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NEAR-TERM MARKET FUNDAMENTALS: Wheat moved moderately higher overnight in conjunction with a significant further advance in soybeans and a similarly modest advance in corn. This comes in the face of an advancing harvest under mostly good conditions across the Northern Hemisphere. The main concern remains the lateness of the crop in the US and Canada although there is still no forecast of a major frost. India’s Farm Minister said late last week that India is aiming to increase winter grain output this year due to the drop in summer monsoon rains. This will include a program to ensure the timely sowing of wheat which can compensate to some degree for expected tightness in rice supplies. In Australia, rains boosted the already favorable crop conditions in SW and SE growing areas, but the NE wheat belt remains dry. Further dryness could begin to stress the crop there but, for now, most crop forecasters are calling for a good crop of about 22 to 23 million tonnes which is about in line with last year’s production. The Commitments of Traders Report for the week ending August 18th showed mixed activity by funds in wheat. Index funds were net buyers of 5,034 contracts despite renewed worries that the CFTC may force liquidation some of their very large long position. As of last week, index funds held nearly 47% of the total net long position in Chicago wheat which compares to about 29% each in corn and soybeans. Activity by trend-following funds continues to be at an opposite extreme from the index funds. Trend followers were net sellers of 3,440 contracts to extend their net short position to a new record large at 57,636 contracts. An Israeli firm is tendering for 25,000 tonnes of feed wheat. This is likely to be from Europe.

CASH NEWS AND TENDERS: An Israeli firm is tendering for 25,000 tonnes of feed wheat.

WEATHER: The northern Plains should see warmer weather with showers this week. This may be followed by intermittent cooling into the end of next week. A shower system moved along the US/Canada border overnight. Weather in the Black Sea region has been mainly favorable over the past week with rains in Russia aiding in late development and dry weather in Ukraine aiding in the harvest. In Australia, beneficial rains fell along the southern tier of the country, aiding the wheat crop in both western and eastern growing areas. However, dryness continues to persist in the NE.

TODAY’S GUIDANCE: The wheat market is trying to decide whether to continue pushing lower or whether it should participate in the short covering rallies now underway in soybeans and corn. We still look for the downtrend to continue with a possible short term acceleration to the downside. However, if that does not happen today, or at the latest by tomorrow, traders should consider covering shorts. First support in the December contract remains near 483. Resistance remains at 508 to 510.

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NEAR-TERM MARKET FUNDAMENTALS: The corn market continues the modest rally that began last week after the December contract made another new low for the move last Monday. Traders indicate that the rally may be a combination of short covering and carryover strength from soybeans, with some concern being registered that the market has not fully priced in the risk of an early frost. For now, there is no frost in the forecast for major growing areas. In fact, this week is expected to start with a warm up to above normal temperatures followed by a moderate cooling and showers later in the week and into the weekend. More extensive cooling is possible by the end of next week. The Commitments of Traders Report for the week ending August 18th showed significant net selling by funds. Index funds were net sellers of 1,861 contracts while trend following funds were net sellers of 21,132. This took the trend-followers’ net position back into negative territory at net short 1,485. Taiwan’s Maize Industry Procurement Association is tendering on Tuesday of this week for 56,000 to 60,000 tonnes of corn from either the US or Brazil.

CASH NEWS AND TENDERS: Thailand is tendering to sell 790,000 tonnes of corn today according to officials there. Of that total 500,000 tonnes is intended for export while the remaining 290,000 tonnes could be sold domestically.

WEATHER: Weekend weather was mainly as expected – drier and cooler. Forecasters are expecting a warm up this week with increased shower activity that may start to usher in the next cooling period in the Midwest by late this week and into this weekend. More significant cooling is possible by the end of next week. There is still no killing frost in the forecasts despite intermittent cooling into the first week of September.

TODAY’S GUIDANCE: The short covering rally in corn is being boosted by strength in soybeans and fair-to-strong export demand in corn, but it looks to be just a temporary pause on the way down. Barring an early frost, supportive demand is about to be overwhelmed by a near record large new crop. And despite some improved economic sentiment in recent weeks, consumer demand for meat is likely to remain soft which will keep a heavy lid on feed profitability. These are major, long term bearish fundamentals that go beyond any temporary oversold conditions. The selling that will be needed to take us lower will come from farmer hedgers and, possibly, trend-following funds. Light, first support remains near 318 to 320 in December corn with the next support at 311 1/2 and then 302 1/2. Resistance is at 344 and 349 1/2.

