August through October has historically been the most volatile time of the year for stocks and commodities and this year may be no exception. Stocks have been on a tear since the US election last November, but have been looking exhausted lately. A very strong earnings season for US companies has helped to prop up the market but has not generated enough enthusiasm to send indices significantly higher (although specific stocks have gained on specific developments). Meanwhile, indices in Europe, particularly the Dax, have already gone into retreat, while the FTSE has paused.
August has also been a historically poor month for commodity prices and is a month where we often see seasonal transitions in commodity price trends. July was a spectacular month for commodities where copper, crude oil, and rough rice posted very strong gains while cotton, natural gas and wheat sold off.
Improving sentiment toward commodities has been driven by two main factors, a weakening US Dollar as increasing numbers of central banks join the Fed in the neutral to hawkish camp, mixed US economic data creating questions about how aggressive the Fed may be in normalizing monetary policy, and improving sentiment toward economies in Europe and in China.
How some of these factors shift may play a big role in whether commodities are able to continue their recovery in August or if the commodity rebound is short-circuited by a seasonal selloff. Swings
in commodity prices may have particular impact on indices with a higher weighting in resource stocks such as the FTSE
in the UK, the S&P/TSX in Canada and the S&P/ASX in Australia.
Although there is no FOMC meeting this month, two big meetings could impact attitudes toward the US Dollar could change over the course of the month. NAFTA renegotiations are scheduled to start on August 16th, which could set the tone for trade relations between the US and partners around the world going forward. Whether President Trump signs or vetoes trade sanctions against Russia that could upset Germany and other allies may also have an impact.
The Fed’s annual Jackson Hole conference may also attract attention from currency traders. The Fed has historically used this event to signal changes in monetary policy and this time around traders may look for hints on when the Fed plans to start normalizing its balance sheet and when it plans to raise interest rates again. With central bankers from other countries also often in attendance, comments about when other countries may taper QE purchases or raise interest rates may also pop up.
The most significant central bank meeting this month is the Bank of England where calls and hints toward a rate hike have been growing in recent months. This could have a significant impact on trading in GBP pairs.
It also could be the beginning of an even more volatile period for domestic politics in the US. Congress has been having trouble reaching agreement on health care reform and is not staring down the barrel of budget negotiations and at hitting the debt ceiling which could lead to a government shutdown. Negotiations may also cover tax reform and infrastructure spending, two areas that have been central factors driving stock markets higher this year. August could see these issues come back to the front burner, although they are not likely to come to a head until September or October.
Topping it all off, there’s a full Solar Eclipse in the US during trading hours on Monday August 21st. It remains to be seen if this is becomes a distraction or if it has an impact on trading psychology.
My forecasts for July had mixed results. Crude oil advanced through the month, finishing way above the $44.74 level where it started trading up toward $48.85, but didn’t quite reach my $49.75 objective. USDJPY
rallied as expected through the first part of July peaking near 114.60 just short of my 115.00 objective before turning downward and falling toward 110.60 before bouncing back toward 112.15. The NASDAQ did not work out at all, only declining a small amount in early July before soaring up to a new all-time high near 5,950
Three interesting markets for August 2017
1) Index DAX Current Price 12,211 1 month forecast 11,825
The Dax is historically one of the worst performing indices in the month of August falling 2.0% on average over the last 25 years. To make matters worse, the index has been turning increasingly downward since peaking and June and recently completed a bearish head and shoulders top pattern. The 11,825 level is close to the 200-day moving average and a common 38% retracement of the previous uptrend.
2) Commodity Sugar Current Price 14.45 1 month forecast 16.50
Sugar spent the first half of 2017 in full retreat but since bottoming out in June, appears to have turned the corner. In July, the price broke out of a downtrend, and momentum has turned upward. A move up through 14.55 would complete a head and shoulders back and signal an uptrend. 16.50 would complete a measured move from the base and is near a 38% retracement of a previous downtrend. May through December has historically been the strongest time of the year for Sugar.
3) Currency EURUSD Current Price $1.1685 1 month forecast $1.1500
The Euro has been on a tear in recent months, rallying up from $1.0500 back in March to a recent high near $1.1700. This rally has been looking tired lately and a recent buying climax plus a bearish reversal suggest it may be vulnerable to a correction. Moreover, August has historically been a negative month for the Euro and the dog days of summer could spark some profit-taking and a normal trading correction. The $1.1500 round number is close to a common 23% retracement of the recent uptrend.
Notes for Puls Biznesu August 2017 one-month commodity forecasts
Led by copper and crude oil, July turned out to be a spectacular month for commodities which enjoyed a big resurgence. 13 out of 20 markets posted gains with the top performers including a 6.3% rally in copper, a 4.6% gain for WTI crude oil, a 4.2% seasonally unusual gain for gasoline. The agricultural group was extremely mixed with rough rice rallying 7.2% and soybeans gaining 4.2% while cotton plunged 8.0% and wheat dropped 6.4%.
July was a mixed month for my expectations. Copper as the best commodity was a spectacular success with the price soaring up toward $2.89 from $2.64, blowing way past my $2.77 objective which turned out to be conservative. Palladium as the worst commodity started near $857, fell to as low as $830 well above my $800 forecast and spent much of the month trading near $860, so a sideways month rather than a big decline.
August has been the worst month of the year for commodities historically and the only month with an average monthly decline in 13 of the 20 markets we follow. The top August performers of the past have been heating oil, gold and wheat. The worst August performers historically have been silver, gasoline, robusta coffee and sugar. The big divergence between heating oil and gasoline also indicates August tends to be a month of seasonal shifts.
Best Commodity Arabica Coffee Current price 113.65 one-month forecast 144.30
Bloomberg Symbol KC
Arabica Coffee was crushed through the first half of 2017 but has turned the corner in the last month. Since bottoming out in June the price has been recovering, it has broken out of a downtrend and momentum has turned upward. Arabica Coffee is one of the few commodities to have a positive average historical return for the month of August. Arabica has underperformed Robusta Coffee dramatically so far this year and there’s lots of potential for closing the gap. The 144.30 level represents a 50% retracement of the previous downtrend.
Worst Commodity Lumber Current Price 385.6 one-month forecast 360
Bloomberg Symbol LB
April through September is historically the worst time of the year for Lumber and a selloff between April and June continued the historical trend. A common August trading bounce for lumber came a month early this year in July, leaving lumber vulnerable heading into August. The price has already started to fall away from 400 and upward momentum has been fading. The 360 level appears in a potential support zone between 358 a common 50% retracement of a previous uptrend, and 362, the 50-day moving average.
Key Dates for August 2017
August 1 Manufacturing PMI reports
August 2 US ADP payrolls
August 3 Bank of England decision and inflation report
August 4 US nonfarm payrolls and Canada jobs
August 7 China trade balance
August 9 RBNZ meeting
August 16-20 NAFTA Renegotiation talks first rouind
August 21 Solar Eclipse in North America
August 23 Flash PMI reports
August 24-26 FOMC Jackson Hole conference
August 30 ADP payrolls
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