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STRATEGY FOCUS
Prepared by
Merrill Lynch & Co.
Global Securities Research & Economics Group
Recently, we have tempered our enthusiasm for aluminum and copper with a primary reason being the potential for slowing Asian demand. While the North American sector remains fairly buoyant and European offtake seems to be improving, Asia has been lagging and we do not see early 1998 prospects for this sector as very encouraging. Recent comments from Canada's Alcan aluminum might be indicative for the aluminum market. They feel LME stocks could rise by as much 100,000 tonnes by the end of the year, possibly hitting 900,000 tonnes during the first quarter of 1998. Earlier this year, the significant downturn in Asian demand for aluminum and copper was not anticipated by most analysts but in recent weeks the bad news has become more apparent. And it is not only China that we are talking about but also Japan along with many of the “Asian Tiger” nations that are mired in a currency crisis. Increased Chinese aluminum output of 13 to 15 percent adds to the negative supply/demand picture. It is likely that the Asian malaise will continue at least through the first half of 1998. For some time we have indicated a $1575 to $1675 trading range for LME 3-month aluminum and tightness in November dates seems likely to hold prices in that range for awhile. However, the advocated trading strategy would be to sell the upper quarter of that range looking for prices to trend lower on a gradual basis through the first quarter of 1998. A similar trading pattern would be expected for copper. LME metals that should be excluded from this view include lead and zinc.
Volatility And Crude Oil Go Together
The crude oil market has spent the past few weeks trading in what might be described as a “violently volatile” fashion on a combination of technical and fundamental factors. The CFTC Commitment of Traders report told much of the story as it showed a massive build of speculative, mainly fund, positions. The large speculative category showed a near record net long position of nearly 56,000 lots. In the past, a 35,000 to 40,000 figure was enough to indicate a market top. The initial fundamental genesis for the rally was a vast over reaction to somewhat increased Middle Eastern tensions, and once these concerns were mostly alleviated the market paid the price for the speculative buying binge with the November NYMEX crude contract falling from a $23.15 per barrel high on October 3 to as low as $20.51 on October 14. Between October 10 and 14 alone prices fell $1.70. In the process, support at the 18-day moving average was taken out and the overall chart bias moved from bullish to neutral, However, no key levels were violated and the all important 40-day moving average level (currently $20.34) held and now serves as solid technical support. It may well be that the recent gyrations were a knee jerk type event and that the basic long-term bullish leaning outlook for the technical picture remains in place. It is significant to note that the London Brent contract also held 40-day moving average support above $19.10. From an Elliott Wave perspective, NYMEX held 50-percent retracement levels. Major trendline support also held.
In our view, the recent sharp selloff is not an indication that crude oil prices are headed for a major additional decline that will send futures into a new significantly lower trading range. Further speculative liquidation could result in some additional downside but the market appears to be headed into a consolidation phase which we expect will be followed by a gradual long-term uptrend. The overall fundamental bias also leans higher.
In the agricultural sector, soybeans have been in a strong uptrend and are probably overdue for a setback as the pace of farmer selling picks up at attractive prices. However, a renewal of the uptrend could be in prospect after a consolidation phase. The most recent USDA Crop report and expected strong export demand should lead to a higher price trend into the first quarter of 1998. Soybean meal is also in need of a cooling off period but buying weakness is advocated. Senior Oilseeds Analyst Mario Balletto favors buying March $2.20 soybean meal calls on setbacks as well as establishing bull spreads on meal. In soybean oil, he favors buying December in the 23.50-cent area.
As for commodities in general, they have displayed a modest, albeit non-inflationary, pattern over the past two weeks and that might be expected to continue in the upcoming period. The CRB Index currently stands at 245.10 versus 243.40 at the time of the October 2 Commodity Market Trends report.
(Reprinted by permission. Copyright © 1997 Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
October 16, 1997Bill O'Neill
Merrill Lynch & Co.
Global Securities Research & Economics Group
North Tower, 21st Floor
World Financial Center, New York, New York
THE ALLENDALE ADVISORY REPORT |
STRATEGY FOCUS |
WEEKLY OUTLOOK
ECONOMIC PERSPECTIVE |
FED STEER PRICES GOING NOWHERE FAST
U.S. ECONOMIC AND INTEREST-RATE OUTLOOK
STICKING WITH THE U.S. TREASURY MARKET |
THE TODD MARKET TIMER
CASH AND BONDS-- THE RODNEY DANGERFIELDS OF FINANCIAL ASSETS?
MYERS ON FUTURES |
THE COPPER JOURNAL |
COMMODITY FUTURES FORECAST WEEKLY REPORT
INTEREST RATE WATCH |
NIKKO MARKET COMMENTS
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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