TODAY’S MARKET IDEAS: Traders can still sell either December futures or December calls on a bounce to the 342. The next downside objective remains at 291 1/2.

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The August USDA Crop Production and Supply/Demand report for cotton did not give the bulls or the bears much news but it did fail to raise world cotton consumption figures. As a result, the focus of the cotton market shifted away from following the stock market higher to following the supply trend lower. The weather in Texas has improved significantly in recent weeks, and this has traders believing that production forecasts in future monthly reports will be on the rise. The weekly Cotton Conditions report showed 53% of the crop was rated good/excellent as of Sunday August 16th, up from 50% the previous week and 48% last year. The 10 year average for this time of year is 53%. In Texas, the crop is was rated 43% good to excellent, up from 40% the previous week and above the 10-year average. In Georgia crop ratings improved to 56% good/excellent from 53% the previous week. While cotton crop conditions are right on the USDA 10-year average, the yield estimate is still well under the trend-line going back to 1994 And there is more and more talk of the advancement in seed technology and how this may boost yields further.

The strong stock market into mid-August and the outlook for an expanding world economy helped support commodity markets like cotton, but traders are now second-guessing the outlook for a robust world economy and instead are looking at a slower recovery and sluggish consumer spending into next year. If we see a period of less bullishness on the global economy, a firm US dollar or a setback in energy and other commodity markets, then commercial and speculative long liquidation selling could be significant bearish force for cotton. The USDA has already raised its world cotton consumption forecast for 2009/10 to 112.76 million bales, up from 110.6 million in 2008/09. If the world economy is slow to recover, we may see some adjustments lower. China built a massive reserve of cotton and other commodities during the first half of the year, and expectations for continued strong demand from China in the months ahead are easing.

Trend-following funds built a net long position of nearly 25,000 contracts as of August 11th, which pushed the combined large and small spec net long position to 40,982 contracts. This is in sharp contrast to a net short position of 5,728 contracts as recently as March 17th. This overbought condition suggests to us that long liquidation selling could develop if support levels are violated like they were on August 14th and 17th. Last week the market traded to its highest level since October of 2008. Following that with a lower close on the week (which appeared likely as of this writing) would be a bearish technical development.

Relative strength topped out at lower levels as the market made successive, higher peaks of 63.75 on May 12th (RSI 77.15), 64.98 on June 21st (RSI 76.2) and 65.347 on August 13th (RSI 65.3). This indicates a considerable loss of upside momentum and could help attract new selling this week. If demand news turns even less bullish and the focus shifts even more to the supply side of the equation, the market could see a significant setback into harvest.
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Some increased concerns for the H1N1 virus problems in the fall and ideas that these issues will keep and maybe even increase the reluctance of foreign buyers to purchase US pork helped to drive the market to new lows early yesterday. Ideas that a vaccine shortage has nothing to do with pork or with the US export market for pork helped spark an impressive short-covering rally but the market could not close higher on the day. News of further weakness in cash bellies and loin prices late yesterday looks to keep the selling pressures in tact for the market today. Pork cut out values, released after the close yesterday, came in at $51.33, down $2.07 from Monday and down from $55.60 the previous week. This is the lowest cut-out value since January 8th of 2003 and compares with $92.12 last year at this time. The market saw a wild range yesterday as the early break to a new 7-year low was followed by a strong recovery to sharply higher on the day. The rally was impressive but the market could not attract new buying support on the move to a new 7-session peak and the market closed lower on the day after a 380 point range. Cash hogs were steady to $.50 lower on the session and are called steady/weak today. Short-covering was seen as the original reason for the rally but there is still a growing concern that the short-term production of pork will remain very high with extra weight on hogs and with extra hogs in the slaughter mix as producers trim herd size. The CME Lean Hog Index as of August 14th came in at 49.25, down 48 cents from the previous session and down from 53.11 the week before. This is the lowest level since January of 2008. The estimated hogs slaughter came in at 430,000 head yesterday which was higher than expected which is normally a positive force but not during a liquidation phase. This brings the total for the week so far to 860,000 head, up from 851,000 last week at this time but down from 861,000 a year ago. Pork production was up 6.9% from the previous week last week and up 7.5% from last year.

TODAY’S GUIDANCE: The move to the lowest level since January of 2003 for pork cut-out leaves the trend down in the cash market and can help rationalize the discount of October to the cash market. Traders await a further washout in the pork industry and further liquidation of breeding stock before expecting production to ease. The market did not receive the news to see any confirmation of a low despite the impressive bottoming-type action of October futures. It may take several weeks or more of liquidation to expect that future production will come in closer to demand.

