A number of US treasury instruments forged new all-time highs again early this week with US bonds making higher highs and proceeding in the general direction of their all-time highs from earlier in the year. Obviously a 33% contraction in quarterly growth combined with another week of increased US jobless claims heads wait to the belief that the US recovery has lost traction. The sharp slide in US data should add urgency to Congress to come to an agreement on the next stimulus package and with the death toll rising until that package is agreed upon, bond a note prices should continue to claw higher.
While the dollar avoided a fresh new low for the move in the immediate aftermath of US scheduled data early Friday, it ultimately caved in and forged new lows. Clearly, the US dollar was losing its macroeconomic differential edge versus a number of other countries and it is growing more likely that the US is destined to leave its rates lower for longer than other areas. In short, a number of fundamental reasons suggested the dollar will continue to slide. The action in the dollar from last Friday’s spike low would seem to be indicative of a corrective bounce unless US PMI/ISM data manages to match the optimistic data seen from the rest of the world.
What goes up aggressively is probably destined to correct aggressively, as the euro in July forged a 700-point rally and culminated that rally with a massive spike high/key reversal. In fact, the euro did not benefit from a very impressive sweep of favorable European PMI readings and that suggests that technical factors are driving the bus. A normal retracement/fresh long entry point is seen down at 1.1645 (from the July rally). Euro positioning in the Commitments of Traders for the week ending July 28th showed Euro Non-Commercial & Non-Reportable traders hit a new extreme long of 223,289 contracts. Non-Commercial & Non-Reportable traders added 37,121 contracts to their already long position and are now net long 223,289.
The Yen is also in a corrective track early this week with the setback already violating a number of retracement levels in a fashion that suggest a dip back down into the 94.00 and 92.00 range is at hand. We suspect that the Yen is seeing some additional selling from its GDP contraction but relatively speaking the 2.2% decline in Japanese growth is significantly better than a-number-of countries. Certainly, we see some measure of support at 94.00.
Like the euro, the massive rally in the 2nd half of July left the Swiss franc significantly overbought with open interest reaching up to the highest level since last December. While domestic data from Switzerland is of little importance to the daily direction of the currency, scheduled data showed consumer prices holding up against deflation slightly better than expected and disappointing purchasing managers readings for July. The first retracement point from the 2nd half of July rally projects downside targeting this morning at 1.0873.
While it would appear to be a day of correction throughout the currency markets, the magnitude of the decline in the Pound is relatively narrow and somewhat impressive. However, UK manufacturing PMI data was disappointing, and the Pound was overbought from the 600-point 2nd half of July rally. A normal retracement of the 2nd half of July rally projects the Pound down to 1.2910. All things considered, the corrective action in the Canadian from last week’s triple high has been very modest. Nonetheless, it would appear to be a corrective start to the week in the currency markets and a slide back to consolidation low support of 74.17 would not be surprising.
While the markets were undermined as a result of disappointing news from jobless claims and US 2nd quarter growth last week, prices did manage to recover from the data washout with the NASDAQ actually turning positive in Friday’s early afternoon action. However, the market did see some favorable price action from Qualcomm, UPS and Procter & Gamble following their earnings reports. In the end, stark warnings from the US Federal Reserve chairman yesterday suggesting we are facing the worst conditions of our lifetime were given fresh impetus following the largest decline in US growth since the Great Depression. Global equity markets at the start of this week were mixed with Asian stocks generally higher and a smattering of European stocks lower.
GOLD, SILVER & PLATINUM:
In early action this week, December gold forged another trade above $2,000 with the primary bullish theme seemingly the expanding uncertainty from the reemergence of infection problems “throughout the world”. Clearly gold appears to be poised to carry a long list of bullish fundamentals into the new trading week even if some of those forces (Stronger Dollar) are providing some initial resistance to start. However, the Dollar did see the largest monthly dollar decline in 10 years in July, the Fed is calling on Congress to provide stimulus, infection counts continue to surge around the world, traders took delivery of a record amount of gold last Thursday (102 tonnes of gold), investment continues to flow into gold ETF’s, interest rates are streaking back toward record low/zero levels and in a fresh development, US credit rating agency Fitch revised the US AAA rating down to negative from stable.
After posting the largest monthly gain (33%) on record and exhibiting a single day trading range of nearly $4.00 last week, the September silver contract is obviously overbought. However, expectations of ongoing spillover lift from gold, further weakness in the dollar, an ongoing pattern of inflows into silver ETF’s and a large speculative contingent expecting silver to begin to lead the precious metals complex higher leaves the silver bull camp with plenty of ammunition. With just 7 months of 2020 completed, silver ETF’s continue to build holdings which are likely to show purchases on the year in excess of 300 million ounces in the coming weeks.
