Written Commentary
BONDS:
Apparently the treasury trade was positioning for fresh flight to quality conditions over the weekend as prices remained firm in the face of comments from the Fed’s Bullard suggesting rates should top 3% and in the wake of comments from the Fed’s Waller who says a series of half-point rate increases might be needed at coming meetings. In conclusion, long-term trend is down but short-term war forces discourage sellers. Treasuries have started out with an inside-day range as they are finding moderate pressure coming into this week’s action.
CURRENCIES:
In retrospect, the significant action in currencies of late suggests a possible major trend shift is in the offing. It appears that the trade is finding newfound interest in the euro, Swiss franc, and Pound in a fashion that suggests the trade is positioning for a reduction in anxiety from the war. In our opinion, it is premature to expect all clear and we view the dollar as cheap into this week’s trade. The Dollar has started out this week within a fairly tight range and is holding a minimally positive tone. There have been few changes in the situation in Ukraine over the weekend along with signs of progress on relaxing Chinese COVID restrictions, and that has fueled mild safe-haven outflows from the Dollar.
The Yen remains on the defensive early this week and is within striking distance of reaching a new 6-year low. While there has been some improvement in recent Japanese data, particularly with their inflation readings, the Yen has been weakened by safe-haven outflows and the Bank of Japan’s reluctance to raise Japanese rates. The Swiss franc continues to lift further clear of last week’s low and is finding mild early strength this week. While it was weakened by intervention from the Swiss National Bank (SNB) after it had reached parity with the euro, the Swiss economy has been resilient with the unemployment rate falling back to pre-pandemic levels in February while Swiss CPI reached its highest year-over-year rate since 2008. The Swiss franc should find support from ideas that the SNB may have to take a hawkish shift in monetary policy.
STOCKS:
While the US equity markets opened lower last Friday, they showed bargain-hunting buying early, but we see increased risk to longs positions because of China’s stance against the US because of the war and the likelihood that the Chinese stance will embolden the Russian president to continue. The markets should be boosted by the potential for a very large Boeing 737 order, the market’s ability to shrug off the Fed interest rate hike and from hope and some quadrants of a cease-fire. In conclusion, we see the risk to longs as substantial but favor the upside from a trend perspective. Global markets have had a comparatively subdued start to the week as they have been unable to regain last week’s generally positive tone coming into this morning’s action. The Chinese city of Shenzhen will lift several of their COVID restrictions, while the People’s Bank of China left rates unchanged at their latest monetary policy meeting. The latest reading on German PPI came in slightly below trade forecasts, while Ukrainian authorities have rejected a Russian proposal to surrender the city of Mariupol.
GOLD, SILVER & PLATINUM:
A lack of progress towards peace in Ukraine leave the possibility of further escalation, which could spark a resumption of flight to quality buying in the metals. Fed tightening should be negative for the metals, but the ongoing war counters that. Despite talk of negations, many are arguing that the Russia/Ukraine war could be head towards a stalemate. Ukraine holding its ground militarily, but Russia is mercilessly shelling cities. If the EU comes through with restrictions on Russian crude oil imports, we could expect another move higher in crude oil and possibly more buying in gold and silver. Friday’s Commitments of Traders report showed managed money traders were net sellers of 28,193 contracts of gold for the week ending March 15, reducing their net long to 147,501.
News that Shenzhen, China will lift several COVID restrictions offers support to the PGMs, as a recovery of computer chip production brings a sigh of relief to automobile manufacturers and supports auto catalyst demand. The Ukraine war had spiked palladium prices because Russia is a big exporter of that metal, but then the Covid shutdowns in Shanghai and Shenzhen threatened demand, so the Shenzhen news should support palladium if other cities can avoid shutdowns. June palladium saw wild action over the past month, and the market has already corrected more than 50% of its rally from the December low to the March 7 high. ETF palladium holdings increased 1,271 ounces on Friday to 545,300, up 1.4% year to date.
