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DEAN WITTER FUTURES COMMENTARY
Prepared by Dean Witter, Inc.
Financial
U.S. INTEREST RATES: In its monthly report on retail sales, the U.S. Commerce Department provided evidence that the economy decelerated significantly this spring. With revised data, the Department disclosed that sales have declined for three consecutive months--a drop of 0.1% in May; a decline of 0.9% in April, and a drop of 0.3% in March. Given these statistics, it is very likely that, at its next policy meeting on July 2, the Fed will hold the funds rate steady at 5-1/2%.
Responding to this "bullish" report, interest rate futures rallied strongly to meet or exceed my targets for an extension of the current uptrends. December Euros reached up to 93.955--well above my objective of 93.87; September bonds reached up to 111-17, essentially equal to my objective of 111-16.
Near Term Forecast: For two reasons, I do not believe that interest-rate futures have the potential for near-term gains much above today's highs.
1. Unless we receive additional "bullish" data which makes investors consider that the next Fed move will be towards lower rates, the current yield levels are insufficient to draw new "cash" commitments.
The 2-year note is approaching 6.00%; the 5-year note is approaching 6.30%; the 30-year bond is essentially at 6.75%.
2. After today's steep up-movement, traders will want to consider whether next Tuesday's CPI report for May might prove threatening. In last month's report for April, the "core" rose a disquieting 0.3%.
In this context I believe that, over the next two days, interest rate futures should not trade much above today's highs. Sometime in that time frame, I expect a modest retrenchment. Listed are three sets of prices: today's highs; levels slightly higher which should contain upside movement in the next two days; targets for a modest retrenchment:
Level Today's To Contain Setback Contract High Add'l Gain Target December Euros 93.955 93.97 93.89 September 5-yr Notes 106-06 106-08 105-30 September 10-yr Notes 108-08 108-10 107-28 September Bonds 111-17 111-20 111-00
Intermediate-Term Forecast: I need to study further before stating an intermediate opinion.
JAPANESE YEN: Japan's top official for exchange rate policy made it his mission today to knock the yen down, and he was very successful. Eisuke Sakakibara, respected for his ability to influence the market, stated that the rally in the Japanese currency had gone too far, too fast. He related that Prime Minister Hashimoto had spoken to him about possible intervention to sell the yen. Mr. Sakakibara also asserted that present conditions were not proper for a near-term increase in Japan's interest rates. In response to all of these remarks, the September yen dropped precipitously to an intra-day low of .8730--399 ticks below yesterday's close of .9129. The contract then rebounded to close at .8875, a net loss of 254 ticks.
Following this sharp drop, the September yen should now enter into a wide trading range. This behavior should evolve as traders await what foreign exchange pronouncements come out of the G-7 summit on June 20/22. Given that context, I expect the September yen to fluctuate between .8750 and .9000.
DEUTSCHEMARK AND SWISS FRANC: Several EU officials suggested that France and other member countries would reach a compromise on the "stability" pact, which would allow the process of European monetary union to stay on track. The September DM and the September SF, which would benefit if the process became untracked, declined. The September DM fell to a intra-day low of .5819, meeting my near- term target of .5825. However, the September SF fell only to an intra-day low of .6970, short of my .6950 target; the September SF then rebounded impressively to close at .7007.
While I am "bearish" on these two currencies for the intermediate term, I am now neutral for the short run. Over the next two days, I expect trading range behavior as traders wait to see if the above-mentioned political compromise is struck and judged durable.
In this process, the September DM should fluctuate between .5800 and .5875 and test the upside of this range.
The September SF should fluctuate between .6970 and .7100 and test the upside of this range.
BRITISH POUND: Moving in sympathy with the Deutschemark, the September BP fell 62 ticks to close at 1.6280. I view this price action as just a continuance of the wide-swinging trading range behavior which has prevailed since May 2. I expect more of the same, and consequently I have no near-term opinion on the September BP.
Three factors pushed August gold and July silver to moderate-sized losses:
1. Platinum fell over 10 dollars;
2. Japanese speculators took advantage of dollar-strength to realize a higher yen-price of gold, and they sold the yellow metal.
3. Australian gold producers also sold.
Today's price action was consistent with my existing forecast which I will now restate with some modifications. From a perspective of the next two weeks, I believe that August gold and July silver remain in their major downtrend. I hold this view because inflation threats are currently not on the horizon.
