Written Commentary
BONDS:
In retrospect, the treasury markets should have come under more significant liquidation at the end of last week as the markets overall seem to embrace a coming end to the war, a cease-fire, or simply signs that Russia is willing to undertake some diplomatic efforts. Even more impressive is the treasury’s capacity to stand up against an avalanche of positive US scheduled data which included an extremely hot PCE!
The action in treasury prices at the start of this week is disappointing to the bull camp, as an early rally to 15-day highs was reversed and the markets do not appear to be overly sensitive to the anxiety flowing from Ukrainian headlines. However, the situation in Ukraine is likely to rekindle significant flight to quality buying once the Russian and Ukraine negotiations fail to reach an agreement.
CURRENCIES:
As in other financial markets, the currency markets appeared to be embracing a moderating of anxiety/uncertainty from the Ukraine situation late last week, with the flight to quality dollar pivoting to the downside and oversold non-dollar currencies showing noted bounces. However, the crisis should not be considered over as the Russians have not been forthright in their statements to the west. With a dollar flare at the start of this week forging the 3rd highest trade of the contract life, the bias is pointing upward. Certainly, flight to quality is moderated into and through the Russian/Ukrainian talks, but we expect no progress from those talks and a quick return of flight to quality buying interest.
With European stocks lower and many sanctions likely to provide headwinds to the euro zone economy, the fundamental path of least resistance remains down in the euro. At this point, European economic news is of little importance to the action in the euro futures. Furthermore, the most recent positioning report showed a large net spec and fund long which is likely to foster stop loss selling. The Commitments of Traders report for the week ending February 22nd showed Euro Non-Commercial & Non-Reportable traders added 12,522 contracts to their already long position and are now net long 97,819.
The action in the Yen continues to be extremely discouraging to the bulls. In fact, the Yen remains pinned down to the recent lows and it is very clear that the flight to quality interest in the Yen is nearly absent. While the Swiss franc managed to aggressively reject a probe below 1.08, scheduled data from Switzerland favors the bear camp, but that news is secondary to fear of substantial economic headwinds for all of Europe. Nonetheless, the Swiss is likely to remain within a range defined as 1.078 on the downside and 1.0920 on the upside.
The charts in the Pound are patently bearish and news of large UK firms unilaterally halting business with Russia creates economic headwinds for the Pound. In the near term, we will not rule out a return to the early December consolidation low down, especially if the UK continues to take steps to injure Russia at the expense of UK economic interest. Like the UK, Canada continues to ratchet up its sanctions against Russia and has raised the potential angst of the Russian leader by banning Russian airline flights in Canadian airspace. In the end, the charts in the Canadian are bearish, with a recent pattern of lower highs and lower lows.
STOCKS:
It seems that the source of the significant recovery bounce late last week was relief that Russia might be willing to attempt diplomatic talks to end the crisis. However, by the time Russia agrees to diplomatic interaction, the war could be over. Other internal positives for equities came from a settlement by the 3 largest US drug distributors and drugmakers from the US opiate epidemic, and several stronger than expected reports on the US economy. Global equity markets at the start of this week were mixed with some markets playing catch-up to large gains in the US on Friday and other markets particularly those in Europe tracking lower. While some markets were higher in Asia, the US market started out with the Dow projected to open more than 300 points lower.
With sanctions against Russia reaching into the international capital flow markets (SWIFT) there are concerns of a lack of global liquidity and that should keep some investors on the sidelines and prompt other investors to move to the sidelines. So far, the damage on the S&P chart has been minimal, with the market showing some respect for the 4300 level. Given recent events in the Ukraine, a swift end to the crisis is unlikely and some investors who picked bottoms last week are likely to flee to the sidelines once the talks fail. However, the bull camp maintains a slight edge if the March S&P can respect support at 4251.50. The February 22nd Commitments of Traders report showed E-Mini S&P Non-Commercial & Non-Reportable traders added 44,223 contracts to their already long position and are now net long 251,038.
Not surprisingly the NASDAQ charts remain the most negative of the actively traded futures contracts with the threat of Russian hacking and reports of some US shipping companies halting business to Russia and the Ukraine leaving investors cold. We see a failure with a decline below 13,760 with 13,500 possible once Russia/Ukraine talks break up without progress. It should also be noted that the positioning in the NASDAQ is net long leaving the market vulnerable to stop loss selling. The February 22nd Commitments of Traders report showed Nasdaq Mini Non-Commercial & Non-Reportable traders went from a net short to a net long position of 6,147 contracts after net buying 11,679 contracts.
