US treasury prices broke down late last week after reaching a somewhat overbought technical condition into the highs earlier in the week, but also because two days of slightly positive jobs related data improved economic psychology. We also suspect some selling of treasuries was seen off market views that a stimulus will be put in place even if the size of the stimulus bill could be disappointing. Nonetheless, the US yield curve did flatten in a sign that some of the markets fear of a deceleration of growth is taking place. In retrospect, a certain amount of corrective selling should be expected in treasury bonds and notes following several positive US jobs related data points last week.
We think the bounce in the dollar index late last week was partially the result of an oversold technical condition, the inability to break below 92.50 and because US jobs data pointed to some stability in the US economy. In other words, we do not think the dollar index is garnering safe haven interest as the gains in the dollar took place in the face of sharp declines in gold and treasury bonds. While the Dollar index has not forged a higher high for the move early this week, the bias is pointing upward and the international view toward the US is improved slightly by the US executive order and potentially from news that US infection counts are beginning to slow.
Apparently big picture economic sentiment is positive to start the trading week and the Yen appears to be under a modest amount of safe haven selling because of that sentiment. Near term downside targeting in the September Yen is seen at 94.20 with lower support and another target seen down at 93.96. With the dollar showing signs of upside follow-through, the euro under pressure and the Swiss unemployment rate for July unchanged, the fundamental and technical environment favors further declines in the Swiss Franc. Initial targeting in the September Swiss Franc is seen down at 1.0897.
The Pound appeared to be under a slight measure of corrective selling action to start this week with short-term technical signals last week reaching overdone levels and that condition accentuated by a resurgence of flows toward the US dollar. Downside targeting in the September Pound is seen at 1.2984. Not surprisingly, the Canadian dollar is also under pressure to start this week in the wake of further strength in the US dollar and from Canada’s action to retaliate against US tariffs last week. However, the Canadian jobs report was better than expected and that should help to cushion the currency down at targeting of 74.51.
The equity markets chopped around both sides of unchanged late last week with the monthly nonfarm payroll report supportive but apparently not strong enough to countervail recent fears that the rate of growth in the US economy might be sputtering. Clearly suggestions that some measures (7 day moving average of infections and new infection daily rates) are not being embraced as bullish developments, perhaps because of the disappointment regarding a quick solution on the stimulus impasse.
Global equity markets overnight were mixed at the start of this week with gains generally seen throughout Asia (with the exception of the TOPIX), mixed action in Europe and initially higher action in the US. In general, the bias in US equities remains supportive despite potential negatives flowing from fresh Chinese sanctions and from ongoing Washington ineptitude. As we are indicating in many other markets this morning, traders need to be monitoring the US infection count, as there were signs last week of a possible “leveling out” of the new cases.
GOLD, SILVER & PLATINUM:
While gold and silver prices were showing higher action early this week, a certain measure of short covering bounce was to be expected given the massive declines last Friday! However, China moved to sanction US officials and some corporate executives and the markets are expecting further fireworks when US/Chinese officials address their conflicts in upcoming meetings. Limiting the upside is the executive action taken by the US President to support the US economy in the light of the failure by Congress to act last week. Other minor limitations for the bull camp to start today are a slightly higher dollar trade and news that gold ETF’s last Friday reduced their holdings by 102,468 ounces breaking an extended daily inflow streak. However, gold ETF’s still added 923,100 ounces to their holdings last week.
The corrective action in October platinum was not as aggressive as the slides seen in gold, silver and palladium Friday with the market showing some signs of periodic bargain-hunting buying on weakness. As opposed to palladium, platinum continues to see positive ETF investment inflow with holdings at the end of last week up 3.5% over year ago levels. With total platinum ETF holdings sitting at 3.4 million ounces, that is significant relative to last year’s total world platinum demand of 6.3 million ounces. The platinum market is also holding a very minimal net spec and fund long position with any trade this week below $920 likely to rid the market of many weak handed longs. The August 4th Commitments of Traders report showed Platinum Managed Money traders reduced their net long position by 3,810 contracts to a net long 13,261 contracts. Non-Commercial & Non-Reportable traders were net long 25,525 contracts after decreasing their long position by 1,906 contracts.
