October 2016 Monthly Commodity Market Overview Newsletter By the ADMIS Research Team

Stock Index Futures While the NASDAQ futures were able to make new highs for the year on October 10, the S&P 500 and Dow Jones futures lagged, trading sideways for a month and a half. While strength in a few large capitalized issues led the way up in the NASDAQ, the S&P 500 and Dow Jones futures lagged behind and tended to be more susceptible to increasing prospects of a fed funds rate hike later this year. Underscoring rate increase prospects were comments within the minutes of the September 20-21 Federal Open Market Committee meeting, which indicated that it would be appropriate to increase the target range for the federal funds rate if economic developments unfolded about as the FOMC expected. There were hawkish comments from Fed officials in spite of the on balance weaker than expected U.S. employment data. September nonfarm payrolls increased 156,000, which compared to expectations of a gain of 172,000 and private payrolls were up 167,000, when an advance of 170,000 was anticipated. Also, the unemployment rate increased to 5%, when 4.9% was estimated.

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S&P 500 Futures - Weekly

Chart provided by QST

There was temporary strength when former U.S. Treasury Secretary Summers, at a lecture at a Bank of Japan conference in Tokyo, brought forth the concept of ongoing purchases of stocks as a possible tool to strengthen economies that are experiencing subdued growth and below target inflation. Overall, stock index futures are holding up well even though analysts are predicting earnings for S&P 500 companies in the third quarter will decline 1.6%. Although this would be the sixth consecutive quarterly decline, there is a positive note in that the string of declining quarterly earnings reports is showing smaller declines. Keep in mind that while the Federal Open Market Committee raised interest rates last December, it is usually not the first, second, or even the third rate increase from the Fed that halts a bull market. It’s the last one. Currently we are not even close to a fed funds rate that will turn this bull market into a bear market. Our analysis suggests another 25 basis point increase in the fed funds rate to 50 to 75 basis points is not restrictive enough to reverse this bull market in stock index futures.

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Energy Crude oil futures advanced to a four month high earlier this month in response to the late September announcement to cut crude output from the Organization of the Petroleum Exporting Countries. OPEC members said they had a preliminary agreement to slash output to a maximum of 33 million barrels a day from the current 33.4 million barrels a day last month. Futures appear to be well supported on breaks due to reports that U.S. oil supply is likely to decline by 400K barrels/day this year and in 2017 with production set to drop through the third quarter 2017. Crude Oil Futures - Weekly

Chart provided by QST

In spite of skepticism that OPEC will come to a meaningful production agreement, our view remains that because of ongoing economic stimulus in many parts or the world, demand for crude oil will be stronger than generally anticipated this year and in 2017, which will drive prices up. Trade crude oil futures from the long side. Natural gas futures advanced to a 22 month high, as a series of smaller-than-expected injections of natural gas into storage has increased hopes that the overhang of supply is dissipating. Some analysts cited the reason for futures to come off of recent highs is due ideas that the rally is overdone and because of news that the natural gas rig count increased by 11 last week. Expect natural gas futures to advance from current levels and into the winter months, as a growing global economy stokes demand.

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Precious Metals After registering spectacular gains in the first quarter of this year, gold and silver futures fell below major support lines to four month lows earlier this month. Much of this pressure took place as traders adjusted for the possibility that the Federal Open Market Committee may be signaling a more hawkish approach to monetary policy. Expectations of higher interest rates tend to weigh on gold and silver, as the metals struggle to compete with yield-bearing assets such as Treasuries when borrowing costs increase. In spite of the recent declines, gold prices are up nearly 19% and the price of silver is up 28% since the beginning of the year. Gold Futures - Weekly

Chart provided by QST

The precious metals have now stabilized, as some traders believe the Federal Reserve may look past the global inflation pick-up and will be slow to tighten credit conditions. Also, there have been comments from the Bank of England indicating the central bank of the U.K. is also willing to look past an uptick in inflation due to sterling weakness.

U.S. Dollar The U.S. dollar advanced to a seven month high, as traders ramp-up expectations of a fed funds rate hike at the December meeting. Several Federal Reserve officials recently talked up the possibility of a near term rate increase including hawkish comments from Federal Reserve Bank 4|Page

of Richmond President Lacker when he said there is a “strong case” for raising the policy rate above the current low level. Keep in mind that the Federal Reserve is the only major central bank that is on course to increase interest rates either this year or in 2017, which further enhances the bullish interest rate differential expectations advantage that the greenback enjoys, especially in light of the European Central Bank, which remains in an ongoing unprecedented accommodation mode. In addition, other major central banks, such as the Bank of Japan and the Bank of England are widely anticipated to ramp up their economic stimulus plans, pushing interest rates down even further. With global interest rates as low as they are in the U.S., and in many countries negative, the U.S. dollar should be well supported.

Euro Currency Since the highs were made in the middle of August, futures have trended lower. In addition to the euro unfavorable interest rate differentials, the currency of the euro zone came under pressure after a report showed the euro zone economy may be losing forward momentum. A purchasing managers’ index for manufacturing and services in the euro zone fell to 52.6 in September from 52.9 in August. Also, there was weakness in the euro zone in spite of bullish economic reports, including news that euro zone economic confidence advanced to the highest level since January. An index of business and consumer confidence rose to 104.9 in September from 103.5 that was reported in August. The forecast was 103.5. Also, the currency of the European Union fell in spite of news that German factory orders surged in August on broadly based domestic demand. There was only temporary strength in the euro due to rumors that the European Central Bank is considering tapering its quantitative easing program. It will be difficult for the euro to mount a sustained advance in light of the negative interest rate structure in much of the euro zone.

