Decoupling? Globalization for Traders

Last week I saw Peter Thiel on CNBC say that emerging economies are in fact decoupled from the US and will carry on in the face of the slowdown here. No. The markets tonight and yesterday are telling us no with Asia and Europe down 7% in a single session. There is a great trade here and that is to be short commodities. March Corn closed just under $5 per bushel on Friday after touching nearly $5.20 earlier last week. March Soybeans ended the week at $12.64 after touching $13.4150 earlier last week. March Hard Red Winter Wheat in Kansas City was over $10 per bushel, Soft Red Winter Wheat in Chicago was $9.6250 and Spring Wheat in Minneapolis was nearly $12 per bushel after being limit up for something like 6 sessions. This was the follow-through from the bullish USDA report of the prior Friday. But if the problems here bring down growth globally, and if prices are made at the margins, prices of these commodities will come down sharply as demand erodes at the margins. Nominal prices for nearby contracts in Beans have not been this high going back to to the beginning of my charts in 1973, the prior high being $12.90 in June 1973. Corn actually got a bit over $5.50 in 1996. Wheat is far above its historical highs, at least for Chicago.

The CRB made a new all-time high just last Monday over 370. In the current environment, the risk of further highs is abating while the risk of those who have gotten long at these incredibly high prices having to dump their positions is rapidly increasing.

Unfortunately, if you didn’t place orders right at the open tonight, positioning is somewhat troublesome as these markets opened down sharply in electronic trade. March Corn right now is down 14 cents, March Soybeans down 35 cents and March Wheat is down nearly 25 cents. Those are already big moves. Gone are the days when you could wait until the “market” opened at 9:30 Central. That said, Soybeans could easily drop to $9 per bushel and that would still be well above the average price over any period longer than a year over which you care to average prices. Ditto with almost any other commodity out there. Crude is likely to drop to $70. Sugar will probably drop to 5c. The only question is the dollar. If the dollar continues to get routed, and the turning point is probably not quite here yet, commodities will stay buoyant even in the face of slow demand growth. But if the dollar also turns around, watch out below.

One Response to “Decoupling? Globalization for Traders”

  1. The PIG Says:

    TCB is right on, with the Grains comments. Traders at the CBOT for the past few weeks have been shaking their heads leaving the pits. As a Trader, you don’t have any sense of being Long/Short. As soon as you think a new high is going to be made, it moves the other way (Limit Down) and vice versa.

    As for the down moves, I see the March contracts under a lot of pressure, with the only exception being KC or Minny (not Chicago) Wheat. The old crop has had a great run. If you want to be a bull, make your bets with the new crop, not the old.

    -Boss Hog