TODAY’S MARKET IDEAS: The trend is still down with 42.55 and 42.10 as next technical swing objectives for October hogs but if pork remains under pressure, there appears to be plenty of room on the downside for the cash market. Another swing down for February hogs leaves 47.27 as next target.

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The technical action is impressive and the market seems to be in a position to see the cash market rally this week but beef prices are not moving higher in a period of tighter supply and this does not help to rationalize the premium of futures to the cash market. While the futures could bounce for a few days, a significant rally appears unlikely until pork values bottom or until demand and/or exports begin to improve. There were only 5 new deliveries this morning. October cattle closed sharply higher on the session yesterday with some stability in beef prices after the recent bounce and talk of tighter supply supporting the cash market this week helping to support. In addition, a rally in hogs and strength in outside market forces helped to support. Traders believe that cash cattle will trade $2.00 higher this week to $84.00 in the southern plains and this would narrow the premium of October to cash and helped support as well. Cash cattle were trading near $100 last year at this time. Boxed beef cutout values were up 6 cents at mid-session yesterday and closed 6 cents higher at $142.44. This was up from $141.62 a week ago but down from $164.34 one year ago. The estimated cattle slaughter came in at 128,000 head yesterday which was a little higher than expected and might be considered a supportive factor as well as packer demand for live inventory improves. This brings the total for the week so far to 250,000 head, down from 251,000 last week at this time but up from 249,000 a year ago. Traders are looking for placements in Friday’s Cattle-on-Feed report to show a 4-8% jump from last year which is seen as a negative. The market is hoping to see a recovery in consumer demand this fall but weakness in stocks this week could be seen as a negative force today.

TODAY’S GUIDANCE: The market bounced from an oversold condition and on ideas that the cash market can trade higher ahead. The market has the supply fundamentals to push higher but demand news remains weak and beef prices have moved sideways in a period of tighter supply. Close-in support comes in at 88.32 for October cattle with 89.30 and 89.82 as resistance.

TODAY’S MARKET IDEAS: The market may bounce but don’t expect follow-through to the upside until traders see better demand, better exports and a low in pork.

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OUTSIDE MARKET DEVELOPMENTS: With a slightly higher overnight equity market bias and a weaker US Dollar the bias toward precious metals prices has seemingly improved from the view that was in place on Monday morning. It is also possible that very favorable German ZEW readings overnight served to tamp down the resurgent macro economic slowing fears that seemed to dominate the headlines over the prior two trading sessions. The bull camp might also be getting a slightly positive draft off gains in the energy complex in the early action today. While some analysts suggested that the Home Depot earnings this morning were positive, the initial reaction in the equity markets was a slight setback in stock prices. With the US Housing Starts and Permits report due out later this morning, the markets are probably reserving their judgment on the direction of the economy. Initial expectations call for a modest improvement in both housing starts and permits figures, with the trade also expecting minor gains in the PPI report.

SILVER MARKET FUNDAMENTALS: While the bull camp might suggest that a rally back above $14.00 is a positive in the action today, silver and other physical commodity markets seem to need something positive from the economic report front in order to get out from under what has been a fairly aggressive pattern of selling over the prior two trading sessions. The bear camp will suggest that a minor slide in the Dollar and a short covering bounce in the equity markets has given the bull camp false confidence this morning and therefore the markets reaction to the scheduled US Housing data later this morning, could be the main event of the Tuesday trade. Some traders think that the onus is on the bull camp in silver, to prove that the recent letdown in the macro economic outlook is temporary and therefore it would seem like the direction of equities might be a touch more important, than the direction of the Dollar in the silver trade today.

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OUTSIDE MARKET DEVELOPMENTS: With a slightly higher overnight equity market bias and a weaker US Dollar the bias toward precious metals prices has seemingly improved from the view that was in place on Monday morning. It is also possible that very favorable German ZEW readings overnight served to tamp down the resurgent macro economic slowing fears that seemed to dominate the headlines over the prior two trading sessions. The bull camp might also be getting a slightly positive draft off gains in the energy complex in the early action today. While some analysts suggested that the Home Depot earnings this morning were positive, the initial reaction in the equity markets was a slight setback in stock prices. With the US Housing Starts and Permits report due out later this morning, the markets are probably reserving their judgment on the direction of the economy. Initial expectations call for a modest improvement in both housing starts and permits figures, with the trade also expecting minor gains in the PPI report.