While the PGM markets last week suffered chart damage and appeared to suffer a decided deterioration in fundamentals from the threat of renewed lockdown, palladium has managed to build a support base above last week’s low of $2,079. However, a Bank of America prediction for palladium prices in 2020 of only $2,198 should be a little discouraging to the bull camp given that prices were already above that level last week. While still not overly significant, it should be noted that palladium holdings on Friday increased for the 8th straight session! On the other hand, in our opinion, it will take very significant gains in gold and platinum this week to support palladium prices which are likely to be off balance because of the renewed demand destruction threat from the 2nd wave of virus.
While the platinum market came under aggressive liquidation pressure last week, it did seem to find value at $900 and bounced aggressively from that level. It should be noted that platinum ETF’s increased their holdings on Friday by 19,177 ounces and the increase was the 8th straight session and for the week the ETF’s added 93,918 ounces. Therefore, it is possible that investors have begun to see platinum ETF’s as a viable instrument. While we think the platinum market will see a tighter positive correlation with gold than palladium, it could still take substantial gains in gold and or a major risk off event to kick platinum back into the bull trend from several weeks ago.
While the copper market did manage to bounce from the latest spike down failure on its charts last week, it is clear that generally positive views toward Chinese copper demand are now being more than offset by fears of a return of global headwinds from the need to return to lock down in many areas. However, Chinese July manufacturing PMI did improve and Chinese equity markets were strong, but that did not alter the negative price bias in copper to start the new trading week. While Chinese demand has been a consistent element of the bull case, a recent developing pattern of weekly builds in Shanghai copper warehouse stocks might be a sign that the trade has been overly optimistic about Chinese demand.
While the charts have clearly turned down in the crude oil market from the mid-July high, the market should draft some fleeting support from a favorable sweep of global PMI data. However, very bearish big picture fundamental headlines are facing the market this week with Russia and Saudi Arabia indicating they are poised to raise production following the decision to bring back some supply. An additional weight hanging on the back of the crude oil market was seen from word that crude oil in floating storage around the world sits at 219% above year ago levels! In the week ahead, we are likely to see more confirmation of OPEC plus production increases which are made even more bearish by the fact that OPEC July output jumped by more than 1 million barrels last month. On the other hand, the bull camp is partially saved by the fact that US oil output reductions in July were the largest on record with a 2 million barrel per day cut.
Given the key reversal last week in natural gas prices following a substantial 7 day low to high rally of nearly $0.30, the market appeared to be vulnerable to downside work this week. In fact with the tropical storm running up the East Coast of the US, the threat against US supply has dissipated completely and that should have undermined the bull camp. However natural gas prices are showing surprising strength in the early going today and managing that action in the face of news that global LNG exports declined for 3rd straight month in July. Perhaps a slight shift to a warmer outlook in the US in the latest forecast (out to August 16th) has provided support as that could ultimately result in moderate US cooling demand extending the expansion seen in July. However, net US cooling demand does not look to reach above normal levels for the full season and that should keep overall sentiment in the Gas market limited.
The soybean market looks set for a short term downtrend into the August 12th USDA Crop Production and Supply/Demand reports. Demand news is somewhat impressive, and that helped the market bounce into the end of the month. However, this is the time of the year when the weather outlook generally trumps all other news. The Midwest looks dry over the next five days, but the 6 to 10 day and 8 to 14 day forecast models show above normal precipitation. As long as the rain emerges after the dry spell, the market is likely in a good position to see soybean crop conditions remain favorable in this key growing period of early August. Weekend rains in the forecast and rains for early next week will be important to materialize. Late last week, the surge higher in palm oil futures plus active demand for soybeans from China plus positive news on US biodiesel usage helped to support.
The bulls are disappointed with the price action last week given the largest sale of US corn to China on record. Even with the strong demand, corn managed to trade down to the lowest level since June 29th to end the month. Exporters announced a sale of 114,300 tonnes of US corn to Mexico on Friday. The weather forecast looks bearish and the trade focus in August will likely shift to the USDA crop production and supply/demand report. On Thursday, US exporters announced a sale of 1.937 million tonnes of corn sold to China, China’s largest single-day purchase on record. In addition, 130,000 tonnes of US corn was sold to an unknown destination. Considering how large the sale was, the market’s response was pretty weak. This is probably because weather tends to be driving force of the market at this time of year. News of above normal precipitation for the 6-10 and 8-14 day forecast models may be enough for producers to assume a higher than trend yield this year.
