terça-feira, 2 de novembro de 2010

Coffee Traders' Forum

The FOMC meeting started today, and tomorrow the market will know about the Quantitative Easing II (or QE2). Initially thought to be near US$ 1 trillion, the amount of money that FED will spend to buy bonds is now expected to be at least half of it, or US$ 500 billion. For the record the market is not working with chances of no-package.
At the same time the mid-term elections are taking place in the US, and there is a real threat for Obama to lose control of the majority of the congress, given the still high unemployment rate and lack of strength of the economy – as if it would be easy to solve all problems in 2 years.
In Brazil Dilma Roussef was confirmed in the run-off as the first woman-president of the country, thanks to Lula and all the “efforts” done by the government to elect a candidate of the party in power (PT = “worker’s party” in Portuguese). In her first speech after the confirmation, she said what the market wanted to hear, that she will stick with fiscal responsibility, inflation target, among other things – might she have a good term and keep her promises.
In the bond-market the PIIGS are suffering as investors got cautious after some rule changes for
restructure debt in the Euro zone. Emerging markets bonds continue to be hot as investors are looking for yield, and some analysts think this will be the next bubble.
Commodity indices are making new highs, led by Natural Gas 15.47% rally in 5 days, followed by
Orange Juice 10.41% and Sugar 7.73% gains. Coffee is just a little lower since our last report, with some weak signals that could take prices lower in the shortterm.
From our last week report title “any bear around?”, 78% of the responses we got came from bulls, while bears counted for 22% of the answers.
Technical Focus: New highs of the “C” did not help prices to test the 210.00 cents,and spec-related selling came to book profit (along with origins). The key support remains intact, 195.20 where sizeable stops might start to get elected. London January contract broke the 2000 area falling sharply afterwards, but so far being able to hold above 1900. A move below 1870 would call more long-liquidation.

Fundamental Focus: Weaker differentials for pretty much all origins, and a more discounted December / March spread should make bulls cautious. Availability of mild coffee is getting better little by little, and as prices are attractive there are more deals taking place for prompt shipment up to the 1st quarter of 2011. Even in Brazil differentials widened a little, allowing exporters to extend their coverage (but not necessarily helping FOB buyers that are waiting for better deals). Delays of shipment in the major origin seems to be getting a little better, but it
seems like more than 300K bags are still “seated” waiting to depart the port (not only there is a scarcity of containers, but also space on vessels is hard to get). Roasters have been complaining about the performance of the “C” and the functionality of the market that has high intra-day volatility, and according to some a lack of connection with the physicals. On the other hand many say that the board is working on that, and getting Brazil on board is one of the reasons.
The reason for such intra-day volatility seems primarily to be the far apart price ideas that origins and roasters think to be the fair-value, and high participation of algorithm and high-frequency traders.
The macro economics has also been influencing tremendously all asset classes, and in that matters that was an interesting article a couple of weeks ago on the Journal mentioning how the retailer investor that spend a lot of time and effort studying the balance-sheets of the companies got wiped out of the market, as “value” became relative.
Coffee seems threaten to trade lower in the short-term, and in regards to the FOMC and the elections it seems to be not a matter of direction but magnitude, as an analyst mentioned.
Have a good week and good trades.

The Conclusion
Commodity-indices are making new highs helped by the dollar weakness and higher interest rates in some economies that are fighting to contain inflation.
Market participants are waiting on the results of the elections and the FOMC meeting tomorrow, which could make the landscape tougher to Obama.
Coffee spreads in NY are getting weaker, and differentials have softened a little, and these could turn into selling signals for the short-run
If the size of the new FED program is announced to be bigger than 500 billion, the greenback could slide further (PIMCO says it could devaluate another 20%) and provide further strength to commodities.
Between the macro and micro, traders are taking the opportunity to roll their position from December to March on the “C”.
Option- activity continues to be more bullish then bearish, and vols are hanging around 43%, with meager skew.
More availability in the physicals is welcomed by a market that has learned and turned to be working in a hand-to-mouth basis for a while.

Best Regards,
Rodrigo Costa
rodrigo.costa@newedge.com

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