GOLD, SILVER & PLATINUM:
The gold and silver markets were tracking higher at the start of this week off reports that aggressive Ukrainian resistance is slowing the Russian advance, and therefore the upcoming Ukraine/Russian talks are less likely to result in any change in the crisis. Apparently, negotiating parties were gathering to meet along the border of Belarus with the Russians expected to call for a total surrender and the Ukrainians expected to push for a cease-fire. Over the weekend, Russia captured two small cities and now have positioning for resupply from ships on the Black Sea. We were expecting a significant setback in gold prices early this week off signs that Russia was going to make it apparent that resistance is futile.
Palladium positioning in the Commitments of Traders for the week ending February 22nd showed Managed Money traders added 12 contracts to their already short position and are now net short 13. Non-Commercial & Non-Reportable traders added 114 contracts to their already short position and are now net short 1,114. In the event the Russians quickly hit their objectives, that would dissipate the threat of locked in supply. The Commitments of Traders report for the week ending February 22nd showed Platinum Managed Money traders added 9,535 contracts to their already long position and are now net long 15,597. Non-Commercial & Non-Reportable traders added 8,168 contracts to their already long position and are now net long 26,362.
COPPER:
Fortunately for the bull camp in copper, the market did not see a significant run up in advance of the Russian invasion as that would have left the market vulnerable to demand destruction fears. Therefore, copper should be less fundamentally and technical technically vulnerable to a large washout. However, despite believable efforts of the Ukrainian fighters, Russia clearly has overwhelming force and they have captured several key cities giving them better resupply capacity.
ENERGY COMPLEX:
With talks between Russia and Ukrainian officials not expected to yield positive results, if there is a cease-fire agreement, the Russians plan to use that as time to regroup without being attacked. While the trade has constantly focused on the potential for a western embargo of Russian oil, it is increasingly possible that Russia could embargo oil gas exports as an economic threat against wave after wave of sanctions placed on them. Reports of stiff Ukrainian resistance lowers the potential for the Russians to obtain objectives before the bite of sanctions cripples the Russia economy. On the other hand, if pockets of Ukrainian resistance remain a force for weeks, the conclusion is likely to be capitulation or domination. On the other hand, the Russian president over the weekend raised his country’s nuclear alert level in a development that is certainly attention-getting on the world stage and that is probably the main reason behind a $4.00 plus rally.
In our opinion, with the avalanche of sanctions now known to the market, the direct threat against disrupted Russian oil shipments is not expected early this week. In the end, the path of least resistance is up but the potential for 180 degree shifts in sentiment is very high thereby leaving massive volatility in place. However, the bear camp is not without ammunition as crude oil in floating storage reportedly rose by 3.2% last week and Iranian talks this week could yield progress. The Commitments of Traders report for the week ending February 22nd showed Crude Oil Managed Money traders reduced their net long position by 19,021 contracts to a net long 272,360 contracts. Non-Commercial & Non-Reportable traders net sold 18,953 contracts and are now net long 450,242 contracts.
We continue to see the gasoline market as the least bullish component of the energy complex with US gasoline stocks consistently running at a surplus and talk that extremely cheap ethanol will be brought into the market. With the net spec and fund trade adding minimally to its pre-existing net long on last week’s major flare-up, the market retains buying fuel. As indicated in other coverage, we see a potential quick end to the crisis which in turn would put significant pressure on gasoline. Gas (RBOB) positioning in the Commitments of Traders for the week ending February 22nd showed Managed Money traders are net long 80,990 contracts after net selling 150 contracts. Non-Commercial & Non-Reportable traders net bought 2,058 contracts and are now net long 75,579 contracts.
After some very violent action last week, the natural gas market could have entered the new week vulnerable to further liquidation action. However, colder European weather and a very real potential for supply disruption from Russia could provide a powerful range up move. In fact, several LNG buyers have halted purchases from Russia and German data had power prices early this week jumping by 14% from the previous day and are now up 60% from week ago levels. On the other hand, there are reports that the Russian national gas company booked capacity from Yamal to Europe in that pipeline and that would be a major bearish development if that gas is indeed flowing west!
