Jesse Livermore, the world’s greatest trader used to say, “Remember, the market is designed to fool most of the people most of the time. Sometimes, the market will go contrary to what speculators have predicted. At these times, speculators must abandon their predictions and follow the action of the market. Never argue with the tape. Markets are never wrong, but opinions often are. I only try to react to what the market is telling me by its behavior.”
Livermore’s observations are perfectly tailored for the commodities markets, where trader sentiment can turn on a dime, at a moment’s notice, and without any specific warning sign. The sudden plunges in commodities from crude to copper to corn since July 2nd suggested to many analysts that the commodities markets had climbed too high, too fast. The subsequent correction of 20% or more into bear market territory, in just four weeks, is indicative of a bursting of a speculative bubble.
The 180-degree shift in trader sentiment marked a stunning turnaround for the sizzling commodities sector, which was on a relentless march higher amid a global scramble for natural resources. A sharp slide in the value of the US-dollar made commodities cheaper for overseas buyers. But the downturn in commodities in July gained momentum when crude oil began tumbling, dragging precious metals, grains, and other commodities lower as traders dumped over-extended positions.
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“Demand Destruction” is the new buzzword for speculators in commodities, based on the notion that a hard-landing for the giant US economy is spreading overseas to Europe and Japan, and will eventually zap China and other emerging nations. In turn, a sharp slowdown in the global economy might weaken demand for crude oil, coal, iron ore, steel, and base metals. Global stock markets have lost trillion of wealth from a year ago, shaking consumer confidence and spending plans.
Corn fell 35% and soybean prices plunged 27% from their record highs as weather conditions turned nearly perfect for crops during July. The USDA is projecting the US corn-crop at 12.3 billion bushels, up from its July forecast of 11.7 billion, which if realized would be the second-highest on record. On August 6th, talk of a commodity fund being forced to liquidate roughly 39,000 soybean contracts and another 40,000 contracts of corn knocked the actively traded November soybeans contract down the 70-cent limit before quickly recovering about 25 cents.
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Corn and soybean oil continue to follow trends in the crude oil market because of the link with the growing alternative fuels industry. Ethanol is made from corn in the United States, and soybean oil is an important ingredient in bio-diesel. One month after a brutal price slide left the commodity markets in deeply oversold areas on technical charts, and bargain hunters jumped into the markets.
Commodity traders who operate under the slogan “sell on the rumor and buy on the fact,” viewed the USDA’s overly optimistic outlook for the US-corn crop as a contrarian signal to cover short positions in the grains market. Also, forced liquidation by over-extended hedge funds is a traditional signal that a bottom is near. So on August 13th, CBoT corn prices jumped 6% to its 30-cent-per-bushel daily trading limit by midday, soybeans rocketed 6% to its permissible daily trading limit of 70-cents and wheat rallied by its 60-cent limit, or over 7 percent.
The direction of commodity prices is of great interest to Japanese investors who have plowed as much as 0 billion into the Australian dollar over the past several years. Stuck with a tiny 0.5% return on short-term deposits at home, Japanese investors are sitting on roughly 780-trillion yen (.3 trillion) of deposits, and have plowed 12% of their assets into Aussie Libor deposits and government securities.
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The seven-year boom in commodities enabled the Australian dollar to climb 80% against the yen since late-2001, padding the rates of return to Japanese investors. Australia posted its first trade surplus in six-years in April, and its commodities exports set a record for the fourth-straight year in the 12-months to June 30th, reaching A$146-billion ($139 billion). But the sharp slide in global commodity prices since July 2nd has soured the outlook for Australia’s terms of trade going forward.
Combined with signals that the Bank of Australia has reached the end of its five-year tightening campaign, Japanese investors are getting jittery over the Australian dollar’s exchange rate against the yen. With the powerful advance of Aussie T-bill futures in Sydney as a guidepost, “yen carry” traders in Tokyo unloaded the Aussie dollar, which plunged by as much as 10% to 93-yen from four weeks ago.
The Aussie has also lost over 14% since it struck a 25-year high of 98.50 US-cents against the US dollar on July 15th, hitting a panic bottom low of 95.90 US-cents on August 13th. But tracking the commodities markets, currency traders turned on a dime when Chicago grain markets zoomed limit-up, and crude oil rebounded by more than $3/barrel on the Nymex. Heartened by signs of stability in key commodities, the Aussie dollar rebounded by 3-yen to 96-yen by the NY close.
