September 2015: A month that helped prove any existence of the “uncertainty avoidance” concept within the marketplace, the markets tolerance for uncertainty and ambiguity, and how it deals with an uncertain future.
September will go down as one in which consensus feels as though the Fed knows something we don’t. Despite strong retail sales, housing numbers, real GDP, and labor-market reports, the central bank decided to keep rates at zero. What are they afraid of? A month in which the eurozone did grow faster than previously published yet, from a very low and fragile base. A month in which Sweden dopped its policy rate to -0.35%.
By September, the markets forgot about the worries we had about Greece, or the European Central Bank ruling in favor of outright monetary transaction – as all eyes quickly shifted to China.
September is the month in which markets seemed to have built-in a hard landing for China.
After years of trading comfortably above its cost curve, copper disappointed again in September, losing nearly 3%; trading at prices last seen in late 2009. Despite severe reductions in capital expenditures combined with shuddered mining operations, the long lag between upstream and downstream operations is weighing heavily on copper – supplies are adequate, if not downright stagnant.
After beginning 2015 near $71/ton, iron ore continues to plummet – finishing September in the $54/ton range. Iron ore continues to be entangled in a web of strong supply growth – most recently reiterated by the shocking rise of Chinese port stocks.
Platinum continued its plunge, shaving -8.75% in September totaling a six-month loss of -19%. Platinum spent August caught in the backwash of record South African output along with the most recent growth of recycled metal (via. automobiles) against a generally muted demand scenario – especially given the most recent news that global automobile production will be near-term flat at best.
The September gold price closed down (-2.0%) from where it began the month; perfectly summing up investor ambivalence and hence, the metals recent identity crisis. Currently, investors don’t know if gold is today a commodity, currency, or some combination in-between? Gold bulls have recently sought shelter as recent economic turmoil in Greece, China, and the emerging markets have had little impact on its price. During the month, investor inflows have been flat while central banks have been prudent buyers.
Despite a record electricity power burn this summer, Natural gas plummeted in September as fading production growth is still toppling the current demand. News of higher exports to Mexico, coal plant retirements and a declining production rate did little to stop prices from dropping from early September prices of $2.75 to $2.52 by months end. For the first time in many months, September’s oil price (WTI) stabilized within a narrow range. WTI began the month in the mid $48/barrel range and slowly grinded its way down to its month end price of $45/bbl.
The September price action gave consensus slight clues that the market is now comfortable with the current surplus; that rebalancing forces are under way, and stability – and perhaps higher pricing – will be upon us within the next nine months. However, WTI implied options volatility remained elevated in September as there remains a large fraction of consensus who believe insufficient supply adjustments have been made and thus will lead to lower, if not depressed pricing.
Weakness in emerging markets, lower commodity prices, and general confusion over the Federal Reserve’s latest intentions re-ordered the risk environment in September – constraining funding currencies including the Japanese yen and euro to fairly tight ranges. On the month, the Japanese yen rallied 1.25% vs. the U.S. dollar while the euro closes September largely unchanged. The U.S. dollar index spent most of September gridlocked, closing the month up 0.12%.
The U.S. dollar appears to be at a standoff. Some believe tighter financial conditions should quickly bring the greenback back down to earth. On the other hand, the market continues to keep a close eye on monetary policy divergence (i.e. U.S. raising rates while Japan and/or Euro loosen) which should keep the U.S. dollar buoyant. Despite a magnificent mid-month rally, the Brazilian Real continues to fall. Poor growth outlook leaves the country exposed to tightening – the Real began the month at .2650, falling to a mid-month low of.2320, only to snap-back and settle the month at .2500.
Commodity currencies including the Australian dollar and Canadian dollar continue to back pedal given commodity weakness continues to act as a central theme of the markets. On the month, the Canadian dollar and Australian dollar lost near 2.0% against the greenback.
Agriculture / Livestock
After tumbling in both July and August, Wheat prices regained their footing, snapping back near 5% in September. Appropriate concern over Canadian production came to fruition in September as severely dry weather hampered an otherwise over-planted region. Corn finished September +7.0% and now matches levels last seen in early August yet still down 10% from its early July high-point.
The September grain stocks report was bearish however, no worse than feared. What a difference a few months make as feeder cattle lose 10.0% on the month and an astonishing 17.0% from late June. The perception of fall placements continues to dominate the price action. Coffee prices stop their six-month 9.0% slide, closing September with a fractional gain. The downward spiral in the Brazilian Real has boosted world supplies yet not to the extent as first imagined. Additionally, Vietnamese exports of Robusta have underwhelmed, helping prices to curtail the downward momentum.
Cocoa spent September trapped within a very broad a volatile trading range. Weather concerns propelled cocoa near its early July highs of 3,325, succumbing to pressure as plentiful supplies from the Ivory Coast provided the market with abundance. Cocoa finished the month near where it started.