BEANS:
Talk of nuclear readiness sparked fear and uncertainty for the market overnight but any signs of de-escalation in the Ukraine/Russia conflict can help prices turn back down. May soybeans closed 4.2% lower on Friday and experienced significant follow-through selling from Thursday’s key reversal. This helps to confirm that a major top may be in place. The market experienced the lowest close since February 15, and the market is already down as much as $1.80 1/4 from Thursday’s peak which was also the range for the week. May soybean meal also experienced follow-through selling from Thursday’s key reversal and the selling push the market down to the lowest level since February 16.
On top of the weekly sales data, exporters announced the sale of 334,000 tonnes of US soybeans sold to China, and 285,000 tonnes of US soybeans sold to unknown destination. Once again, the sales to China were for the new crop season as China buyers see the big discount as an incentive to book needs. The weekly export sales report showed that for the week ending February 17, net soybean sales came in at 1,232,513 tonnes for the current marketing year and 866,500 for the next marketing year for a total of 2,099,013 as compared with expectations for 500,000-1.2 million tonnes for old crop and 450,000-850,000 tonnes for new crop. Cumulative soybean sales have reached 88.4% of the USDA forecast for the 2021/2022 marketing year versus a 5 year average of 85.6%.
CORN:
The market closed just three cents higher on the week last week with a 61 cent range. Open interest showed aggressive long liquidation selling in recent days. US demand is already strong due to sharp reductions in South America production, and demand will just strengthen if Ukraine is unable to export. May corn closed sharply lower on the session Friday and experienced the lowest close since February 18. Ideas that the conflict in the Black Sea region will eventually be over, rumors that Russia is willing to negotiate plus talk that even if Russia occupies Ukraine that they will ship Ukraine corn to China were all seen as potential negative factors. Strong gains in the US stock market also suggest that there is a little less concern for a major extended conflict.
WHEAT:
May wheat closed 55 3/4 cents higher on the week last week (up 6.9%) with the extreme volatility after reaching the highest level since mid-2008. The range for the week was $1.63 3/4. Russia is the world’s largest exporter of wheat while Ukraine is the fifth largest exporter, and many Black Sea export terminals are currently closed. On top of the current year export situation, traders are nervous that the conditions for Ukraine yield are far from ideal, and even the harvest activity for 2022 wheat crop is in question as Ukraine producers are unlikely in position for taking care of their crop.
May wheat closed 75 cents lower on the session Friday and more than a $1.00 off of the highs of the day. The sweeping outside day down is a key reversal and suggests a significant top is in place. The general idea that the Black Sea region will see export terminals reopen up soon enough to avoid much of a slowdown in exports from the region helped to pressure. Egypt is tendering for wheat this week and traders will monitor this transaction closely as Black Sea exporters have held the lion’s share (50% Russia and 30% Ukraine) of exports to Egypt. French wheat is said to be the lowest price for the tender.
HOGS:
April hogs closed sharply lower on the session Friday and the market is down as much as 930 points in just three sessions. Ideas that slaughter may begin to come in closer to expectations, instead of well short of expectations has helped to pressure. The premium of futures to the cash market, plus concerns that exports will remain low and that imports could pick up steam were seen as bearish forces. The CME Lean Hog Index as of February 23 was 98.04, down from 98.16 the previous session but up from 94.24 the previous week. The USDA pork cutout, released after the close Friday, came in at $111.38, down 96 cents from Thursday but up from $107.51 the previous week. The market is also correcting the overbought condition.
The USDA estimated hog slaughter came in at 477,000 head Friday and 131,000 head for Saturday. This brought the total for last week to 2.507 million head, up from 2.498 million the previous week but down from 2.649 million a year ago. Estimated US pork production last week was 548.2 million pounds, up from 546.8 the previous week and down from 575.2 a year ago. China’s national average spot pig price as of February 28 was up 0.71% from the previous day. For the week prices are up 0.71%, down 8.04% for the month and down 21.62% year to date.