The massive washout in copper prices at the end of last week would seem to be a serious overreaction to a minor shift in fundamental conditions. However, the copper trade should have been unnerved by a failure to pass a US aid package, from an escalation of US/Chinese trade tensions and from a noted increase in weekly Shanghai copper stocks. Certainly, another weekly build in Shanghai copper warehouse stocks of 12,942 tonnes (a gain of 8.1% on the week) insinuates a recent trend of softening demand for copper at the main Chinese warehouse. On the other hand, the trade continues to discount the build in Shanghai copper stocks as a result of arbitrage and not necessarily a weak demand sign. In fact, LME warehouse stocks continue to plummet with a daily decline string nearing 40 days and the net change last week in global warehouse stocks showing a notable decline despite the Chinese inflow.
While initial gains in crude oil prices early this week are not significant, we suspect they are the result of a slight improvement in global market sentiment, recent favorable Chinese data, the US executive action over the weekend to support the US economy and from news that large oil companies have put in place plans for production cuts of 1 million barrels per day. On the other hand, the US crude oil market is facing higher dollar action early this week following a lack of definitive lift last week from a supportive US payroll report and from a promised production cut from Iraq. In fact, positive fundamental news last week failed to prevent a breakdown on the charts at the end of last week. Going forward, crude oil prices are likely to find fundamental support from expectations of a 3rd straight week of US crude oil inventory declines. However, the most recent statistics from China showed crude oil imports into August 7th basically holding steady with July 31st readings and declining relative to the figure released on July 24th.
With more than 1 inch of rain expected for Iowa and parts of Illinois this week, the long liquidation selling trend of last week should continue. With the rain, traders will be more confident in record type yield potential for the crop. The 8-14 day model also showed temperatures should come in below normal. Slower than expected palm oil production out of Indonesia may help provide some support last week and the active pace of soybean imports from China could also support, but the active exports from South America and the outlook for Brazilian producers to see a sizable increase in plantings is an offset. Brazilian producers have seen good profits due to high internal prices and a weak Brazilian currency.
The outlook for an inch of rain or more this week in Iowa and parts of Illinois should be enough to keep the short-term trend down. While getting oversold, news of contract lows for meal, Kansas City wheat and Minneapolis wheat just adds to a bearish tone for feedgrains and corn. December corn closed 3 cents lower on the session Friday and this left the market with a 6 1/4 cents loss for the week as the market managed to match contract lows. Positioning ahead of the USDA report plus bearish outside market influences like the surge up in the US dollar helped to pressure.
September wheat lost 35 3/4 cents last week as the larger than expected crops from Canada, Ukraine and Russia have helped to spark aggressive selling. The selling pushed the market down to the lowest level since July 7th. IKAR increased their Russia production forecast for the third time in two weeks. Widespread downpours in some of Australia’s key growing areas in the past week have increased confidence the country will have a bumper wheat harvest following years of drought-affected production. Rains were heavy around much of southern Western Australia in the past week, with 2 inches in some areas on Sunday. Government forecaster ABARES raised its wheat production estimate by 25% in its June outlook, after a favorable start to the planting season. It sees wheat output at 26.7 million tonnes in 2020-21, a 76% surge from a year earlier, according to the report and some traders now see a crop as large as 29 million tonnes. Exports are expected to rise 85% to 16.5 million tons. Pakistan is tendering to purchase 1.5 million tonnes of wheat.
The technical action is bullish with the upside break-out on Friday as product prices continue to move higher in a period of hefty supply. The USDA pork cutout released after the close Friday came in at $71.42, up $1.46 from Thursday and up from $64.67 the previous week. This was the highest the cutout had been since July 21st. The price action is especially impressive given the active slaughter pace and higher weights with pork production last week up 9.9% from last year. October hogs closed sharply higher on the session but off of the highs. The buying helped push the market up to the highest level since July 17th. Ham prices have surge higher in the last couple of trading sessions and this helped support higher pork values and more demand from packers to hold live inventory. The CME lean index as of Aug 5 was 52.78, down from 52.92 the previous session and down from 53.56 a week before.