British Pound The British pound penetrated the 1.28-1.29 triple bottom area after U.K. Prime Minister Theresa May promised to start pulling the U.K. out of the European Union by March. However, the pound was able to mount a temporary partial recovery when May agree that Parliament should be allowed to vote on her plan for Brexit. This move had the effect of reassuring investors that the

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U.K. government will have a more moderate approach to its negotiations with the European Union. The pound continued to decline after a report showed U.K. mortgage approvals fell to the lowest level in almost two years. Also, there was some selling on news that U.K. manufacturing increased .2% in August, which compared to the estimate of a .4% gain.

Grains From mid-September to mid-October, soybean, corn and wheat futures rallied and are near key resistance. Soymeal traded mostly sideways and soyoil traded higher. The U.S. corn harvest is near 46% completed. Although yields are great, they are still not a record. Farmer selling is slow. The U.S. soybean harvest is 62% completed and yields are still near record and the farmer is selling. Soyoil rallied on higher palmoil prices and talk of higher demand. Soyoil also found support from a wet Canada canola harvest. The USDA estimates higher 2017 South America corn and soybean crops, although northern Brazil is a little dry. Crude oil prices firmed on talk of reduce global supply and the U.S. dollar has moved higher, but is near key resistance. On October 12, the USDA estimated the U.S. 2016 soybean crop at near 4.269 million bushels versus 4,201 in September. The USDA also estimated the U.S. 2016/17 carryout near 395 million bushels versus 365 in September and the USDA increased world 2016/17 soybean end stocks to a record 77.4 million tonnes due to higher Brazil supply. The 2017 Brazil weather is expected to be near normal, but is starting out drier than normal in the north. The USDA estimates the Brazil 2017 soybean crop near 102.0 million tonnes versus 96.5 last year. They continue to estimate China’s 2016/17 soybean imports to be near 86.0 million tonnes versus 82.5 last year. Traditional funds continue to be net long soybean, soymeal and soyoil futures. What will make them cover? On October 12, the USDA estimated the U.S. 2016 corn crop is near 15,057 million bushels versus 15,093 in September. In addition, the USDA also estimated the U.S. 2016/17 carryout near 2,320 million bushels versus 2,384 in September. Also, the USDA dropped world 2016/17 corn end stocks to 216.8 million tonnes versus 210.0 last year. Traditional funds continue to be net short corn futures. What will make them cover?

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Chart provided by Bloomberg.com

On October 12, the USDA estimated the U.S. 2016 wheat carryout near 1,138 million bushels versus 1,100 in September. The USDA dropped world 2016/17 wheat end stocks to 248.4 million tonnes versus 239.7 last year. Traditional funds continue to be net short Chicago wheat futures. What will make them cover? Minneapolis wheat futures have rallied versus Chicago on concern over Canada’s wheat quality. Kansas City wheat futures have found support due to some dryness across the U.S. southwest hard red winter growing areas.

Livestock Cattle futures staged a recovery in early September after trading below 100.00 for the first time in nearly six years. The rally lasted into the middle of the month, but bearish momentum resumed and futures continued to decline to new monthly lows and contract lows on the last day of the month. Ample cattle availability and strong levels of production exacerbates downward momentum with participants likely not expecting much seasonal fed cattle price support during October. Futures have certainly overshot most downside projections at this point, but it would seem that the market is struggling to find a bottom. Wholesale beef prices continue to struggle, as well, while failing to compete with cheaper protein alternatives with little hope for Q4, as consumer 7|Page

demand will target turkey and ham, but cheaper beef prices are expected to help encourage further export growth. Cattle prices are likely to remain on the defensive through the end of the year as placements are expected to increase through October as supplies remain ample and feed remains cheap with the market not anticipating a recovery until Q1 and Q2 2017. We remain bearish on rallies in the interim for 2016. December 16 Live Cattle Futures - Daily

Chart provided by QST

The hog futures market spent September on the decline, falling to the lowest level since 2009 being weighed down by excessive pork production after the September hog and pig report showed September 1 inventories at a record high. Futures have failed to generate any substantial upward momentum as participants expect slaughter to reach or even exceed capacity during November with production expected to hit an all-time record high in Q4. The sharp declines in hog and pork prices are expected to help stimulate export demand yet ample domestic supplies should help limit upside potential through the end of the year. We remain bearish on rallies through the end of 2016.

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December 16 Lean Hog Futures - Daily

Chart provided by QST

Support and Resistance Stock Index December 16 S&P 500 Support

2105.00

Resistance

2179.00

Resistance

4905.00

Resistance

54.40

Resistance

3.600

Resistance

1285.0

December 16 NASDAQ Support

4750.00

Energy December 16 Crude Oil Support

48.50

December 16 Natural Gas Support

3.350

Precious Metals December 16 Gold Support

12500.0

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December 16 Silver Support

17.000

Resistance

18.420

Resistance

2.2200

Resistance

98.800

Resistance

1.11400

Resistance

3.80

Resistance

10.00

Resistance

4.40

Resistance

108.90

Resistance

49.00

Industrial Metals December 16 Copper Support

2.0650

Currencies December 16 US Dollar Index Support

97.000

December 16 Euro Currency Support

1.08700

Grains December 16 Corn Support

3.20

November 16 Soybeans Support

9.40

December 16 Chicago Wheat Support

3.90

Livestock December 16 Cattle Support

88.90

December 16 Hogs Support

40.00

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If you would like more information about the markets featured in this monthly newsletter, please send us an email to [email protected]. Thank you. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. The views and opinions expressed in this letter are those of the authors and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analysts do not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

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