With last week’s low to high rally in September bonds reaching 41/2 points, it was not surprising to see a noted corrective setback last Friday. In fact, with the S&P forging a new all-time high, analysts deciding the bond market was the “wrong” market this week and seeing more Fed members discuss tapering one might have expected treasury prices to have fallen significantly last week. Over the past couple weeks, a large portion of the market (including us) has labeled the rally in treasuries as excessive. However, the treasury market appears to have correctly anticipated a slowing of the global recovery pace and with the appearance of a significant “surge” of Delta variant infections in the US, the threat of slowing is enhanced.
At the end last week, it does not appear as if there is a primary leadership currency in the marketplace. However, if there is a leadership currency it is the Japanese Yen which managed to rise last week in the face of disappointing scheduled Japanese economic news and in the wake of a decision to not allow spectators at the Olympics in Japan. After bottoming out just below 8,000, US infections have spiked up with the latest reading topping 26,000. However, the US dollar has not shown bullish interest toward the dollar as-a-result of the rising concern that another infection wave will trip up the US economy.
With the euro bouncing off its lows last week we suspect the significant oversold technical condition from the July washout has been balanced and a return down to 1.1800 is likely in the September contract. While German wholesale price readings for June on a year-over-year basis jumped sharply, German wholesale price readings for June on a month over month basis came in softer than the prior month thereby limiting inflation buying support for the euro. The Commitments of Traders report for the week ending July 6th showed Euro Non-Commercial & Non-Reportable traders are net long 120,733 contracts after net selling 13,833 contracts.
The Pound appears to have run into solid resistance at the 21-day moving average early this week and it feel back from that level last Friday. The reversal appears to negate the breakout above the June downtrend channel resistance line despite UK Prime Minister plans to remove all remaining Covid restrictions next week. Apparently, currency traders are fearful that a full opening up of the UK will result in a spike in the highly contagious Delta variant. With a technical bounce off last week’s lows seemingly stalling with a double high, the Canadian looks vulnerable to a resumption of the June and July downtrend. In the near term, the Canadian will not have critical scheduled data released, but the currency appears to have already lost upside momentum off the expectation of further asset purchase reductions by the Bank of Canada. In other words, the trade might see the reduction of asset purchases as premature.
With the S&P forging a new all-time high last Friday and managing the gains in the face of increasing concern over the Delta variant, it appears that investors are still willing to buy breaks. On the other hand, we are very concerned with the US equity market’s lack of significant upside action in the face of this week’s large decline in US treasury yields. However, big banks and big tech are under attack by Washington officials and that is certainly deterring some buying interest.
Global equity markets early this week were mixed with Asian/Pacific Rim stocks higher and the rest of the world generally lower. In looking ahead this week, the trade starts out with residual global economic slowing fears following the early July flow of soft data. However, a reserve rate requirement reduction in China and expectations that the ECB will implement fresh policies to attempt to revive inflation providing investors with some confidence. On the other hand, the equity markets are likely to shift their focus from low treasury yields to the beginning of a heavy flow of corporate earnings with the bull camp in need of fresh bullish fodder.
GOLD, SILVER & PLATINUM:
While the gold market has respected $1,800 in the early trade this week, the bull camp continues to lack a definitive bullish theme capable of “driving” prices sharply higher. In a slightly negative development, overnight stories of Indian sales of family gold heirlooms are predicted to push scrap sales above 215 tonnes this year, with reports of very heavy sales of gold in southern India in the face of severe financial pressures from the pandemic. All things considered, the rally in gold over the prior two weeks has been impressive with the market fighting against periodic strength in the dollar and a slight sprinkling of economic disappointment. On the other hand, interest rates in the same timeframe fell precipitously and in turn became the “focus” of the gold trade.
With palladium forging a 12-day rally of $433 and returning to a wide trading range forged between April and the present, it appears that the aggressive washout below $2,750 has been rejected. In fact, it appears that investment interest in palladium is expanding with a significant 8,575-ounce single day ETF holding inflow last Friday which is a single day gain of 0.2%. It should also be noted that on the week palladium holdings increased 3,369 ounces. However, the demand side of the equation in palladium remains disappointing, with US auto sales falling back in the most recent monthly readings, global economic data becoming mixed, and in-particular with Chinese economic activity seemingly losing momentum.
With a weaker start to the new trading week and 3 weeks of sideways chop around both sides of $4.25 it appears that September copper is destined for another temporary probe below $4.25 early this week. Apparently, the London copper market started the week out soft off fears that Chinese demand for copper was likely to soften along with the recent softening of Chinese economic data. On one hand, disjointed Chinese economic news (predictions of a sharp month over month decline in Chinese overall exports), Chinese lingering threats to deflate industrial material prices and the Delta variant issue should present fundamental resistance. On the other hand, Shanghai copper stocks have posted 8 weekly draws in a row and have reached the lowest since February of 2019.
