Following disappointing readings for Chinese industrial productions and retail sales, French CPI and Euro zone GDP were in-line with trade forecasts. North American data included a retail sales reading that was lower than expected, but also had better than forecast results for non-farm productivity, unit labor costs and Canadian manufacturing sales. While industrial production was in-line with estimates, capacity utilization, business inventories and a private survey of consumer sentiment came in higher than trade forecasts. Treasuries kept within tight inside-day ranges but were moderately higher by the close of last Friday’s trading session.
The Dollar remained on the defensive going into the weekend as it finished last Friday’s trading session with a moderate loss. While most of the major US economic numbers posted better than expected results, a lower than forecast retail sales number pressured the Dollar. On the other hand, the Japanese Yen benefited from safe-haven inflows and went on post a moderate gain. We see the action in the dollar early this week as negative with a fresh 6-day low and the prospect of a soft Empire State manufacturing reading.
Global markets had a turbulent finish to last week as they struggled to hold onto a positive tone late into Friday’s trading session. The Fed’s Kaplan said that he sees US unemployment falling to 8% to 9% while fourth quarter GDP growth will come in around a 6% to 7% annualized pace. Positive guidance from Applied Materials provided an additional source of strength to the tech sector. US equity markets saw choppy price action as they finished the day near unchanged levels. Global equity markets were mixed at the start of this week with declines generally less than 1/2% with some gains (in Shanghai) above 2.3%.
GOLD, SILVER & PLATINUM:
While gold is tracking higher to start this week, it remains within the trading range put in place at the end of last week. However, the US dollar forged a 6-day low and could begin to provide fresh speculative currency related buying. The trade might also buy the rumor of the Wednesday release of the FOMC meeting minutes as some traders think the Fed (at the time of that meeting) was very concerned with the second flare of US infections. In retrospect, the gold market failed to transition from a safe-haven commodity following leveling US infection counts last week and that combined with the ongoing allure of paper assets prompted the market to suffer a tremendous 2 day high to low washout of $166 and in the process broke the back of some bulls. In our opinion, traders should not be too quick to call for an end to the bull market as the dollar is showing signs of fresh weakness and a fresh new low for the move this week and surging investment interest from Wall Street could begin to firm up last week’s fundamental and technical reversal action for all the metals.
While the copper market is showing some initial strength early this week, to make a splash in the market and threaten the bear camp probably requires a trade above a month-long downtrend channel resistance line at $2.9005. However, the copper market should be emboldened by notable strength in nickel and zinc prices in China which indicates the base metals saw the PBOC assistance as facilitating the already in-place Chinese economic recovery. On the other hand, the charts in the copper market do favor the bear camp to start this week with a series of lower highs and periodic lower lows continuing to post on a regular basis. It should also be noted that the net spec and fund long positioning in copper remains at some of the highest levels since June 2018, and the inability to hold above $2.80 could force a fresh and significant wave of longs from the market.
With the crude oil market not getting a definitive benefit from stories regarding boosted Chinese purchases of US supply and that action likely to help US/Chinese trade relations, it would seem as if the market is not in a particularly strong posture to start the new trading week. On the other hand, trade expectations call for oil exports to China from the US next month to double as US crude currency adjusted prices are favorable for China to buy from the US and that could kill two birds with one stone (improved trade relations and getting the lowest price).
With November soybeans breaking out to the upside and reaching their highest prices since July 9, any bearishness from the recent report is apparently forgotten. While China is asking for documentation that shipments of soybeans are Covid-19 free, that at least shows interest on their part for imports. Even the President added to the bullish vibe with suggestions that the US/Chinese trade deal remains intact, even though the trade discussions scheduled for this past Saturday were delayed. With the trade buzzing with reports that China is booking significant US crude oil commitments for next month and the spin from the virus documentation import requirement, US export news is supportive of prices. Also supporting soybeans are reports of rising soybean oil prices in and reduced palm oil production expected now in Malaysia. It is also likely that dry weather continuing for the next 10 days is providing bulls with confidence.
December corn has broken out to the upside with a possible near-term target seen at a gap from early July up to $3.43 3/4. With President Trump indicating China made the largest-ever purchase of US corn and the market still attempting to digest the Midwest storm damage from last week, the bull camp has several reasons to extend the initial upside probe. In addition to the wind damage in Iowa, the markets are suggesting that more rain is needed, which is probably why the specs poured into futures and options in the face of ongoing expectations of a record crop. As in soybeans, traders are coming to suspect that the US corn crop may not be as strong as was indicated in last week’s monthly USDA supply/demand report.
