FOCUS ON THE SOYBEANS: Uninspiring weekly export sales and bearish South American weather combined to pressure the market back below $7.00/bu. this week. With about 80% of the Brazilian soybean crop now planted, the return of rain to this key world producing region significantly increases the odds for yet another record growing year. To wit, Brazilian crushers have already pegged new-crop soybean production at 30 million tons, up 11 percent from last year's record. Brazilian soy meal production is expected to rise 12% above the previous record, to 16.7 million metric tons. Lower than expected U.S. weekly exports sales at 361,700 have also cast a pall over the market. However, total U.S. soybean sales for 1997- 98 are still more than 9% above a year ago and shipments 23% ahead. Nevertheless, facing another huge South American crop, the market will need a steady increase in world demand to offset the increased supplies that are expected to jump to 149.17 million metric tons in 1998.

Technically, this contract appears headed back to retest the October low at $6.87/bu. Failure to rebound at this level could open the floodgates and enhance the odds for a further retracement of the sharp October/November rally. The Fibonacci bands on the daily bar chart come into play at $6.85½ and $6.70¾/bu. Trend line support is found at $6.52½/bu. The slow stochastic is now reading oversold at 13.08%. For reference, a seasonal buy window will remain open for the August soybean contract throughout most of December. The odds appear to favor seeing a technical rebound back to $7.30/bu.

Recommendation–Look to buy near $6.87/bu. Sell Stop–$6.80/bu., close only. Objective–$$7.30/bu.

FOCUS ON THE CORN: For the most part, corn prices remain on the defensive. Although bullish long-term fundamentals remain intact, ideas that export business from Japan and South Korea could be lost to competitors appears to have taken some of the wind from the bulls' sails. Reports that the Japanese, historically the most consistent buyer of U.S. corn, could shift business over to Europe, was not well received by traders this week. Combined with China's return to the export market, concern is building that the recent rapid pace of U.S. exports may be beginning to slow as end users seek cheaper grain elsewhere. This week, the USDA reported net export sales at 701,600 tonnes, which was 69% above the previous week. However, this number is 16% below the 4-week average and continues to fall short of what is needed to reach the USDA projection of 1.925 billion bushels.

While strong exports remain critical to the outlook for U.S. corn prices, traders also remain focused on South America, whose feed grain acreage has been significantly sacrificed to bolster soybean production. With El Nino still threatening to play havoc with global weather patterns, experts feel that reports of adverse growing conditions in the southern hemisphere could cause a quick shift in trader sentiment and generate a strong reflex rally. Indeed, the recent run of hot, dry weather in Australia and expectations that the drought-ridden South African corn crop could see a four million-ton drop, stand as testimony to the adverse effects of this weather phenomenon. On the daily bar chart, we see that March corn has now dropped to its lowest level since early October, having retraced 50 percent of July/October rally. Prices are now testing the trend line support near $2.77/bu., and appear vulnerable to further long liquidation. The next Fibonacci band, reflecting a 0.618% retracement, comes into play at $2.70½/bu. The October low at $2.64¼/bu. would be the next downside target if the bulls should fail to regroup. While we anticipate an eventual rebound, we're still looking for some further price deterioration ahead, which we'll consider as a good buying opportunity.

Recommendation–Look to buy near $2.72/bu. Sell Stop–$2.64/bu., close only. Objective–$2.95/bu.

FOCUS ON THE U.S. TREASURY BONDS: Credit market bulls continue to benefit from an upbeat inflation outlook, a shrinking government deficit, and falling commodity prices. However, with the benchmark 30-year long bond yield now at 6 percent, its lowest in 22 months, the market appears to be facing considerable resistance. Some experts now see diminishing concern over the Asian financial crisis and, specifically, its impact on the Japanese economy, providing a catalyst for profit taking, as traders rationalize that a lessened “flight to quality” also implies lower foreign demand for U.S. government securities. In addition, as December is considered a “book squaring” month for dealers locking in end-of-year profits, it would take little fundamental news to kick start a serious correction from the current 120-00 level. In this regard, the upcoming report on civilian unemployment could easily do the trick, especially if payrolls should rise above the expected 230,000 jobs.