--Unless August gold trades above 345.5, 1 expect further erosion to 341.0.
--Unless July silver trades above 480.0, I expect further erosion to 460.0.
COPPER: Values failed to sustain sharp early gains as good selling interest developed overhead. The weakness appeared to have been in response to the belief that nearby tightness has eased as freer lending emerged and pressured the backwardation down from 101 yesterday to 87 today. The lack of follow through on the early strength could be construed in a negative fashion particularly if the decline in LME levels begins to slow or reverse.
The energy complex attracted renewed short covering. The strength to values continued to be traced to ongoing tension between the UN and Iraq over obstructions to weapons inspectors, the appearance that the UN oil-for-aid deal extension is being delayed until the UN approves aid distribution plans along with the appearance that excess crude cargoes in the North Sea had been absorbed helped touch off fresh buying interest. Nevertheless, the recovery still remained cautious as the availability of West African crudes continued to weigh on the market. The recovery might extend itself as the oversold situation combined with the approach of the OPEC meeting later this month helps uncover better buying interest which could help carry values up to the 19.70 level basis August.
For products, better support to gasoline continues to be apparent.
We suspect that this is still linked to the prospect that demand will begin to rebound as weather improves and vacations start in earnest. A key determinant of whether more active support establishes itself might be in the July August gasoline. Some renewed strength appears to be emerging which could support July to 100-point premium. In addition, we continue to see the gas crack as attracting further support which might carry it to the 5.20 level basis August in the more deferred months, we will be monitoring the December pair and be looking to buy heating oil selling gasoline on weakness linked to nearby strength in gasoline.
Natural gas futures erased early losses on short covering. Early weakness appeared to be linked to weaker cash values. A weaker cash price might persist into next week, as the cash buyers continue to show restraint in terms of purchases. Weather is likely to remain moderate which could potentially lead to weaker off-take and less injection. A breakdown in cash through the 2.00 level could take values eventually down to the 190-195 level on the nearby.
COTTON: The cotton market closed slightly lower but still appears to be attracting underlying support as cool wet weather in the Delta persists raising concern over yield prospects. The USDA report did attract some modest support to values. The strength appeared to be linked to the revision downward in Chinese ending stocks to 15.4 mb from 17.1 previously for 1996/97. O a world basis, ending stocks for 1997/98 were indicated at 35.31 mb compared to 36.54 mb. The decline puts the stocks to usage ratio at 39.9 percent compared to 41.8 percent in 1996/97. For the U.S. modest revision upward in anticipated exports to 7.1 mb and a concurrent revision downward in U.S. stocks for 1996/97 to 3.95 mb from 4.05 mb previously was largely ignored. Market attention will likely begin to focus more actively on the development of the Delta crop better buying might emerge in advance of the Plantings Report on June 30 which could carry value through resting resistance near 74 basis July and toward the 76-77 cent level.
SUGAR: The market opened unchanged but prices were able to gather momentum to recover and close near the highs of the day. Support came from renewed trade and speculative interest which took prices back through 11.40 basis July to touch a high of 11.50.
Underpinning the move higher was a report that indicated the European beet crop could be threatened by dry weather conditions and could affect crop yields in that region. Addition support also came as key resistance had been pierced at 11.40 basis July which triggered light buy stops going in to the close. However, today's rally may lack follow through as prices are still vulnerable to large scale investment fund liquidation as they continue to hold a sizable net-long position going in to July's LTD on June 30th.
COCOA: Prices opened sharply higher off a firmer London market and continued to trade in firm fashion before settling 52-points higher on the day. Renewed fund and speculative buying took prices through resistance at the 1460 level basis July setting off a series of buy-stops. The market topped out at 1537 before drifting back slightly by the close. The buying interest was traced to continued Ivory Coast crop rumors that suggested first estimates are expected to show that production for 1997/98 will be lower than the previous year. The general talk is that weather conditions have prohibit early pod setting which could affect the total development of the main crop. However, the reports are preliminary and usually varies significantly from actual output. Furthermore warehouse stock levels in London as well as New York remain ample and will likely limit any further near-term rallies. Look for prices to continue to attempt to surge higher in response new-crop reports out of the Ivory Coast followed by heavy liquidation as FND approaches on June 17th.
