Next Week's Economic Focus - 2019/05/03

A trade deal on top of strong payrolls should equal a huge rally in stocks!

It’s a Tale of Two Cities with the US economic outlook strong and the outlook for commodity prices weak. With the US Federal Reserve reiterating its positive view on the economy, transitory inflation, and a fairly entrenched neutral stance, it could be difficult to derail the flow of capital toward equities. Recent spec and fund positioning in several stock index futures were still holding a net short despite the markets continuing to trade to new all-time highs. Unfortunately for commodities, the hope for better physical demand is glossed over by the strong dollar and in many cases, fears of oversupply.

The grain complex recently registered a spec and fund net short of 1.3 million contracts, a new record. This could eventually be seen as excessive bearishness, but farmers and market analysts will quickly point to the historic oversupply in soybeans and the entrenched confidence in large yields as major limitations to any recovery in prices this year. There have been times in the past when participants have complained that markets were not “trading the fundamentals.” Given the record net short positions in some markets, we can’t rule out a larger than expected rally from concentrated stop-loss buying by funds, even if it isn’t supported by the fundamentals.

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David Hightower