GOLD MARKET FUNDAMENTALS: The gold market seemed to get a mixed bag of classic fundamental news overnight, with the silver trade seeing evidence of lower July Indian gold imports, but that potentially negative result was seemingly tempered by other suggestions that August gold demand in that country would improve. In the end, talk about the Indian gold demand season hasn’t been as supportive as some in the bull camp might have liked to see, but the gold trade overall just doesn’t seem to be that interested in classic supply and demand developments. With October gold prices this morning sitting roughly $8 an ounce above the prior session’s lows, it would appear that a minor bounce in equities and a weaker US Dollar has at least temporarily put the sellers off balance. Like a host of other physical commodity markets, the gold trade today probably needs something positive from the economic front to keep the negative bias from regaining control over prices.

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CRUDE OIL MARKET FUNDAMENTALS: While the energy complex has clearly rejected the lows posted in the prior trading session, we have to leave the edge with the bear camp into the trade today. It seems as if the trade fully embraced evidence of slowing recently and at times even discounted favorable economic readings. However, a slightly positive overnight bias in equity prices and a much stronger than expected German ZEW reading has partially tempered bearish macro economic attitudes. At least in the near term, the focus of the energy complex looks to be alternatively waffling back and forth between the outlook for demand and the direction of the Dollar. From a classic fundamental perspective, it is hard to suggest that the bull camp is destined to find strong evidence for its case, as swelling crude oil stocks are expected to be documented again in the weekly inventory reports due out this afternoon and again on Wednesday morning. With the energy trade seemingly focused on the threat of sagging energy demand recently, one should not underestimate the importance of the scheduled economic data today. To determine whether the US data is positive or negative to energy prices today, one probably needs to look for the direction of the equity markets just after the New York opening. While we can’t rule out a temporary climb back above $70.00 in October crude oil contract today, it might take a rise back above 985.90 in the September S&P to in effect but the bear camp in energies off balance. In the end, the bear seems to have control of the recent trend, but that control could be lost if the US Housing numbers rekindle recovery talk again.

GASOLINE: The October unleaded contract seems to have found a critical pivot point support around even numbers of 1.80. Since the market expects to see another crude stock build in the weekly inventory reports, it is possible that a weekly decline in gasoline stocks ahead will be discounted. As in a host of other physical commodity markets, the gasoline market clearly needs something positive from the macro economic front to shut off the selling bias that was in place over the prior two trading sessions. Therefore, the US Housing starts and permits data this morning probably takes on an added measure of importance, as the February through August rally of 90 cents was certainly built on expectations of a recovery. Because of the recent let down in economic sentiment, we doubt that gasoline prices will rise sharply in the wake of favorable economic readings this morning, but the sell off could restart aggressively, in the event of soft economic readings this morning.

HEATING OIL: Apparently the heating oil market saw some bargain hunting buying and in the process managed to respect the even number price zone of 1.80. In the action today the heating oil market will be a classic physical commodity market looking for direction from the economic front. As suggested in the unleaded coverage this morning, the bulls probably won’t get as much benefit from a good number as the bear camp gets from a slack number. In fact, we see solid resistance at 1.8679 unless the S&P mounts a sharp rise above the 985.95 level. Certainly the product markets are going to garner support from evidence of further declines in the refinery operating rate, but in looking at the annual surplus situation it is difficult to get bullish toward heating oil this winter, without a well entrenched recovery view in the marketplace.

TODAY’S ENERGY MARKET GUIDANCE: Without good US numbers the bear camp might attack.

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DOLLAR: Not surprisingly the Dollar is catching a distinct flight to quality bid this morning. In addition to ideas that global equity prices were ahead of reality, the market seems to have seen a downshift in economic readings, with the US retail sales report and Michigan sentiment readings late last week being joined by a slack UK private housing report and lackluster attitudes toward the Chinese recovery in the overnight headlines. Apparently the currency markets are uninterested in suggestions from Japan that they are poised to climb out of the recession in the next quarter. In fact, with the UK and now the US, seemingly adding slightly to their quantitative easing efforts, the markets are suspecting that the slow down threat remains in place. With a large US financial institution failing over the weekend and the failure apparently the biggest of the year, that clearly rekindles financial market flight to quality interest in the Dollar. With the August 11th Commitment of Traders with Options report for US Dollar showing the Non-commercial position to be net short 10,110 contracts, with the Non-reportable position net short 1,693 contracts, that made the “combined” spec and fund position net short 11,803 contracts as of early last week. Therefore the September Dollar looks to be poised to rise to the late July highs of 79.81, but we doubt that the Dollar is going to completely throw off the downward bias that has been in place since early March.