Talk of extremely high yields in Russia helped to spark selling early this week. IKAR raised their Russian wheat production estimate to 79.5 million tonnes from 78.0 million previous. The wheat market remains in a consolidation pattern since July 10 as the market is absorbing a slightly smaller outlook for the amount of exportable surplus available from Europe. The market has found support recently from news of Brazil buying some wheat from the US. However, traders believe that the Brazil wheat crop could exceed 7 million tonnes this year as compared with 5.15 million tons in 2019. There is some concern that Ukraine’s share of milling wheat for the new crop season may be well below previous years. Ukraine is the world’s fourth largest wheat exporter with expectations for the crop near 24.5 million tonnes this year compared with 28.3 million in 2019. This may be offset by a larger crop out of Russia. September wheat experienced two-sided trade on the session Friday but managed a bounce to the highest level since July 27. There was not much follow through buying on the rally above Thursday’s high.
Pork production for the week was up 10.6% from last year and it may be difficult for the market to absorb all of the pork without a further break in the pork cut-out value. The USDA pork cutout released after the close Friday came in at $64.67, down $2.50 from $67.17 on Thursday and down from $69.97 the previous week. This was the lowest the cutout had been since July 7th. The CME lean index as of July 29 was 53.56, up from 52.95 the previous session and up from 49.69 a week before. This leaves October hogs trading near a $4.00 discount to the cash market as compared with a normal discount of near $16.24 at this time of the year. October hogs managed a strong recovery from the lows Friday as the early selloff to the lowest level since July 2nd failed to attract increased selling pressure. Talk of the oversold condition of the market and ideas that the short-term cash trend has been higher in spite of high production helped to support.
The cattle market remains in a solid uptrend and the breakout on Friday pushed the market up to the highest level since March 6. The cash cattle market continues to trade with a slightly positive tilt, but October cattle is trading near a $10 premium to the cash market as compared with the five-year average basis showing a discount of $3.42. The slow opening of restaurants in the US could be seen as a slight negative, but slaughter levels continue to come in near year ago levels which is smaller than trade expectations. Beef prices have held up relatively well and traders are optimistic that cash cattle can rally. Beef demand can sometimes struggle in August, and beef production could begin to rise rapidly if the backed up cattle in the country begin to move on the market.
The cocoa market remains in a short-term uptrend. For the week, September cocoa finished with a gain of 176 points (up 7.9%) which was a second weekly gain in a row. There have been more indications that this season’s production from Ivory Coast and from Ghana will fall short of last season’s results, and that provided underlying support to the market. Recent West African rainfall has been mild which should help with the flow of cocoa beans to port facilities, but additional and heavier rain may still be need to benefit the region’s upcoming 2020/21 main crop production.
The coffee market is overbought and vulnerable to long liquidation selling after the recent surge higher left technical indicators overdone; like RSI at 82.3. The market pushed up to a new 14-week high Friday. For the week, September coffee finished with a gain of 10.55 cents (up 9.7%) which was a fifth positive weekly result over the past 6 weeks. Strong coffee sales figures from Nestle and positive guidance from Starbucks continued to fuel coffee’s rally as they have soothed concerns with global demand. Coffee was one of the weakest commodities during the second quarter as it was pressured supply and demand factors. There has been a consensus that Brazil’s 2020/21 “on-year” crop production will post a new record high that would offset production problems in other nations. Brazil still remains on track for a record crop, but it may not reach top-end forecasts of 67 million bags or higher. More importantly, this year’s harvest has fallen behind schedule due to labor availability issues, and this has led to a relatively tight supply for this time of the year. Colombia and several Central American producers are also expected to have harvest issues over the next few months.
The latest weather 6-10 and 8-14 day forecasts call for a return of below normal precipitation to the Texas growing regions that extends into the Delta and eastward all the way to eastern Georgia. In addition, the heat returns to West Texas. However, some of these areas may see some rain in the next 5 days, which should bring relief to the dry areas. With that in mind, we could see further improvement in crop conditions in this afternoon’s report. Looking ahead, we could start to see the cotton market react positively to occasional hurricane threats, as heavy rains could damage open bolls.their net long to 15,820.
Sugar’s upside breakout came with little carryover support from key outside markets as it benefited from recent bullish supply/demand developments. The 2020/21 season is still expected to result in a sizable global production surplus, so sugar’s near-term upside may remain limited at best. After more than 7 weeks of trying, October sugar was finally able to break out of its consolidation range and reached a 4 1/2 month high. For the week, October sugar finished with a gain of 115 ticks (up 10.0%) which broke a 3 week losing streak. The Brazilian currency fell by more than 1.2% which weighed on sugar prices, and that was partially offset by an uptick in energy prices that helped to shore up Brazilian domestic ethanol demand. However, the prospect that the 2020/21 season would have lower EU production and a multi-year low in Thailand’s output provided a boost to sugar prices going into month-end. Thailand is the world’s second largest sugar exporter after Brazil, so a second season with their exports at a low helped sugar prices to rally.
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