Nevertheless, there are those who strongly feel that benchmark yields are destined to fall below the 6 percent level, as even more fallout from Asia's deflationary debacle is yet to be felt. In addition, with the yield on 10-year notes approaching 5.75 percent, ideas are beginning to surface that mortgage investors will soon begin buying calls options in increasing quantities to hedge against a rush to refinance loans (in essence, prepaying them) at lower rates. Indeed, the breach of the 6% yield could further ideas that the fundamentals responsible for sending rates to their lowest level in nearly two years remain intact. Some economists now point to the flattening of the yield curve as signs of an impending economic slowdown. However, others contend that the sharp drop in bond yields, which have narrowed 30 basis points since mid-October is responsible for the flattening and not an overzealous Federal Reserve. As the Fed now appears content on maintaining the status quo, the odds of seeing higher interest rates by year-end continues on the low side. Of course, all complacency would quickly change should the Fed begin to show renewed concern over wage push inflation and as talk of another pre-emptive strike in the first quarter of 1998 begins to circulate.

Technically, March T-bonds are now facing critical resistance at the 120-00 level, but have yet to show any real signs of topping. The slow stochastic has flattened near overbought and offers little predictive value. Measuring objectives point to another two full points higher should the bulls continue to stampede. However, in the event of a fundamentally inspired correction, the nearest Fibonacci band suggests a quick move back below 118-00. All things considered, we feel that, at current price levels, and with the end of the year fast approaching, a temporary sideline stance is warranted.

Recommendation–Stand aside.

FOCUS ON GOLD: The sharp drop in Asian gold demand continues to plague this precious metal, which has now declined to a 12½-year low. Compounding the problem for the gold bugs was news that yet another central bank (Argentina's) was selling off its gold reserves to the tune of four million ounces. Argentina now joins a list of central banks that have been off loading gold to raise capital for one reason or another. And with each new announcement made, fears of additional sales keep gold prices reeling as investors lose more confidence that a bottom may be nearing. Thus far, Asian demand, that in the past has propped up prices when considered cheap, is not to be seen. Facing their own financial crisis, it appears that acquiring gold bullion is low on their list of priorities. Indeed, according to a report issued by the “Gold Council,” even before the recent economic meltdown, Asian gold consumption slipped by 7% in 1997. In the wake of their respective currency devaluations, demand from major Asian gold consumers, such as Japan and South Korea has slipped even further. Believing that gold's fall from grace is far from over, the pressure continues to build on the meal, as traders see the potential for more central bank selling and little physical support to halt the onslaught that has collapsed the market $119/oz. since last February.

The monthly bar chart displays the steady demise of gold prices over the past two years. Projections of seeing prices slip below $200/oz. cannot be ruled out, although, from time to time, short-term corrections are always possible. At some point, low supplies and decreased mine production will generate a rebound. However, if gold's role as a benchmark of monetary value continues to erode, gold could eventually revert to becoming a raw commodity, somewhat like copper, whose worth will be determined mostly by industrial demand.

Recommendation–Look to sell near $295/oz. Buy Stop–$302/oz., close only. Objective–$250/oz.

FOCUS ON COPPER: Reacting to the specter of weakening physical demand from Asian nations and rising warehouse stocks, “red metal” prices have fallen to their lowest level since November 1993. Considered a casualty from the Asian deflationary collapse, experts see copper possibly falling another 10 cents/lb. before finally finding a bottom. As copper prices fall, copper stocks at the London Metal Exchange continue to increase, now having jumped from 216,000 tons in mid-June to the current 341,500 tons. Obviously, negative trader sentiment also is weighing heavily on this market, as the charts continue to graphically depict the steady price deterioration. The spot December contact is fast approaching the 80 cents/lb. where some bottom picking may develop. The monthly bar chart displays a highly oversold market, but still showing no sign of bottoming. A close below 80 cents/lb. could unleash yet another round of commodity fund selling and producer hedging, driving prices perhaps through 70 cents/lb. We see little reason to abandon the bears, although a correction from current price levels would not be too surprising.

Recommendation–Continue to stand aside.

December 4, 1997Siegel Trading Company

549 Randolph, Chicago, Illinois

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