The Treasury bond market mostly consolidated last week with the trading range sitting just below 164-00 and to just above 165-00. The bond market held the gains despite better-than-expected Chicago purchasing managers and University of Michigan sentiment figures in a testament to the treasury markets lingering bullish psychology. Treasury prices merely coiled in a tight range early this week despite weakness in 4 of 8 country manufacturing PMI readings for July released. Furthermore, only two entities posted positive manufacturing PMI (Germany and the overall Euro zone) with one country posting an unchanged PMI which indicates July was not a stellar month for the global economy. It should be noted that expectations for US manufacturing PMI for July show only a very minimal gain of 0.3% versus June.
The dollar index ranged sharply lower late last week before rebounding aggressively as if week ending short covering was taking hold. However, at times last week the recovery currencies made significant gains against the dollar and that could continue this week if equities recover and the spread of the Delta variant begins to level out. The Dollar index was tracking lower early this week and with the market bouncing aggressively last Friday following last week’s aggressive washout, the oversold technical condition of the market was likely alleviated.
While the Yen did not show definitive upward action, it should be noted that Japanese bank manufacturing PMI readings for July were one of the few July manufacturing PMI readings to post positive readings. The charts in the Swiss franc are the most definitively positive throughout the currency complex, with the Swiss also drafting support from fundamental data. In addition to a 0.7% consumer price index jump in July over year ago levels, Swiss purchasing managers jumped significantly from the prior month (71.1 versus 66.7).
The charts in the Pound were negative with last week’s rally reversed aggressively and the trade below the low from Friday posted in the early going injuring the technical structure of the currency. Fortunately for the bull camp, UK manufacturing PMI for July matched expectations and matched June readings. Clearly, the Canadian dollar lost momentum from last week’s significant bounce with the currency seemingly content to hold just above 80.00. On the other hand, the Canadian dollar should be supported because of upbeat Canadian growth expectations, a narrower budget deficit in the first 2 months of this year and to a lesser degree by the weakness in the US dollar.
We think the equity markets were exhausted late last week and interested in taking profits ahead of a weekend following the latest US infection read above 86,000. Fortunately for the bull camp, the potential for progress on the infrastructure spending plan remains good and the last US scheduled data released from the US (Chicago purchasing managers and consumer sentiment) came in positive to provide a little macroeconomic optimism. At the start of this week, global equity markets were all higher with gains in the CSI 300 reaching up to 2.5%! While US markets have not made new all-time highs in the early going this week, the prospect of fresh all-time highs are good. Apparently, the equity markets are hopeful of progress on a $1 trillion US infrastructure spending bill but manufacturing PMI data from around the world was generally disappointing.
As in the S&P, the Dow futures sit in proximity to all-time highs to start this week. However, the net spec and fund long in the Dow futures is a mere fraction of the record net spec and fund long of 95,118 contracts. In addition to an impressive series of consolidation lows around 34,762, the Dow should be supported by upcoming corporate earnings reports. Dow Jones $5 positioning in the Commitments of Traders for the week ending July 27th showed Non-Commercial & Non-Reportable traders net bought 4,394 contracts and are now net long 4,793 contracts.
While the NASDAQ was not far off all-time highs, it is further from the highs than other measures of the market and likely set to remain off balance because of fears of further Chinese restrictions against key global tech orientated Chinese based companies. Some analysts think China is attempting to force Chinese orientated/originated companies to move back onshore and list on Chinese exchanges. However, positive tech headlines early this week leave the bull camp in control. Nasdaq Mini positioning in the Commitments of Traders for the week ending July 27th showed Non-Commercial & Non-Reportable traders were net short 17,917 contracts after increasing their already short position by 8,184 contracts.
GOLD, SILVER & PLATINUM:
Apparently, the gold and silver markets are not cheered by a sweep of global equity market gains to start the new trading week. In fact, gold and silver were tracking despite a softer dollar and higher PGM pricing! Obviously, the Chinese PMI reading is a dampening influence on all physical commodities as that confirms China’s economy is struggling to maintain positive traction with domestic demand softening to a crawl. Therefore, it is a natural progression to fear a softening of Chinese gold purchases. Going forward, the gold and silver markets will have to prove they can avoid a retrenchment to start the new trading week, as the action at the end of last week probably weakened the resolve of the bull camp. In looking back to last week’s news flow, the bull camp should see some residual support from the World Gold Council quarterly demand figures which showed a pickup in demand from central banks even though investment demand remained very anemic.
