With treasury prices falling back to the lowest levels in 10 months in the face of a very disappointing University of Michigan sentiment report, it appears that the bias is bearish. In fact, looking back the market saw very bullish economic data and yet prices appeared to fight their way higher on the charts. On the other hand, we suspect that chatter of more forward movement on the US relief package prompted selling off the idea that further stimulus would dramatically increase the likelihood of getting beyond the pandemic without recession.
The action in the currency markets late last week was very telling as the dollar, euro, Swiss franc, and Yen were all trading lower at the same time. Obviously, that pushed buyers toward the British pound and Canadian dollar which would appear to have the most bullish setups into this week’s trade. On the other hand, they sharp range up spike in the dollar was likely the result of positive stimulus headlines from Washington. For the first time in nearly 2 months, the dollar action appears to be associated with the ebb and flow of uncertainty in the marketplace.
The stock market once again waffled around both sides of unchanged late last week in a sign that investors are indecisive as to the health of the US recovery, losing interest in the corporate earnings storyline, are not yet buying into the idea that US infections are trending and highly skeptical that a stimulus will be passed in the coming week. Global equity markets were higher at the start of this week with the exception the Spanish market which showed a very modest decline. Obviously, a risk on environment has emerged in the early Tuesday trade with global equity markets leading US markets higher. However, it should be noted that investors seem to be pushing money into “reopening” stocks like hotels, cruise lines and perhaps even airlines and for some that is a sign that bullish sentiment is starting to run very hot.
GOLD, SILVER & PLATINUM:
Despite headlines early this week touting significant outflows from gold and silver ETF’s last week, prices have started out positive as a result of a broad risk on market environment. Obviously, a downside breakout in the dollar (to the lowest level since January 27th) has contributed to the positive early traction. Unfortunately for the bull camp, the gold market is lagging the rest of the precious metals markets with high yielding bonds thought to be siphoning off some investment interest. Year-to-date gold ETF holdings have seen a net sale of 558,788 ounces this year while silver holdings remain positive with net purchases of 84.6 million ounces. Further negative gold price divergence with silver at the start of this week is expected because of lingering rotation potential from gold to interest bearing instrument with Treasury Bond yields reaching the highest level since February 24th, 2020.
With Citigroup predicting London copper to trade at $10,000 (which compares with a recent price of $8,437 a tonne and at an 8-year high already) and suggesting the strength would result from a “deep global deficit, prices are justified in their noted strength at the start of this week. Furthermore, with a definitive risk on vibe throughout commodities, word that the UK is ahead of projected vaccination estimates, news that US infections and hospitalizations are declining, and talk that China’s return from holiday will result in catch-up demand, leaves the bull camp with significant ammunition.
While the crude oil market spiked sharply higher at the start of this week and approached the $61.00 level, it failed to hold those gains in a potential sign of a short-term overbought condition. However, in addition to a very impressive “risk on” global market vibe, the crude oil market is reportedly drafting support from extreme cold in the US which has boosted heating demand. Other potential supportive issues are seen from the closure of the Houston Ship Channel because of freezing temperatures and from the shutdown of the largest US oil refinery because of cold weather. In fact, given widespread electricity outages (because of the strain of extreme temperatures) there are several reasons for supply concern and therefore weather should be supportive of crude prices throughout today’s trade. While the reduction of demand for physical crude is likely because of the refinery closures, the refinery closures have also resulted in an explosion of product prices (relative to crude oil) and that should increase demand for crude by refiners ahead because of more attractive crack margins.
Palm oil jumped 4% in Malaysia on Monday as a continued advance in crude oil helped to drive the market higher. May soybeans closed higher on the session Friday but stayed inside of Thursday’s range. The market experienced choppy trade all week but did manage to close 5 1/2 cents higher on the week. Talk of harvest delays in Brazil helped to provide some support, but there is also plenty of talk of surging soybean planted acreage for the coming year, and also ideas that the US will be in position to import soybeans from Brazil for late in the marketing year.