The inability to hold a 3-day high followed by a quick setback to the vicinity of the 21-day moving average at $72.09 sets up a test of the bull case early this week. In retrospect, the $6 plus break in crude oil last week violated a-number-of key chart support levels and in turn dealt a psychological blow to the bull camp. However, in addition to another bullish weekly EIA crude oil stocks decline last week, the market is supported by news that Russian President Putin had no plans to talk to OPEC+ at present, there was a record US implied gasoline demand reading last week and the market is supported by news that crude oil in global floating storage remains 51% below year ago levels. In other supportive news, crude oil was able to recover in the face of slack US and Chinese economic readings and (so far) demand fears have not resurfaced in the face of surging US infection counts from the Delta variant. After bottoming out just under 8,000, the latest daily US infection count produced by the CDC showed over 26,000 infections! Going forward, further recovery action probably requires another decline in weekly US crude oil stocks, and that is likely considering that the US refinery operating rate is settling in above 92%.
Good rain amounts in dry areas of the Midwest over the past 7 days, plus more rain in the next 5 days has left the market in a short-term downtrend and soybeans fell 5% for the week last week. Late July and early August is the key weather period for determining soybean yield, so the market is unlikely to pull more of the weather premium out over the near term. For the USDA Supply/Demand report, traders see soybean yield near 50.6 bushels per acre, 50.0-50.8 range, as compared with 50.8 in the June report. Old crop ending stocks are expected to come in near 135 million bushels, 115-165 million range, as compared with 135 million bushels in the June update.
With hefty rain totals for much of the Midwest over the past seven days, and especially for South Dakota and southern Minnesota, plus the forecast for more rain in these areas over the next five days are bearish forces and contributed to the selloff to the lowest level since May 26 on Friday. Perhaps the warmer and drier trend in the 6-14 day models has helped support this morning. December corn closed 12% lower for the week last week. Last week, previously dry areas of Iowa, South Dakota, southern Minnesota and Wisconsin received good amounts of rainfall to ease dryness concerns, and there is another 1 to 2 inches expected for large parts of Minnesota, Iowa, Illinois, Wisconsin, Michigan and Indiana this week. The 8-14 day forecast models show above normal temperatures for the Dakotas, Minnesota and parts of Iowa, but mostly normal and even below normal temperatures for the southern and eastern parts of the Midwest. Below normal precipitation is expected for the entire Midwest.
If there are no bearish surprises for the USDA report, the extended forecast models still look threatening for the spring wheat crop and crop conditions look to deteriorate over the next two weeks. On the other hand, September wheat pushed down to the lowest level since April 5th and closed 5.8% lower on the week. For the supply/demand update, traders see wheat ending stocks near 724 million bushels, 572-809 million range, as compared with 770 million bushels from June. World ending stocks are expected to come in near 295.8 million tonnes, 292-300 million range, as compared with 296.8 million tonnes in June.
The USDA pork cutout released after the close Friday came in at $114.28, down $1.22 from Thursday and down from $114.30 the previous week. Cut-out values were near $65 last year and near $70 in 2019 at this time of the year so the very strong price this year may be difficult to hold into the fall as slaughter levels seasonally advance. Exports could also begin to ease for the rest of the year but for now, China demand remains strong.
The short-term trend remains down with August cattle moving to the lowest level since June 11 on Friday. Continued weakness in the beef market and sluggish trade for the cash market has kept sellers active. Beef prices are at the highest level ever for this time of the year, and this has traders nervous over continued sluggish retail demand. Dressed steer weights continue to trend lower in a period when weights typically push higher which is a positive. On the other hand, slaughter levels should seasonally advance in the weeks and months just ahead. For the week, August cattle finished with a loss of 277 points.
Cocoa was an exception to the second-quarter commodity rally in that it was weighed down by bearish supply/demand factors. With the market reaching an eight-month low last week, cocoa is well into “bargain” territory and may be ready to begin a longer-term recovery move. September cocoa broke out of it near-term consolidation to the upside and rallied sharply to finish Friday’s trading session with a sizable gain that broke a 6-session losing streak. For the week, September cocoa finished with a gain of 28 points (up 1.2%) which was a second positive weekly result for the past 3 weeks and was a positive weekly reversal from Thursday’s 8-month low.
After starting the month with a wide-sweeping outside-day down session, coffee prices appeared to found their footing late last week. Although their recent frost did not reach their major Arabica-growing regions, Brazil’s current crop will come in well below last season’s output total which should help to underpin coffee prices this week. September coffee continued to have trouble sustaining upside momentum as it finished Friday’s trading session with a moderate loss. For the week, September coffee finished with a loss of 1.65 cents (down 1.1%) which was a fifth negative weekly result over the past 6 weeks.
December cotton closed at its highest level since June 11th, but did not take out last Tuesday’s high. The dollar was weaker, and the Dollar Index closed at its lowest level since June 29, which was supportive to cotton. With the threat to the Texas crop diminished, the trade seems to be focused on demand issues, particularly export sales, which showed improvement on Friday. The market remains in a short-term uptrend in spite of the recent bearish weather developments.
Sugar prices finished last week on a 4-session losing streak as it fell more than 1.20 cents below a multi-year high on July 1st. If energy prices remain well supported during the third quarter, Brazil’s Center-South mills are likely to shift more of their crushing towards ethanol production. The Center-South cane crop has already dealt with dry conditions since last year, so this could lead to a very large drop in their sugar production from last year. October sugar was unable to shake off early pressure and remained on the defensive as it reached a new 1 1/2 week low before closing Friday’s trading session with a moderate loss. For the week, October sugar finished with a loss of 87 ticks (down 4.6%) which broke a 2-week winning streak.
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