EURO: The Euro is clearly under a liquidation watch, as the markets have once again rekindled concerns for the recovery. We would suggest that weakness in equities at the end of last week and into the opening this morning, were the result of ideas that the equity markets were ahead of reality and to see equity prices fall consistently throughout this week, might require fears of a failed recovery effort. However, in the near term slumping sentiment looks to apply pressure to the Euro and that could easily send the September Euro down to the first consolidation support zone of 140.00 on the charts. With the August 11th Commitment of Traders with Options report for Euro showing the Non-commercial position to be net long 17,551 contracts, with the Non-reportable position net long 18,905 contracts, that made the “combined” spec and fund position net long 36,456 contracts as of early last week. Therefore from a technical basis, the Euro would seem to retain at least a couple more days of long liquidations selling pressure.

YEN: The yen clearly seems to be a currency in vogue, with strength being seen in the Yen recently in the face of strength in equities and the currency also being bid higher in the face of slumping equities. Clearly the Yen is garnering some flight to quality type buying and that in combination with mostly upbeat macro economic views toward the Japanese economy looks to give the Yen an additional flight to quality benefit. Near term upside targeting in the Yen is seen at 106.41 and perhaps even higher if the anxiety being thrown off by the equity markets intensifies.

SWISS: A big range down extension in the Swiss clearly suggests that the Swiss, Euro, Pound and Canadian are all set to lose in the face of an economic letdown in world equity markets. While the Swiss looks to follow the lead of the Dollar and the Euro in the coming trading sessions, we would be surprised if the September Swiss didn’t fall quickly back to the 92.00 level in the coming trading sessions.

POUND: In addition to deteriorating macro economic views, the Pound also seems to be getting pressure from news of a privately generated housing survey. With the Pound into the August highs, technically and fundamentally overbought, that seems to set the stage for a slide to at least 162.63. In order to see a full washout in the September Pound, down to the 160.00 level, probably requires extensive liquidation carnage in global equity markets!

CANADIAN DOLLAR: Since the Canadian has already seen an aggressive liquidation washout to the even number 90.00 level this morning, a good measure of the macro economic disappointment is probably already factored into prices. However, it would appear as if the negative outlook toward the global recovery, is still destined to play out over the coming trading sessions and that could put the September Canadian down to the 89.31 level in the coming two trading sessions.

TODAY’S MARKET IDEAS: Expect the Yen and Dollar to extend overnight gains for at least the first two trading sessions of the new week.

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The Trend in Treasuries looks to remain up mostly off the sharp ongoing slide in equities. Apparently the markets are concerned about an extension of the slowing, in the wake of the slack US retail sales readings and the surprise decline in US sentiment figures at the end of last week. Since the declines in equities have now become notable that in turn has sparked a wave of safe haven buying of Treasuries. We suspect that the markets will be ultra sensitive to the NAHB Index and the New York Empire State Manufacturing survey early in the session today. However, in a somewhat strange twist of fate, we suspect that bonds and notes will rally unless both scheduled readings this morning are stronger than initial expectations. With both scheduled readings expected to be minimally above the prior month’s readings, the trade has partially baked into the cake, a gradual improvement in the economy. While the August 11th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 115,575 contracts, with the Non-reportable position net long 7,684 contracts, that made the “combined” spec and fund position net short 107,891 contracts as of early last week. The August 11th Commitment of Traders with Options report for US Treasury 10 Year Notes showed the Non-commercial position to be net short 83,744 contracts, with the Non-reportable position net short 109,241 contracts, and that made the “combined” spec and fund position net short 192,985 contracts as of early last week. However, with September bonds trading as much as 2 full points above the level where the COT report was calculated, we suspect that the net spec short reading in bonds is overstated but because the trade was still net spec short, one can’t rule out even more short covering buying ahead. In fact, with another US financial failure over the weekend, it is possible that fears of a second wave of financial failures is contributing to the upward bias in Treasury prices. In the near term, we can’t rule out a rally back above 120-00 in September bonds and above 118-00 in September Notes, as it could take a couple sessions before the disappointment from the economic front is tamped down. In fact, with a downside breakout in the S&P, putting stocks down to the lowest level since August 3rd, a return to the July highs in Treasuries is now possible. Fortunately for the bear camp in Treasuries, the majority of the weakness in equities is the result of expectations running ahead of reality, as opposed to real fears that the recovery has been lost.