The sweeping key reversal on February 9, follow-through selling the next day, a negative stochastic crossover from 82, major RSI divergence (which shows a loss of momentum), and the COT report showing a near record net long position by speculators are bearish forces. Open interest remains high, and the market could see increased selling if support levels are violated. May corn closed lower on the session Friday matching Thursday’s high as traders appear less confident that the market has corrected the overbought condition. The market closed 11 cents lower on the week and posted a contract high on Tuesday so the weekly key reversal is seen as a bearish technical development as well.
European milling wheat futures on Monday closed 2.7% higher for the session as traders see the Algerian wheat tender to buy optional origin milling wheat as a positive force. There are still weather concerns for US wheat, and even Black Sea region wheat due to on and off cold. Some traders see some damage impact on near 30% of the belt focused on Kansas. Australia officials revised their wheat crop higher to reach a record 33.34 million tonnes this season, as compared with the estimate from December at 31.17 million tonnes. Russia wheat export prices fell for the fourth consecutive week last week. Traders believe the wheat tax has been priced in.
April hogs closed higher on the session as the market posted contract highs for the third session in a row last Friday. The continued strong advance in pork values plus expectations for a seasonal decline in slaughter into the spring has helped to support. The market is extremely overbought with RSI near 85 and slow stochastic measures at 90.5 and 93.8. Open interest, however, remains in a steep uptrend and is up more than 26,000 contracts this month. The USDA pork cutout released after the close Friday came in at $86.82, down $1.00 from Thursday but up from $83.19 the previous week. The CME Lean Hog Index as of February 10 was 72.36, up from 71.74 the previous session and up from 69.09 the previous week. The USDA estimated hog slaughter came in at 488,000 head Friday and 216,000 head for Saturday.
The move to a new contract high for June cattle last Friday leaves 122.22 as the next technical target. April cattle closed sharply higher last Friday as the buying pushed futures up to a new contract high. Bitter cold weather over the weekend may cause increase death loss and also cause a sharp drop in weights. Traders see stronger demand as the US economy reopens. April Cattle may be close to putting in a near term peak. The market put in a new contract high at $125.82 for the April contract, but Nebraska cash cattle were trading at $113.09, down from $113.45 last week. This leaves April cattle trading at an $11.72 premium to the cash market versus a five-year average discount of $0.55.
Cocoa has not been able to sustain upside momentum since last November’s sharp rally, and has spent 2 months inside of a consolidation zone as near-term global demand concerns remain a major issue. The market has continued to hold its ground above a mid-December spike low, however, as cocoa’s longer-term demand prospects are much more positive. May cocoa continued its recent volatile trading pattern as it shook off early pressure with a sizable midsession rally, only to give back those gains late in the day to finish Friday’s session with a modest loss. For the week, May cocoa finished with a loss of 39 points (down 1.6%) and a third negative weekly result in a row.
Coffee has seen wide price swings since the start of 2020, and the December/February consolidation has been a period of relative stability. Given the longer-term supply outlook, a rebound in demand should lift coffee prices well clear of their recent levels. May coffee bounced back from a new 4 1/2 week low, but could not sustain that rebound into the close as the market finished Friday’s outside-day trading session near unchanged levels. For the week, May coffee finished with a loss of 3.60 cents which was a third negative weekly result over the past 4 weeks.
March cotton traded to a new contract high last Friday and again at the start of this week. The nearby contract traded to its highest level since August 2018. This followed another strong week of export sales reported on Thursday and a bullish USDA supply/demand report on Tuesday. Actual shipments for the week ending February 4 reached 433,629 bales, a marketing year high. The S&P 500 and the NASDAQ both made all-time highs which is supportive to demand. ICE warehouse stocks reached 98,378 bales on February 11, up 1,570 from the previous session and up 8,529 from the previous week. Stocks have increased for 16 sessions in a row.
Sugar prices remain on-track for a tenth monthly gain in a row as they continue to find support from an improving demand outlook and stronger energy prices. The market appears to have lost upside momentum last week, however, so sugar may start out this week under pressure before finding its footing again. May sugar bounced back from early pressure, but fell back on the defensive and following choppy action late in the day finished Friday’s trading session with a moderate loss. For the week, May sugar finished with a loss of 6 ticks (down 0.4%) which was a negative weekly key reversal. March sugar also posted a negative weekly key reversal from the highest front-month sugar price since April of 2017. After a 5-week winning streak, May sugar has only seen one positive weekly result over the past 4 weeks.
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