In retrospect, the treasury markets posted very uniform gains last week without much in the way of adversity. Obviously, there is another major market juncture ahead as a number of moving fundamental parts converge. While many expect a US relief package to be passed, it appears as if Washington is not in a big hurry and therefore it is likely that a final deal will be delayed until the house adjournment allows the representatives 11th hour fanfare on July 31st. However, the more important juncture in the coming week is probably the direction of US infection counts as we think a continuation for another week will result in a significant risk off market reaction.
In retrospect, it appeared as if the dollar index was being liquidated for a number of different reasons late last week. Some have suggested that the brunt of the decline was the result of a serious downgrade in the US economy because of the infection problem and the battle with China. We would also suggest the dollar is likely to remain under pressure given that recent US scheduled data points have softened. On the other hand, the dollar is significantly oversold from the July washout and any sign of abatement in hotspot infection counts could be justification for a major short covering bounce in the dollar. With the dollar ranging down sharply early this week and market expectations predicting Europe will have a significant macroeconomic differential edge with the US, more declines in the dollar are expected.
The Japanese Yen continued to benefit from its revived safe-haven status with the market extending last week’s extremely strong finish and seemingly poised to return to levels seen during the height of the lockdown anxiety from the US in early March. In fact, with the Yen rising sharply through a series of disappointing all Industry Activity, Coincident Index and Leading Economic Index readings for May, it is clear the currency is not trading the state of the Japanese economy. To derive the next upside target in the Yen traders need to look back to a cluster of closes in the March panic up around 95.88.
While the Swiss has fallen back from the spike up move at the start of this week, the uptrend remains firmly entrenched, with what appears to be fairly-significant upside momentum remaining in place and therefore we suspect that market views of a widening of the European macroeconomic edge versus the US is providing a lot of lift in the Swiss. However, we also think that the explosion in precious metals prices is increasing the attractiveness of the Swiss. The next upside targeting in the September Swiss is seen at the contract high from March up at 1.0946.
Despite deteriorating economic views toward the US, a UK travel quarantine of arrivals from Spain and US/Chinese political tensions, the Pound has forged a higher high and the highest trade since early March. In other words, the recovery currency Pound appears to be able to draft lift from optimistic European economic views despite a-number-of threatening domestic headwinds. While we have trouble justifying a September Pound track above 1.30 in the near term from UK domestic factors, overt dollar weakness appears to be set to lift all boats.
While the Canadian charts appear to be favoring the bullish track and the currency is managing to benefit from weakness in the US dollar, we are not overly impressed with the bull case. Nonetheless we see potential solid support at 74.38, initial resistance at 74.91 and a possible return to 75.10 in the event the US dollar extends sharply lower.
While last week’s earnings reports were better than what this week’s price action would suggest, it is difficult to discount ongoing fears from US/Chinese trade relations, some evidence of softening US data, ongoing infection hotspots, fears of antitrust threats against big tech and the potential for further delay in agreeing to the next stimulus package. However, from a technical perspective, the S&P was already maintaining a moderately surprising spec short and the decline from the last scheduled report probably boosted the size of that net short.
Global equity markets at the start of this week were mixed, with Asian and Pacific-Rim stocks higher, European markets softer and US stocks showing moderate gains. While US equities have basically ignored or discounted deteriorating views toward US economic conditions, there are signs that investors are beginning to “look away” to foreign markets. In addition to very stellar gains in Shanghai equity markets this year, the currency markets are clearly factoring a dramatic shift in macroeconomic differential conditions with the trade now banking on European growth outdistancing US growth by a wide margin. In fact, the precipitous decline in the dollar might be warding off foreign investors from US equities.
GOLD, SILVER & PLATINUM:
As indicated already, the explosion in precious metals prices were the feature of the early week trade, with a number of bullish arguments thought to be driving the complex higher. Apparently, the markets are of a mind that the solution to the US economic slowdown will be very elusive and that significant amounts of additional assistance will be needed as the world’s largest economy looks to have the longest battle against the virus. Given the slumping view toward US economic prospects and ideas that Europe will open a significant macroeconomic edge over the US, it is not surprising to see the dollar forge yet another lower low for the move and in turn contribute to the upward extension in precious metals prices.
Not surprisingly, investors also added to the bullish environment with news that Friday saw 1.76 million ounces purchased by gold ETF’s with a more astonishing purchase of 9.1 million ounces of silver by silver ETF’s. Furthermore, the gold market continues to get a tremendous amount of bullish press coverage and that is likely to embolden the bull camp further and is likely to result in a an even wider cross section of small investors learning about precious metals ETF’s, for the first time.
While the silver market action last week discouraged a portion of the bull camp, the market was able to hold well above $22.00 and managed to close within $0.80 of the latest multiyear high last week. Clearly the fresh explosion in silver prices and the massive inflow of money into Silver ETF’s of 9.1 million ounces Friday ignites a fresh wave of speculative buying. Year to date net silver ETF purchases are 261.4 million ounces, which is already enough to consume all of the world annual silver surpluses of the last 10 years combined (from the just the first 7 months of 2020)! However, despite the massive run-up in prices last week, the silver spec and fund long positioning remained almost 40,000 contracts below the high long position for 2020 and significantly below the all-time spec long of 118,943 contracts. The July 21st Commitments of Traders report showed Silver Managed Money traders net bought 4,626 contracts and are now net long 47,647 contracts. Non-Commercial & Non-Reportable traders are net long 62,469 contracts after net buying 2,399 contracts.
