In retrospect, the treasury bond market deserved a significant short covering rally late last week after what we think was a new record net spec and fund short positioning at last week’s low. Clearly, negative psychology thrown off by equities, ongoing problems with the passage of the stimulus package and a distinct reversal of reflationary commodity price action were justification for the bounce in treasury prices to end the trading week. In retrospect, the treasury market deserved a short covering bounce, with the net spec and fund short in bonds, adjusted into the Friday low, likely nearing record short positioning.
The dollar index exploded late last week primarily off rising US treasury yields, but that impact is likely to diminish over this coming week unless there is a surge of euphoria associated with market expectations that the pandemic is winding down. With a fresh higher high for the move to start the trading week, it appears as if the dollar remains in vogue and the expectation of even higher US yields remains in place despite a general risk on environment. Surprisingly, better-than-expected European and UK PMI data did not undermine the dollar but that premise could be tested again later this morning in the wake of US manufacturing PMI results.
While we will not discount the potential for further declines in equity prices this week off fears of rotation from equities to treasuries, we do not expect a sustained anxiety event. In fact, seeing a very strong recovery in the NASDAQ late last week combined with the authorization of the Johnson & Johnson vaccine over the weekend could present the market with renewed buying interest. Global equity markets were all higher with the market in Tokyo posting gains in excess of 2%.
GOLD, SILVER & PLATINUM:
While the gold and silver markets traded higher to start out the week, a portion of that strength was likely a technical balancing move from last Friday’s significant washout in prices. However, US treasury yields have declined with a bounce in bond prices of nearly 5 points. On the other hand, the dollar forged another higher high for the move and is now trading at the highest level since February 8th and therefore the currency impact on precious metal prices continues to be limiting. However, there is a definitive risk on vibe flowing from global equity markets, the House passed a stimulus package and forwarded the package to the Senate, where it is expected to proceed slowly with eventual reconciliation. Unfortunately for the bull camp gold ETF’s last Friday reduced their holdings for a 10th straight session, extending the longest daily outflow streak since December 7th and bringing this year’s net liquidation of holdings up to 2.5 million ounces. Last week gold ETF’s reduced their holdings by 1.3 million ounces while silver holdings (despite an outflow of 581,089 ounces on Friday) increased their holdings by 1.9 million ounces.
Like many other physical commodity markets, the copper market has managed to “bounce” following last week’s reversal of reflation sentiment. Unfortunately for the bull camp, Chinese manufacturing data for February was disappointing in several measures released early this week and that undermines Chinese copper demand expectations. However, some indirect support for copper could be seen following an upward revision in aluminum price forecasts from Goldman as they see a tightening market with a looming global deficit which in turn gives additional credence to forecasts for a global copper deficit.
With a significant range down failure at the end of last week, a noted tempering of reflation views, noted strength in the dollar and US production conditions normalizing, the bear camp enters the new week with some confidence. However, a return to risk on sentiment brought on by favorable stimulus and vaccine news has caused some sellers to cover positions early this week. Unfortunately for the bull camp, we see a significant bearish threat to prices flowing from the likelihood that Russia will push OPEC plus aggressively later this week for further loosening of production restraint. One could suggest that the surprise and significant production setback in the US from the cold snap, provides OPEC plus with some cover to return more production.
A more positive tilt to outside market forces plus a much drier forecast for the next two weeks for Argentina are factors which may have supported solid gains at the start of this week. Traders also see the slower pace of the Brazilian harvest as a reason to suspect some better demand from other exporters for soybeans. AgRural sees Brazil’s soybean harvest at 25% complete as of Feb. 25th from 15% a week earlier, and 40% in the previous year. The pace is still the slowest since 2011. The market seems to have the supply/demand fundamentals for a continued strong uptrend, but increased harvest activity out of Brazil and the lack of new export business from the US Gulf are factors which have contributed to the selloff. May soybeans are still operating under the negative technical influence of the February 25 key reversal. There is little rain in the new 2-week forecast for Argentina which may provide some support and too much rain for the Brazilian crop could also cause some quality issues for the harvest. On Friday, Chinese meal prices fell 5% for the biggest decline in eight years. There are increase concerns for the possibility that African swine fever slows the expansion of pork in China.