COPPER:
While copper’s 3-day winning streak resulted in a positive weekly reversal with prices more than 25 cents above last Tuesday’s 2 1/2 week low, they are finding significant pressure coming into this week’s action. Demand concerns from China are shadowing the market, and copper may have trouble regaining upside momentum early this week. Shanghai exchange copper stocks had their largest weekly decline since May 2020 last week, which was supportive to copper on Friday. Protests at a Peruvian mining complex provided additional support. China’s refined copper production during January and February was 4.5% ahead of last year’s pace.
ENERGY COMPLEX:
The Russia/Ukraine war intensified over the weekend, and there was no sign of progress with cease fire talks, helping to send May crude higher overnight. The lack of progress toward peace has reignited talk of a full shutdown in Russian oil exports to Europe. The International Energy Agency has stated that next month the world will see 3 million barrels per day less supply because of the Russian embargo. OPEC Plus nations had 136% compliance with their production cuts during February, which resulted in those nations being more than 1 million barrels per day (bpd) below quota. Over the weekend, a group of Yemeni rebels attacked Saudi energy and water desalination facilities, which caused some damage and a reduction in refinery output. During January, Saudi crude oil production reached 10.145 million bpd, with exports at 6.996 million, both the highest since April 2020.
RBOB and ULSD extended their recovery moves following strong gains on Friday with strength early this week. Russia’s invasion of Ukraine led to a sharp drop in their petroleum product exports into western Europe as well as a complete suspension of exports to the US, and that continues to be a source of support.
Natural gas is increasingly being seen as a bridge to clean energy. China in in the process of shifting their electrical generation from coal to liquefied natural gas (LNG). The reduction of Russian supply to the West has intensified the construction of US LNG export terminals.
BEANS:
Argentina has raised the export tax rate on soy oil and meal by two percentage points to 33% until the end of the year in a bid to combat domestic inflation. The government has declared a “war” on inflation, which is running at above 50% annually. Traders continue to monitor diplomatic efforts on Russia’s invasion of Ukraine which continues to disrupt Black Sea crop exports and is likely to impact new crop production as well. With raging food and fuel prices, protectionist actions from Indonesia, Brazil and Argentina remain a concern. May soybean oil closed sharply lower on the session Friday and the selling drove the market down to the lowest level since February 28. Prices for soybean meal are still on the rise in Brazil as strong demand for exports due to strong global demand due to a possible increase in the export tariff on meal and oil from Argentina has helped to support.
CORN:
The export and ethanol usage pace is running higher than trade expectations, and traders suspect that US corn will stay in strong demand with Ukraine corn locked in the Black Sea, and new crop plantings in Ukraine in question. The market has consolidated near the highs for the last 12 trading sessions as shallow support continues to hold. The market closed 20 3/4 cents lower on the week and the setback off of the March 4 contract high has helped correct the overbought technical condition of the market. December corn managed to close slightly higher last Friday. War in Ukraine and drought in Brazil plus a more protectionist tone in Argentina may support even stronger demand for US corn. Costs to ship grains and soybeans on the Mississippi River have soared to an almost eight-year high. Russia’s invasion of Ukraine has damaged ports in the Black Sea and this has halted corn shipments.
WHEAT:
A lack of progress or movement towards a peaceful resolution soon helped to support the market early this week. Traders will continue to monitor the US weather, and also any developments for the Black Sea infrastructure. Diplomatic efforts will also be monitored. May wheat closed sharply lower on the session Friday but with an inside trading session. Heavy rains across Kansas and Oklahoma helped to pressure the market. In the last several days, Western Kansas received 1/10 to 1/4 of an inch of rain and central and eastern Kansas got 1/2 to 1 inch of rain with some places near 1 1/2 inches. The 1-5 day forecast shows 3/4 of an inch to 1 1/2 inches for much of Kansas and Oklahoma. The 6-10 day forecast models showed dry weather, but the 8-14 day forecast models show above normal precipitation which is a bearish development.