With a tremendously strong/impressive finish last week and further impressive upside follow through early this week, the palladium contract appears to be poised to make a quick sprint back up to the $2,500 level. While the palladium market at the all-time highs earlier this year was perceived as significantly overvalued off the potential for a significant deficit off industrial/auto catalyst use, we think the fundamental focus in the market has now shifted toward an investment vehicle for money seeking safe haven. However, we also think that the palladium market is poised to exhibit significantly more volatility than platinum, with the range on Friday of $104 becoming a common occurrence. However, the palladium market has a very minimal net spec and fund long (the COT positioning is probably understated due to the $120 rally after the report was measured. The Commitments of Traders report for the week ending July 21st showed Palladium Managed Money traders net bought 1,258 contracts and are now net long 3,027 contracts. Non-Commercial & Non-Reportable traders are net long 3,580 contracts after net buying 1,254 contracts.
While the platinum market did not finish last week strong, we see the potential for $1,050 trade in the next several weeks. However, like the palladium market, platinum is likely to exhibit expanded trading ranges as the trade flips between physical-commodity focused trading and flight to quality/investment trading. Unfortunately for the bull camp, the platinum market has a more significant net spec and fund long than palladium with the net long clearly understated given the rally that took place after last week’s report was measured. Platinum positioning in the Commitments of Traders for the week ending July 21st showed Managed Money traders were net long 12,197 contracts after increasing their already long position by 4,004 contracts. Non-Commercial & Non-Reportable traders added 4,229 contracts to their already long position and are now net long 24,809.
If US/Chinese relations were not on the rocks, we suspect that the overnight issuance of another Chinese scrap copper import quota would have served to lift copper prices. Certainly, the copper market should draft some support from a solid German IFO reading but as is usually the case, the focus of the copper market is primarily locked onto the ebb and flow of the Chinese economy. While LME copper warehouse stocks continued to decline with another large 3,700 tonne decline on Monday, a BHP 2020 copper output gain of 2% in the fiscal year ended June 30th countervails market expectations earlier this year that the coronavirus would injure global output across-the-board. In another sign of copper price vulnerability, copper scrap discount pricing relative to refined copper pricing continues to expand thereby setting up the potential to siphon buyers away from the market that drives futures prices.
On one hand, the world appears to be optimistic toward European and Asian economic prospects but on the other hand, the outlook for the US economy and therefore net global energy demand is troublesome. Therefore, a continuation of sideways action in crude oil prices early this week would not be surprising. However negative energy prices developments are the lowest Indian June oil imports in 9 years but new lows in the US dollar could give the US a relative demand edge over non-US supply. Unfortunately for WTI bulls, the market was presented with news that global floating crude oil storage remains 244% above year ago levels and that highlights the historical backlog of supply from the global lockdown.
As indicated in crude oil coverage, implied demand for both energy products declined in the US last week with some analysts pointing out the lack of widespread returned to work mileage driven as the culprit. With the additive disappointment of airlines announcing a pause in expanding flight schedules any further risk off anxiety from equities or from infection concerns could justify a quick slide back down to last week’s low of $1.1855 in September gasoline and down to $1.2145 in September ULSD.
However, the gasoline market might not be as vulnerable to stop loss selling as other markets given its net spec and fund long position remains at some of the lowest levels in several years. The Commitments of Traders report for the week ending July 21st showed Gas (RBOB) Managed Money traders were net long 38,660 contracts after increasing their already long position by 6,530 contracts. Non-Commercial & Non-Reportable traders were net long 57,583 contracts after increasing their long position by 5,208 contracts.
While the natural gas market surprised the trade last week with 3 days of short covering and managed that action in the face of what appeared to be a definitively bearish shift in the US weather outlook, we maintain a bearish view toward prices this week. Certainly, the market benefited from the tropical storm threat last week, but the storm was not severe, and prices could now see back and fill selling early this week. As indicated the latest weather forecast out to August 9th showed expanded pockets of below normal temperatures in the lower Midwest and only narrow pockets of above normal temperatures in the Texas Panhandle and Florida. As in the petroleum market, in the event the infection situation ratchets up anxiety toward the US recovery again this week, all commodities could be faced with outside market pressure selling.
Very strong demand from China continues to provide support for the soybean market and with mostly non-threatening weather, any sign of a slowdown in demand due to political reasons could spark aggressive selling. China imported a record high 10.51 million tonnes of soybeans from Brazil in June, up from 5.5 million tonnes last year. The southern half of the Midwest looks to get hit with hefty rain totals in the next seven days, and there is nothing too threatening in the 6-10 or the 8-14 day models. November soybeans closed up 4 1/4 cents for the week last week. The soybean market has built up a significant weather premium in recent weeks even with crop conditions still solid. If the weather forecast continues to look favorable for crop development, selling could intensify and take out some of that built up weather premium.
