Perceptions that the strong rally in the U.S. Dollar may lead to a drop in demand for commodities pressured both the Grain and Softs complexes on Monday.
Soybeans, corn and wheat were all sharply lower as traders sold positions on the notion that the stronger Dollar will make U.S. grain markets too expensive for foreign buyers. Speculation that China may cut back on demand was also a driving force behind the break. All of this bearish news regarding demand was on top of last week’s bearish U.S.D.A. report predicting an increase in crop production.
The soft complex was also down on Monday. Speculators either took profits or renewed shorting activity in Cocoa, Coffee, Cotton and Sugar in anticipation in a drop in demand because of the stronger Dollar and a slow down in China’s economy.
U.S. stock index futures fell sharply following the lead of the Chinese stock market. Economic problems may be brewing in China because of excessive speculation and the possibility the central bank will tighten. For weeks, the U.S. markets have been churning on thin volume and very little fresh money. U.S. traders remain skeptical that future corporate earnings will be able to meet investor demand. Stocks may have to come down considerably now that there is evidence that consumers aren’t spending.
The U.S. Dollar gained considerable ground against most majors as investors dumped higher yielding currencies. The September Japanese Yen was able to post a gain as investors repatriated their funds.
September Treasury Bonds and Notes continued to attract new money in a trend which began last week. Today’s buyers were more interested in protecting their money following the collapse in the stock market. Last week’s auction was absorbed easily by the market which means investors still feel that U.S. debt instruments are good investments.
December Gold and December Silver both posted losses on Monday as the Dollar gained strength throughout the day. Without inflation there is no need to hold precious metals as a hedge. Problems could be arising in China which could lead to less demand for Copper and other industrial metals.
A slowing global economy could be lower demand for energy products. September Crude Oil fell on Monday as the Dollar rose and demand for higher risk assets abated. Demand for energy products could also fall because of mounting evidence that the consumer is not spending. This could lead to a decline in gasoline prices.