Like the gold market, the silver market will have to prove it can sustain last week’s rally with the bull camp with the trade heavily reliant on big picture macroeconomic optimism. While the most recent COT positioning report understates the net spec and fund long the market should not be heavily vulnerable to stop loss selling. Silver positioning in the Commitments of Traders for the week ending July 27th showed Managed Money traders were net long 21,189 contracts after decreasing their long position by 5,058 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 4,840 contracts to a net long 46,282 contracts.
With a very poor range down finish last week, the platinum market enters the new trading week vulnerable to follow through selling. As opposed to the palladium market which has a relatively small net spec and fund long, the platinum market holds a moderately large net spec and fund long of 19,363 contracts and in a relatively thin trade that could result in modest chart failures becoming major chart failures. With ETF holdings of 3.8 million ounces overall, seeing platinum ETF’s last week shed 93,022 ounces is a sign that investors are cool toward the metal. Platinum positioning in the Commitments of Traders for the week ending July 27th showed Managed Money traders are net long 217 contracts after net selling 1,370 contracts. Non-Commercial & Non-Reportable traders net sold 1,424 contracts and are now net long 19,363 contracts.
Apparently, the developing supply threat in South America more than offsets a very disappointing Chinese manufacturing PMI reading for July as copper prices were tracking higher early this week. However, the bull camp should take solace from the potential strike at the world’s biggest copper mine in Chile (BHP’s Escondida mine) and from talk that real progress might be seen on a $1 trillion US Infrastructure bill this week. On the other hand, seeing the Chinese government announce an additional auction for 30,000 tonnes of copper for this week is a resistance thickening development. Further emboldening the bear camp are slackening Chinese copper demand expectations following soft Chinese PMI results and without a strike at the BHP facility, copper could reverse the early gains and work lower.
While the energy markets last week charged higher off improving demand views and a widespread belief in the market that a global supply deficit remains in place, oil prices early this week are under pressure despite an attack on an Israeli oil tanker. Furthermore, it should be noted that the US has promised a response against Iran because of the tanker attack. However, the markets recently were presented with news that OPEC plus output in July hit a 15-month high and that production is likely to be increased further in August by OPEC+. Apparently, OPEC’s saw its output in July increase by 610,000 barrels per day and that supply increase is joined by the August 400,000 barrel per day increase from OPEC+. Even the demand side of the equation has shifted negative for prices with Chinese PMI data overnight disappointing and most of the manufacturing PMI data points released overnight coming in soft.
The gasoline market continues to be the stellar performer throughout the energy complex with US gasoline consumption the centerpiece of the bull case. While the US implied demand readings have been improving recently, the primary force likely to drive gas prices even higher is further evidence that gasoline demand continues to outstrip supply. In other words, given the very strong US refinery activity rate (more product flow) demand must be solid or inventories would have built up over the last several weeks. It is difficult to determine what the surging US infection count will do to prices as the latest US daily reading topped 100,000, and that could spark a risk off environment.
Even though last week’s technical action showed a loss of upside momentum, the bull camp should be emboldened by a slightly hotter US temperature forecast for the Northeast out through August 15th. Natural gas prices should also be supported because of lower US natural gas production estimates from Bloomberg news, with US production as of August 1st thought to have declined by 1.6 billion cubic feet per day. In yet another supportive development, Chinese LNG local prices continue to surge with prices reaching above $17 per million metric BTUs. The weekly Baker Hughes oil rig count showed the first decline in overall US oil and gas drilling in 8 weeks and that should provide very minimal support to prices.
The seven day forecast models show almost no rain across the Midwest but the 6-10 day models show above normal temperatures but also above normal precipitation for Minnesota, Iowa, and the rest of the eastern Corn Belt. This could be crop saving rains for many producers. The Dakotas and Nebraska stay dry in the 6-10 and 8-14 day forecast models so significant losses are possible in the far Western Corn Belt.
The corn market closed sharply lower on the session last Friday as better than expected rains emerged for South Dakota Thursday night. The bar is set high for the bears as record yield is needed in the US to avoid significant tightness. About two thirds of Minnesota, 50% of South Dakota and 30% of Iowa received 1/4 inch or so in the last 7 days, and these areas are vulnerable to stress given the lack of rain for the whole region for the 7-day forecast. The 6-10 day models show above normal precipitation for Iowa/Minnesota and above normal temperatures and this helped to pressure the market. For corn, the current ending stocks estimate is 1.432 billion bushels. If yield is down 25% for the Dakotas and Minnesota and 10% in Iowa, this could result in a loss of more than 1 billion bushels. December corn managed to close 2 1/4 cents higher on the week but the technical action on Friday was negative.