Beef prices are inching higher as the weekly slaughter pace remains below year-ago levels. We continue to believe that the slaughter pace will pick up steam soon as market-ready cattle on feedlots looks burdensome. As long as slaughter remains below last year, beef could stay firm, but production could swell if the slaughter begins to come in above year ago levels. The average dressed steer weight for the week ending July 25 came in at 903 pounds, up from 899 the previous week and up 869 a year ago. The 5-year average weekly weight for that week is 876.4 pounds. October cattle closed moderately lower on the session Friday and it was the lowest close since July 29th. Technical traders were active sellers but a jump in hog prices and a firm tone to boxed beef cut-out values helped to support.
Cocoa prices have only had one negative daily result over the past 11 sessions as the market continued to benefit from improving global risk sentiment. Although it is near-term overbought and vulnerable to a pullback, cocoa looks to be heading towards higher price levels. December cocoa was able to push to a new 5-month high overnight. For the week, December cocoa finished with a gain of 95 points (up 4.0%) and a third positive weekly result in a row. There has been increasing concern that a recent shift towards drier weather will negatively impact West African production, and that has been a source of strength. Most growing areas in Ivory Coast and Ghana will receive one or two days with minimal precipitation through the middle of next week, and that may lead to dialed-back expectations for the 2020/21 main crop output. In addition, simmering political tensions in the Ivory Coast gave an additional boost to cocoa prices as it appears that their current President Ouattara will seek a third term in spite of a 2-term limit in their constitution.
A 12.50 cent decline (down 9.7%) from midsession Wednesday to midsession Friday helped to correct the short-term overbought condition. For the week, December coffee finished with a loss of 3.70 cents (down 3.0%) which broke a 3-week winning streak and was a negative weekly reversal from Wednesday’s 4 1/2 month high. Concern over harvesting issues with several major producing nations provided support to the market over the past few weeks as the Safras & Mercado consultancy pegged Brazil’s 2020/21 Arabica harvest at 79% completed versus 91% at this point last year. The Brazilian currency lost more than 1.5% in value and reached a 3 1/2 week low, however, and that fueled end-of-week long liquidation as a weaker currency encourages Brazil’s farmers to more aggressively market their near-term supply to foreign customers.
December cotton plummeted last Friday in a steep selloff that took it to its lowest level since July 31, for the biggest daily decline in four months. Traders apparently became concerned that the market may have rallied too far and were anxious to level positions ahead of this week’s USDA crop reports. There has been an underlying tone of concern about demand destruction from the coronavirus and with the recent flare-up in US-China tensions. On the other hand, Chinese purchases of US cotton have been strong this year, and earlier last week, it appeared that the two nations were set to work on reinforcing the phase 1 trade agreement at a scheduled on-line meeting between trade representatives on August 15. However, on Thursday, President Trump announced sweeping bans on US transactions with Chinese owners of the messaging app WeChat and the video sharing app TikTok, and this raised tensions further.
Sugar prices spent the first week of August coiling within a relatively tight trading range. Unless it can find fresh carryover support from key outside markets, sugar will be vulnerable to a further correction. For the week, October sugar finished with a gain of 3 ticks (up 0.2%) and a second positive weekly result in a row. A more than 1.5% decline in the value of the Brazilian currency weighed on sugar prices Friday as a weaker currency encourages their nation’s Center-South mills to produce more sugar at the expense of ethanol. The India Sugar Mills Association said that their nation’s 2019/20 sugar demand would be roughly in-line with 2018/19’s 25.5 million tonnes, while their 2019/20 sugar exports would reach a record high. India’s monsoon rainfall nationally is now back to being roughly in-line with the long-term average, and that should benefit cane production during their 2020/21 and their 2021/22 seasons.
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