COFFEE: Prices traded in a choppy fashion as the market still attracted overhead arbitrage selling while underlying support did emerge toward the 2.00 level. Despite the steadier tone the market remains cautious amidst a lack of strong trade support combined with the appearance that most roasters appear to be covered through the summer. While some caution might be injected into trading ahead of the USDA report Friday along with the GCA report Monday, we suspect if anything these reports hold out bearish possibilities for the market. The USDA report should show a relatively balanced situation with production for 1997/98 near the 98.6 million bag level. While 1996/97 should be revised downward to the 98.9 mb level compared with 100.9 estimated in December.
FROZEN CONCENTRATED ORANGE JUICE: Early buying by speculative interest failed to be sustained. Instead good selling interest from trade continued to emerge near the 80.00 level touching off disappointed long liquidation. Movement was delayed. We still favor the long side near current levels on the potential for July to attract interest ahead of its delivery period given its discount to cash. In addition, an improvement in retail demand by over 3 percent has recently been noted over year-ago levels. Resistance near 80.00 cents basis July still remains generally stiff.
The USDA's higher June winter wheat production report started this pit a little lower while the rest of the floor was slightly mixed by the latest USDA Supply and Demand changes. Wheat remained under pressure most of the day due to today's 43 million jump in the USDA's winter wheat production with Kansas City leading the break because of today's 26 million increase in HRW. Today's 5-million rise in old crop stocks to 130 and a 20-million cut in new crop to 240 million started the bean complex slightly mixed, but old crop quickly rallied sharply higher because of last night's reports of crushers sweeping the CST bins of remaining supplies. Corn also opened near unchanged and then drifted back and forth, on either side of Wednesday's close most of the day since the USDA left all their corn, feed grain and world course grains reports unchanged today.
SOY COMPLEX: Today's modest weekly old-crop beans (1.5 million), meal (19.2 K) and no bean oil, while new-crop bean were a strong 21 million added to today's initial mixed action. Despite, the USDA only upping U.S. by 5 million versus 10-million jump in imports, commercial and fund buying then quickly turned spot July strong as talk about tight crusher supplies and Wednesday's disappearance of CST stocks had the floor expecting no deliveries on June 30, too.
Egypt tendering for 30,000 vegoil this week lent some support to bean oil despite today's poor sales and commercial buying and bull spreading lent support to meal today.
Spillover selling from wheat's late break did cut today's gains in the complex, but July held together late and the N/X spread firming much of the day and closing positively at +171 level. Quiet country response to today's rally also a positive but today's big news was another impressive weekly crush of 25.4 million versus estimates of 24.3-24.8 which should open prices firm initially on Friday. Wire report about El Nino impacting Southeast Asian vegoil production also out this afternoon, but impact is 11 to 15 months after significant drought has began which was buried at end of story.
Given this week's early break, only 837 close needed to begin turning the negative attitudes, but a close above 853 would be big plus for return move to highs. Today's impressive new-crop sales were also longer-term positive for this market.
WHEAT: Only a modest 5-million decline in old-crop stocks as the USDA cut food by 5 million while upping exports by 10 also added to today's bearish attitude along with today's 22 increase in 97/98 stocks to 579 mil. Reports of EU repealing its $5 export tax didn't help wheat either despite no sales planned till late July.
With the USDA apparently waiting for their planting survey results before making any adjustments in South Plains harvested acres, today's steady to higher production estimates in Texas, Colorado, Oklahoma and Kansas took the sails out of this market as renewed fund selling then pressured this market into commercial house stops late.
Weekend rains in South Plains and USDA official talking about a plan to get China to agreed to a new TCK stance will need to help hold the line in July at 350 level otherwise further WN pressure to 340 is next. Kansas City next support 368-70 after 377.
CORN: Today's solid export sales in both old and new crop at 24.7 and 18.7 million lent some initial support along with the USDA not cutting this year's old-crop exports, but some higher than expected rains in the WCB overnight prompted this pit to drift much of the day. Wheat's late break weakened this pit on close.
Friday's cattle report expected to show hefty 17% higher placements and 13.4% larger on feed levels is positive for feed demand, but beans will need to lead higher.
June 12, 1997
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