstrate that they are still in control. A parade of Fed officials stressed that the end of QE would not constitute tightening and was not a prelude to rate hikes. The ECB took up the banner of accommodation by providing forward guidance for the first time ever, indicating that rates will be at current levels or lower for an extended period of time. Similarly the BOEs new chief has promised to throw his own forward guidance on the stimulus bon fire in August. The BOJ has already impacted markets with its fresh accommodative policy, and there is some speculation that the Chinese central bank could offer up some new stimulus if Chinas economic growth slips any further.

It is becoming clear that the global recovery will be a long, slow, and multi-speed one, which will make the eventual unwind of extraordinary monetary easing extremely complex and fraught with peril. But for at least another couple months, markets will likely continue to ignore the longer term issue of exit policy, and enjoy the modest improvement in the economy as it faces only some moderately sized potential pitfalls, mostly on the political front.

Finally, Europe Gets Some Sun

Europe is getting more attention as its economy appears to have stopped getting worse, thanks largely to central bank interventions. At its July meeting, the ECB initiated forward guidance for the first time to further leverage its verbal intervention. This, combined with the promise of the OMT program (which has been enacted but never actually used), is just about the last line of verbal defense from the ECB. If economic data starts to deteriorate again, the central bank may have to raise the prospect of negative deposit rates again, which Draghi has said they are technically ready to implement, though the policy could have serious unintended consequences. First, negative rates could further squeeze the lending margins of banks, particularly in the weakened peripheral nations. Second, it may be seen as the last tool available to the ECB, and just the perception that its bag of tricks is empty may be enough to cause some market jitters on the notion that the central bank has nothing left to give if another crisis hits. If more economic weakness forces the ECB to take the plunge into negative rates, analysts believe they would have to make it a significant move, cutting rates as much as one percentage point to give the policy enough oomph to be impactful.

As the ECB waded into providing forward guidance, the BOE also stepped in to say that it will delineate a rate path this month. The details of the forward guidance are set to be released alongside the August 7 Inflation Report, as newly minted BOE Governor Carney starts to put his stamp on monetary policy. In future meetings Carney could also move to increase the banks asset purchase program again, as his predecessor advocated.

There are emerging signs that the European economy has finally hit bottom. The latest EMU unemployment reading ticked slightly lower to 12.1%, the first decline in almost two-and-a-half years, and Euro Zone July PMI Manufacturing edged above 50, the first growth reading in 24 months. There are still deep problems in the peripheral countries for example, the IMF just downgraded its forecasts for Spains unemployment, predicting it will remain above 25% for the next five years but on the whole it seem that the euro zone has seen its worst days. With the light at the end of the tunnel starting to become visible, the EMU has to do its best to stay true to the path of greater integration, despite a bevy of political challenges across the zone.

The European political scene has still has many potential flash points that could refuel the Euro Zone crisis. In recent weeks Greece was shepherded through the necessary steps to get its next bailout tranche, but there are still some questions about a future funding gap, while in Portugal the government survived a tiff between coalition members over fiscal strategy. Spanish PM Rajoy is comfortable enough with the path to economic recovery to asset that the recession is being left behind and the danger of a bailout has gone, but continues to contend with the taint of a government slush fund scandal. Perhaps the most troubling situation is in Italy, where former PM Berlusconi is prodding his party to threaten to break up the fragile coalition government that took weeks to form after an inconclusive election in April. If President Napolitano refuses to grant Berlusconi a pardon from a one year sentence that was recently affirmed by the high court, the government could fall apart.

2. Hot Market Review - Wheat Market Now Very Mature, Suggesting Downside Limited

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

Soft red winter wheat futures are in a major bear market, as seen on the daily bar chart. However, the wheat market, along with corn, is in a very mature bear market. That means odds are high that there is not much more downside price potential left in this major bear market run. Now, veteran market watchers are looking for those very early technical clues that would suggest a market bottom is in place. That's my job. My customers can expect to find early trend-change clues, right when they occur, in my Daily Market Update reports that I provide to my valued customers.

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!