Crop conditions are already poor for North Dakota and Montana, and the region has seen no rain in the last seven days and looks very dry for these two states and for the Canadian prairies for the next seven days. This could spark major abandonment and further production declines as the crop withers. September wheat experienced choppy and two-sided trade Friday as weakness in the other grains helped to pressure. December Minneapolis wheat closed moderately lower on the session but still closed sharply higher on the week. Egypt is tendering to buy wheat and traders will monitor this situation.
The CME Lean Hog Index as of July 28 was 112.02, up from 111.94 the previous session but down from 112.25 the previous week. This leaves October hogs trading at a $24.00 discount to the cash market as compared with the 5-year average discount of $14.60. The outlook for increasing supply at the same time that China demand is on the decline is a bearish combination and helps to rationalize the huge discount. However, this leaves the market oversold and vulnerable to a bounce. October hogs closed sharply lower on the session Friday and the market fell sharply from Tuesday high of 94.05 to a low of 87.27. The selling pushed the market down to the lowest level since July 15. After four days down and with a discount to the cash market, the market may find some underlying support soon. However, supplies are on the rise and China demand is declining and that leaves a bearish fundamental tilt to the market.
A bearish tilt to outside market forces and weakness in agricultural markets helped to pressure cattle last Friday and the outside forces may carry a more positive tilt early this week. The longer-term fundamentals look positive with declining production in the weeks and months ahead, and a still positive tilt to consumer demand for beef. Average estimated dressed cattle weights for the week ending July 31 came in at 816 pounds, up from 815 from the previous week and down from 835 a year ago. The 5-year average weekly weight for that week is 820.4. Over the last seven weeks, weights have moved sideways in a timeframe when weights normally trend higher. This is a positive force. The USDA boxed beef cutout was up $3.60 at mid-session Friday and closed $3.24 higher at $278.46. This was up from $266.63 the previous week and was the highest the cutout had been since July 9. Cash live cattle ended last week with a firm tone, roughly $0.50-$1.00 higher than the previous week.
While cocoa was unable to avoid a second negative monthly result in a row, it finished July more than 130 points above an eleven-month low on July 20th. The near-term demand outlook is likely to remain a source of pressure over the next few weeks, but cocoa is showing more signs that a longer-term low has been put in. December cocoa was unable to shake off early pressure and dropped sharply at midsession as it finished Friday’s trading session with a sizable loss. For the week, however, December cocoa finished with a gain of 58 points (up 2.4%) which broke a 2-week losing streak and was only the second positive weekly result since mid-May.
The more than 59 cent price range that December coffee trading within during the past 2 weeks was nearly as large as the more than 66 cent range the market traded in during the previous 2 1/2 years. Although the market is likely to see downside follow-through early this week, July’s frost damage to Brazil’s coffee trees should provide longer-term support to coffee prices. December coffee found early support, but then turned sharply to the downside as it reached a new 1-week low before finishing Friday’s trading session with a heavy loss. For the week, December coffee finished with a loss of 9.50 cents (down 4.9%) which broke a 2-week winning streak and was also a negative weekly key reversal.
December cotton sold off sharply on Friday and closed at their lowest level since July 21. Traders were disappointed in the market’s failure to follow-through on Wednesday’s move to new contract highs, and some may have been anxious to take profits going into the weekend. The dollar recovered after Thursday’s steep selloff, may have added to the longs’ nervousness. However, the market did manage to close 4.49 higher on the month for the best performance since April. The 1-5-day forecast calls for moderate to heavy rains in west Texas, which further increases the odds for a strong crop this year. The 6-10 and 8-14 day forecasts call for normal to below normal temps in the region, with normal to below normal precipitation in the 6-10 and below normal in the 8-14. However, as we look ahead to the August USDA Crop Production and supply/demand (WASDE) reports, the lack of drought conditions in West Texas could open the door for significant production increases for the non-irrigated fields.
In spite of the Thursday/Friday pullback, sugar prices were able to extend their monthly winning streak to four in a row with a twelfth positive monthly result over the past 14 months. Although the market could see early downside follow-through this week, sugar should find carryover support from key outside markets and should be strength by recent bullish supply-side developments. October sugar was unable to hold onto early strength as it turned sharply to the downside and followed through on last Thursday’s negative daily key reversal as it finished Friday’s trading session with a sizable loss. For the week, October sugar finished with a loss of 26 ticks (down 1.4%) which broke a 2-week winning streak and was a negative key weekly reversal.
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