While massive world ending stocks remain a headwind, the wheat markets are in a good position to extend their recovery moves this week. December Chicago wheat ended last week with a gain of 6 cents, breaking a 2-week losing streak and forming a positive weekly reversal from last Wednesday’s 6-week low. December Kansas City gained 8 1/2 cents on the week, breaking a 4-week losing streak. The wheat markets have found support from dryness issues in Argentina, but that was offset by talk of big yield potential for Canada and Australia. A sharp drop in French production has been a source of support. German 2020/21 wheat production is on track to fall more than 6% from last season, but this is an improvement from previous readings, and Polish production is on track for a 5% increase from last year. Ukraine’s Economy Minister said that their wheat harvest was 96% complete as of Friday. SovEcon forecast Russian wheat exports this month at 4.400 million tonnes versus 4.867 million last year. IKAR overnight raised its estimate for Russian 2020 wheat production to 82 million tonnes from 81 million previously. The USDA’s recently raised its estimate to 78.00 million from 76.50 million previously.
Pork prices continue to strengthen in a strong seasonal demand period, and this is supporting the hog market. October hogs closed 72 higher on Friday, and this left the market with a gain of 200 points for last week. The pork rally is especially impressive given the large increase in production from year-ago levels. The USDA pork cutout released after the close Friday came in at $74.42, up $1.17 from Thursday and up from $71.42 the previous week. This was the highest the cutout had been since June 1. China’s pig herd grew 13.1% from year-ago levels in July, the first year-on-year growth since April 2018. The sow herd increased by 20.3%. This suggests that in six months, slaughter-ready hogs will be above year ago levels. This also suggests that China’s import demand will slow but not fall off all of a sudden. China’s national average spot pig price as of August 17 was up 0.41% from the previous day. Prices are down 2.65% for the month but up 7.95% year to date and 55% from a year ago.
The cattle market closed lower on Friday but it remains in an uptrend. The market is seeing strong seasonal demand with the approach of Labor Day, and cash cattle and boxed beef prices continue to advance. October cattle closed slightly higher on Friday and managed to gain 377 points for the week, +3.5%. The USDA boxed beef cutout was up $3.09 at mid-session Friday and closed $3.29 higher at $214.24. This was up from $205.47 the previous week and was the highest the cutout had been since June 17. Cash live cattle traded in light volume on Friday about steady with Thursday’s prices, which was up $2-$4 from last week. As of Friday afternoon, the 5-day, 5-area weighted average price was $104.44, up from $100.20 the previous week.
Cocoa’s abrupt change in fortune last Friday may be symptomatic of its overbought status, but it also reflects the impact of sluggish global risk sentiment on its near-term prospects. While bullish supply developments provide some support, the market may see early downside action this week until stronger risk appetites emerge. December cocoa had a wild finish last week, first rallying to its highest level since August 10 and then dropping 80 points to finish with an outside-day lower. It finished the week with a loss of 69 points (-2.7%), breaking a 3-week winning streak and forming a negative weekly reversal from Monday’s 5-month high. This is a negative technical development that could indicate a near term change in trend after rallying $320 off of the contract lows from July 8.
December coffee pushed through last Friday’s lows, yet it comes into the week well above last Tuesday’s 3-week low. It finished last week with a loss of 1.45 cents (down 1.2%) which was a second negative weekly result in a row. On Friday, the market rallied to its highest level since August 6 after tight near-term supply in Europe was viewed as a sign of improving demand. ICE exchange coffee stocks (of which more 93% are held in the European ports of Antwerp, Hamburg and Bremen) fell 1,863 bags on Friday and reached their lowest level since April 2017. However, the Brazilian currency lost more than 1% in value on Friday, which helped to send coffee back lower by the close. Weakness in their currency encourages Brazilian farmers to market their supplies to foreign customers.
The cotton market has been drawing support from the hot and dry conditions in west Texas, but we question whether some additional damage to the crop there will offset the bearish developments from last week’s USDA reports. US 2020/21 ending stocks are now projected at 7.6 million bales, which is the highest they have been since the 2007/08 marketing year. The stocks/use ratio has reached 42.9%, up from 40.9% in 2019/20 and the highest it has been since 2008/09. World ending stocks at 104.91 million bales is the highest they have been since 2014/15 and the second highest on record. December cotton closed lower on Friday but spent the day inside Thursday’s range. Apparently there were some concerns ahead of the US/China trade talks that China might back off the Phase 1 agreements. The talks had been scheduled for Saturday but ended up being postponed due to “scheduling conflicts” or possibly to allow China more time to meet it pledge. The peak hurricane season is the next 6-8 weeks, and developing storms will be watched closely for risk of crop damage.
October sugar broke out above its August consolidation zone last week on bullish supply news. However, the market remains on track for a large production surplus for 2020/21 and may be starting to get top heavy. After reaching a five-month high early on Friday, October sugar finished the day with a minimal loss and a negative daily reversal. It finished the week with a gain of 43 ticks that was a third positive weekly result in a row. A 1% decline in the Brazilian currency and weaker crude oil prices Friday put carryover pressure on sugar that fueled some end-of-week long liquidation. Thailand has seen some rainfall in recent weeks, but they still look to be on track for a second season in a row with production near 10-year lows. That country is the world’s second largest sugar exporter, so their production issues have an outsized impact on the global market.
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