The Chinese corn rally is especially impressive given China’s active imports during June. However, the weather setup is bearish for the corn market. Continued confirmation of higher than “trend” yield due to the favorable weather would suggest a very burdensome supply outlook. The market received plenty of bullish news regarding Chinese demand for feedgrains and US corn over the past few weeks, but it has failed to lend support. Supply fundamentals are a key focus at this time of the year.
The wheat markets seem to lack the supply fundamentals for an extended move higher, but some buying from China and some adjustments lower in production from major exporters combined with a significant break in the US dollar are all factors which helped to support. The International Grains Council cut their forecast for global wheat production by 6 million tonnes to 762 million. EU production was revised to 125.6 million tonnes as compared with their previous projection of 128.4 million. Russia production was revised down by 1 million tonnes to 78 million. China’s monthly wheat imports jumped to the highest in almost seven years in June, official customs data showed. China imported 910,000 tonnes in June, up 197% on the same month last year, bringing total imports in the first half of the year to 3.35 million tonnes, up 90% from last year’s pace. Indonesia’s 2020-21 wheat imports are seen rising 1.9% to 10.8 million tonnes according to the USDA’s Foreign Agricultural Service.
So far, the market has been able to absorb the big current supply with impressive exports, especially to China. US/China trade relations continue to be an important factor, and could spark concerns of cancellations of outstanding sales. October hogs closed moderately lower on the session Friday but bounced off of the lows into the close. While China demand has been very strong, traders are nervous that with China and the US ordering consulate closings, that China’s import demand may be impacted. The market has stayed volatile as pork values and cash markets have been better than many traders anticipated.
Friday’s Cattle on Feed report was generally neutral to slightly supportive relative to pre-report estimates. Placements at 102.1% of last year on June 1st were below estimates which are supportive to December and February 2021 cattle contracts. Placements were mostly lighter weights and this could ease concerns that there are more cattle to cause a further back-up of cattle onto feedlots. Marketings were in-line with estimates at 101.3% of last year and will likely lend some support to the cash markets. On Feed as of July 1st at 99.6% of last year was also in line with estimates which may give a bit of support to the nearby cattle contracts. The number of cattle on feedlots for 90-days or longer came in at 5.7% above last year and up 12.1% from the 5-year average. This is a bearish factor. October cattle closed higher with an inside trading session on Friday but still finished lower for the week.
Cocoa will continue to face demand concerns until the global economy reaches full speed again, but there are signs that overall global demand reached its lowest point during the second quarter. Europe and Asia look to be well ahead of North America with coming out coronavirus restrictions, and that along with near-term bullish supply developments can help cocoa prices maintain upside momentum. For the week, September cocoa finished with a gain of 64 points (up 3.0%) which was the first positive weekly result for 4 weeks. While US and major European stocks markets finished the week on a downbeat note, the Eurocurrency continued to show strength as it reached a new multi-year high, and that provided cocoa with underlying support as that should benefit Euro zone grindings with acquiring near-term supply over the rest of the year.
Coffee prices finished last week in a tight consolidation range that is well above their June contract low. The market appears to have priced-in a record high Brazilian 2020/21 crop and with global demand starting to show some improvement, coffee can extend the rally. For the week, September coffee finished with a gain of 6.10 cents (up 6.0%) and a fourth positive weekly result over the past 5 weeks. A slow Brazilian harvest continues to provide underlying support to coffee prices as it has offset pressure from their record high crop this season as it has kept Brazilian coffee supply relatively tight. There is mostly dry weather forecast for the south Minas Gerais region this week, however, and that may help to speed up their harvesting. While it posted a mild loss on Friday, the Brazilian currency has lifted clear of its recent consolidation zone, and its recent strength has benefited coffee prices as it eases pressure on Brazil’s farmers to market their near-term supply to foreign customers.
The weather forecast is a little drier than what was expected on Friday as the above normal precipitation was taken out of the forecast and West Texas looks drier than normal. The cotton market collapsed on Friday as weakness in the stock market and fears of worsening trade relations with China helped to drive December cotton down to the lowest level since June 30th. The reopening of the US economy has come much slower than expected and this, combined with increased trade tensions with China, could spark more selling from speculators.
Since reaching a 4 1/2 month high in early June, sugar prices have been able to bounce back from 3 pullbacks (each of which have posted lower lows) but has not retested the early June high. With fresh evidence of a bearish global supply outlook, however, sugar may extend this current pullback and maintain downside momentum. For the week, October sugar finished with a loss of 24 ticks. While a mild pullback in the Brazilian currency weighed on sugar prices, the main source of pressure came from a key gauge of Brazilian supply. The trade group Unica released their latest report which showed Center-South sugar production during the first half of July came in at 3.02 million tonnes. This was 55% above last year’s levels and close to a record high for a half-monthly output total, which weighed on sugar prices as it underscores the sharp increase in Brazilian production from last season. Sluggish Brazilian ethanol demand is likely to make Center-South mills keep sugar’s share of crushing well above last year, while dry and warm weather over the next week will keep harvesting and crushing delays at a minimum.
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