CATTLE:
For the Cattle on Feed report Friday, placements for the month of January came in at 98.8% of last year as compared with the average trade expectation for placements to come in near 99.2% of last year (97.4-103.8 range). This is slightly supportive against trade expectations and near the low end of the range. January marketings came in at 96.9% as compared with expectations for 97.3% of last year. This is slightly bearish. As a result, On-Feed supply for February 1 came in at 100.8% of last year which was right near the expectation for 100.7% of last year. The USDA report news was very neutral and should not have much impact on the market Monday. Traders viewed the cash market as disappointing last week with mostly steady trade at $142.
The USDA boxed beef cutout was up 53 cents at mid-session Friday and closed 97 cents lower at $258.27. This was down from $265.85 the previous week and the lowest level for the beef market since April 2nd. April cattle closed lower on the session Friday and the selling pushed the market down to the lowest price level since January 28. The early strong rally failed to attract new buying interest. Open interest remains high and traders are nervous with the current demand set up which has kept sellers active. The USDA estimated cattle slaughter came in at 119,000 head Friday and 50,000 head for Saturday. This brought the total for last week to 647,000 head, down from 660,000 the previous week and down from 665,000 a year ago.
COCOA:
Cocoa prices continue to be driven by the ebb and flow of global risk sentiment in the wake of Russia’s invasion of Ukraine, as that will impact near-term European demand prospects. While ongoing tensions may put pressure on the market early this week, cocoa would be a major beneficiary if and when the Ukraine/Russia conflict finally concludes. May cocoa finished a volatile trading week with choppy two-side action as it closed Friday with a modest loss that was an eight negative daily result over the past 10 sessions.
COFFEE:
Coffee prices have been able to hold their ground above last Thursday’s low and the early February low as it continues to find support from bullish supply developments. The market continues to have a very large net spec short position, however, so a negative shift in global risk sentiment early this week could put coffee prices back on the defensive. May coffee prices kept within a fairly tight trading range as they finished Friday’s inside-day session with a modest gain. For the week, May coffee finished with a loss of 7.35 cents (down 3.0%) and a second negative weekly result in a row.
The Brazilian currency remained under pressure for a second day in a row, which in turned weighed on coffee prices as that may encourage Brazil’s farmers to market their remaining near-term supply. However, a bullish supply outlook continued to underpin the coffee market going into the weekend. After a strong start to the season, several Central American producing nations have dialed back their 2021/22 coffee production forecasts due to part to leaf rust.
COTTON:
May cotton experienced the lowest close since January 25 on Friday, but the market managed to bounce well off of the lows of the day. The selling pushed the market down to the lowest level since January 18. The sharp break in the grain markets and a surge higher in the stock market had some traders feeling that there was some hope that the war would not last much longer, and that the impact might not be as severe as believed. Traders remain concerned that a major conflict in the Black Sea region could hurt the global economy, and might spark lower demand for cotton. From the USDA Outlook Forum, the first preliminary outlook for the 2022/2023 season showed a 13.2% jump in US planted area from last year to 12.7 million acres. Ending stocks are expected to increase to 3.6 million bales, but this assumes a big jump in exports to 15.5 million bales from 14.8 million this year.
While the West Texas key growing regions are showing very dry soils because of drought conditions over the past few months, the 6-10 and 8-14 day forecast models show above normal precipitation. The weekly export sales report showed that for the week ending February 17, net cotton sales came in at 247,234 bales for the current marketing year and 218,156 for the next marketing year for a total of 465,390. This was well above trade expectations but the sales occurred before Russia invaded Ukraine.
SUGAR:
Sugar’s abrupt turnaround late last week left prices nearly 4% below last Thursday’s 4-week high and just above their February lows. With the market already receiving positive ethanol demand news, a sizable rebound in key outside market could lift sugar prices back above their recent consolidation zone early this week. After a mild start, May sugar turned sharply to the downside as it finished Friday’s trading session with a sizable loss. For the week, May sugar finished with a loss of 2 ticks (down 0.1%) which was a negative weekly reversal.
Energy prices followed through to the downside as they saw heavy losses again of Friday, which put carryover pressure on the sugar market as that may weaken near-term ethanol demand in Brazil and India. Brazil’s Center-South domestic ethanol sales have come in below last year’s levels over the past 6 months, but hydrous ethanol sales during the first half of February were 22% above their first-half January total. The weekend announcement that Russia will be removed from the SWIFT banking system could drive crude oil back towards multi-year highs, and that could give sugar prices an additional boost early this week.
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