HOGS:
April hogs closed moderately lower on Friday, which was their lowest close since March 4. Slaughter has been coming in a little closer to expectations recently, in contrast to the much lower than expected pace in January and February. Weight data is also a bit higher than normal, which suggest some hogs are backed up in the country. The USDA estimated hog slaughter came in at 475,000 head Friday and 58,000 head for Saturday. This brought the total for last week to 2.435 million head, down from 2.475 million the previous week and down 3.5% from a year ago. Estimated US pork production was 530.6 million pounds last week, down from 540.1 million the previous week and down 3.35% from a year ago.
The USDA pork cutout, released after the close Friday, came in at $102.66, down from $103.73 on Thursday but up from $100.79 the previous week. The CME Lean Hog Index as of March 16 was 100.77, up from 100.41 the previous session and 99.91 the previous week. Friday’s Commitments of Traders report showed managed money traders were net sellers of 2,674 contracts of lean hogs for the week ending March 15, reducing their net long to 63,345. The long liquidation selling trend is a bearish technical development and suggests increase selling if support levels are violated. Non-commercial, no CIT traders were net sellers of 11,330 for the week, reducing their net long to 29,141.
CATTLE:
There is a somewhat positive tilt to the demand side of the equation given the strong gains in the stock market last week, but demand is still a concern, and weights remain higher than normal. Traders have been worried that consumer spendable income could collapse in the next few weeks due to the increases in food and energy costs. The rally in live cattle prices off the March 4 low has been accompanied by a decline in open interest, indicating that the move was based on short covering and not new buying. This is not a good foundation for a bull market. US beef production is expected to decline 170 million pounds in the second quarter from the first quarter. This would be only the second time since 1987 that production will have declined during that period.
COCOA:
Cocoa prices were unable to complete a positive weekly reversal, but they will start this week more than 80 points above last Thursday’s 2 1/2 month low. While near-term demand remains a concern, cocoa has bullish supply developments that can help to underpin prices early this week. May cocoa was able to shake off early pressure and hold its ground in positive territory as it finished Friday’s trading session with a sizable gain. For the week, however, May cocoa finished with a loss of 83 points (down 3.2%) which was a third negative weekly result over the past 5 weeks.
COFFEE:
While coffee was unable to complete a positive weekly reversal, it will start this week’s action nearly 10.00 cents above last Tuesday’s 4-month low. Although the market continues to receive bearish news from rising warehouse supply, coffee has a bullish supply outlook that can fuel a recovery move. May coffee was able to regain upside momentum as it finished Friday’s trading session with a sizable gain. For the week, however, May coffee finished with a loss of 1.90 cents (down 0.9%) which was a fifth negative weekly result in a row. The Brazilian currency shook off significant early pressure and climbed more than 0.50% in value as it is within striking distance of a new 8-month high.
COTTON:
The cotton market experienced an impressive upside breakout to new contract highs on Friday as commercial buyers were active and the market is up again this morning. May cotton even managed to trade limit up as strong mill buying was noted. Export sales have remained very strong over the past month even with the relatively high price, and this helped to support strong buying. There is a little decent rain in the Panhandle, but only about 1/4 of an inch near Lubbock, Texas and the rest of West Texas for the 1-5 day forecast.
SUGAR:
Sugar prices will start this week in a near-term consolidation zone well below their early March highs, but they finished last week’s trading on an upbeat note. While they will need continued strength in key outside markets, sugar should also start to benefit from a bullish production shift over the next few months. May sugar was able to shake off early pressure as it finished Friday’s trading session with a moderate gain. For the week, however, May sugar finished with a loss of 31 ticks (down 1.6%) which was a second negative weekly result in a row. The Brazilian currency shook off early pressure and rallied back to within striking distance of a new 8-month high, which provided sugar prices with carryover support as that eases pressure on Brazil’s Center-South mills to produce sugar for the global export marketplace.
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