The drier forecast for Argentina is positive but strength in the US dollar and some continued fears of China’s pig herd has pressured. AgRural sees Brazil corn plantings at 39% complete as of Feb. 25th from 24% a week earlier, and 67% the previous year. Outside market forces were bearish on Friday. The sharp selloff in crude oil and a rally in the US dollar were seen as bearish forces. December corn closed lower on the session Friday and experienced follow through selling from Thursday’s key reversal, but the close was well up from the lows. With managed money fund traders holding a net long position of 361,151 contracts, it will not take much in the way of bearish outside market forces or demand concerns to spark a corrective break. Traders view slow ethanol production and the possibility that large production out of South America will move to the market soon as factors that could spark more selling. The Brazilian currency has fallen to a new 2 1/2 month low, and this could make Brazilian producers more aggressive in marketing corn to foreign customers.
The wheat market seems to have turned back lower as the slow exports and rain in the forecast this week for Kansas and Oklahoma plus bearish outside market influences are seen as negative forces. While there is still no Chicago wheat deliveries after two sessions, Kansas City wheat deliveries reached 1,288 contracts, and this pushed the month-to-date total to 1,377 contracts. May wheat opened slightly lower on Friday and closed sharply lower on the session. A surge higher in the US dollar plus weakness in the other grains helped trigger selling pressure. Many commodity markets experienced long liquidation selling, and wheat does not seem to have the supply fundamentals for an extended move higher.
With the market holding an extreme overbought condition, and with April hogs holding a huge premium to the cash market, a minor profit-taking selloff on Friday turned into a major drop of 2.9%. Pork cutout values pulled back as well on Friday and the premium of futures to the cash market narrowed significantly. April hogs open steady on the day and closed sharply lower. The market is extremely overbought technically, and outside market forces weighed on the market. The strong US dollar plus the large premium of futures to the cash market helped to pressure as well. The USDA pork cutout released after the close Friday came in at $92.06, down $2.01 from $94.07 on Thursday but up from $90.14 the previous week. The CME Lean Hog Index as of February 24 was 79.95, up from 79.12 the previous session and 77.20 the previous week. The USDA estimated hog slaughter came in at 488,000 head Friday and 174,000 head for Saturday.
With the market in a short-term oversold condition, and with vaccine news supportive to a more aggressive reopening of the economy this spring, the market may find some short-term demand support. However, the market will also need to absorb last week’s big beef production which was up 7.8% from a year ago. A long liquidation selling mode was noted in the commitments of traders report. April cattle closed sharply lower on the session Friday after a slightly lower opening. Bearish outside market forces and further long liquidation selling are factors which helped to pressure. The selling pushed the market down to the lowest level since January 22. The USDA estimated cattle slaughter came in at 119,000 head Friday and 64,000 head for Saturday. This brought the total for last week to 666,000 head, up from 552,000 the previous week and up 6.1% from last year. With the higher weights, beef production last week was up 7.8% from last year.
While cocoa’s updraft ran out of steam going into the weekend, the market will finish the week and month well above its December/February consolidation zone. As global demand prospects continue to improve, cocoa prices may head towards a retest of their late November highs. May cocoa was able to bounce back from early pressure, but could not hold its ground in positive territory as they finished Friday’s inside-day trading session with a modest loss. For the week, however, May cocoa finished with a gain of 161 points (up 6.6%) which broke a 4-week losing streak while the market posted its first positive monthly result since November.
While coffee saw choppy price action over the last 3 sessions of February, it will start out March above its early September high and at the highest price levels since the start of 2020. Although global risk sentiment may remain subdued, coffee has a positive global demand outlook that can help to underpin prices early this week. May coffee fell victim to end-of-month profit-taking and long liquidation as it finished Friday’s trading session with a sizable loss. For the week, however, May coffee finished with a gain of 8.35 cents (up 6.5%) and a third positive weekly result over the past 4 weeks.
The sweeping reversal from an extreme overbought level on Thursday leaves cotton’s short-term trend down, and other industrial commodity markets last week also experienced aggressive selling. May cotton gapped lower on Friday and continued the selloff from Thursday. It did manage a significant bounce off its lows of the day, but it still closed lower and never made it back to unchanged. This action was similar to what was seen in the corn and soy markets. Outside markets recovered early this week and the cotton market traded sharply higher. The dollar was sharply higher, which is negative to export markets like cotton, and the stock market was lower, which is also negative for cotton. Still, May cotton ended the month with a gain up 6.99 cents for a gain of 8.5%.
While sugar has a bullish supply/demand outlook, its key outside markets finished the month on a downbeat note. As a result, sugar may be vulnerable to further downside action before prices find their footing. May sugar followed-through on Thursday’s outside-day down session as it fell to a new 1-week low before finishing Friday’s trading session with a sizable loss. While sugar was able to extend its streak to a tenth positive monthly results in a row, May sugar finished the week with a loss of 44 ticks (down 2.6%) which was a second negative weekly result over the past 3 weeks and a negative weekly key reversal.
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