David Fuller's view

The Continuous Commodity Index (Old CRB) (weekly & daily) had taken another turn for the worse from Tuesday through Thursday but shows a bullish upward dynamic today.  It needed to because this was required to reaffirm prior support near the psychological 500 level.  A clear break above December’s highs near 516 would provide evidence of potential base formation development.

Interestingly, price action over the last year for gold (does not yet show the close at 1248) and silver (does not yet show the close at 22.14), shown on daily charts, looks similar to CCI above, while platinum and palladium are leading this latest bounce from range lows.  This is helping CCI today and while the evidence to date is far from conclusive, cyclical rallies in both precious and industrial metals often commence in the latter stages of Wall Street’s bull trends.

 The all-important crude oil contracts, WTI and Brent, of which the latter is now by far the more important, have eased back recently but are firmer today.  Brent remains in the middle of its range since 2011, and while not cheap, is not really a problem for most countries while it remains rangebound.  In fact, it should encourage fracking.  However, danger lights for the tepid global economic recovery would be flashing in the event of a sustained break above $120.

There is little reason for the prices of US grain and bean staples such as corn, wheat, soybeans and rough rice to be affected in the off season by the USA’s recent ‘polar vortex’ which is now receding.  Some concerns were expressed about winter wheat but the storm has provided more than enough snow and it appears not to have been blown away to any serious extent. Wheat has continued to trend lower and now looks somewhat overextended, as does corn, which rallied today on a lower estimate for last year’s crop from the USDA. In contrast, a strictly near-term shortage of Canadian oats for the USA has lifted the price this week but it is now approaching previous resistance.

China’s Shanghai A-Shares’ underperformance (weekly & daily) has contributed to the erosion of investor confidence in most Asian stock markets since at least last May.  It is obviously a big influence on commodity prices as well, not least industrial metals, although they do show some evidence of base formation development.  China’s market is cheap relative to the USA, if you accept the PRC’s figures.  Meanwhile, the A-Shares performance has been a factor in causing international investors to retreat from Asia in favour of Western developed markets, which still have the powerful tailwind of accommodative monetary policies.  This is making Wall Street more expensive relative to Asia but the pendulum is likely to swing back partially at some point during 2014, particularly if global GDP growth improves. 

Japan remains Asia’s one big exception to this regional underperformance, thanks to the biggest monetary stimulus currently underway.  The Nikkei 225 (weekly & daily) has paused near its May high so some further ranging may be seen before this nearly 8-month consolidation, which I classify as the first step above the base, is completed.  A close beneath 15,000, breaking the rising lows since June, would be required to delay significantly further upside potential.  However, this appears unlikely given Topix 2^nd Section’s recent performance (weekly & daily) including new recovery highs during nine consecutive days to the upside.  I have often cited TSE2 as a lead indicator for Japan and this is a clear breakout.  Provided these latest gains are mostly consolidated above 3500, it should not be long before the Nikkei follows this lead.  The completion of the first step above a large base formation is usually followed by significant medium term gains.   

New Zealand is also a top performing Asian Pacific stock market still in form.  It backed away from the psychological 5000 level in November but I would continue to give the upside the benefit of the doubt provided it says above 4600.