Apparently, the primary focus of the treasury market is on Fed dialogue regarding their patience with inflation, but the bull camp was also assisted late last week by disappointing US retail sales and Michigan consumer sentiment readings. Just as is the case in the equity markets the treasury markets see the current condition as a “Goldilocks” environment where inflation and growth evidence will not easily boost rates. While treasury prices have forged 4-day highs to start the trading week, yields of euro zone bonds are fresh off multi month highs and both the US and Europe are moving back toward full reopening.
After holding near the 91.00 level for 48 hours the dollar index gave way and violated a series of key chart support levels late last week. With the dollar earlier last week lifted directly from a historically hot US PPI report, last Friday’s sharp setback was justified by the Fed’s insistence that inflation will be transitory. Furthermore, with equities throwing off optimism, money is likely to move to riskier currencies like the Swiss franc and euro.
With the dollar showing signs of resuming last week’s downside reversal, the 4-day high in the euro early this week was not surprising. Underpinning the euro is a measure of inflation from Italian CPI for April and from periodic evidence of the unwinding of activity restrictions throughout Europe. We do not detect a definitive risk on environment early this week and therefore the early gains in the euro might need to be confirmed by gains in US equities. Near term Euro positioning in the Commitments of Traders for the week ending May 11th showed Non-Commercial & Non-Reportable traders added 25,395 contracts to their already long position and are now net long 164,466.
While not a “perfect” storm, the equity market thinks US interest rates are going to hold at low levels and the economy will be allowed to gain significant momentum before the Fed removes the punch bowl. Therefore, it was not surprising to see stocks rally late last week in the face of disappointing scheduled data with the markets also benefiting from momentum-based buying following the key reversal yesterday. Global equity markets were mixed at the start of this week with Asian markets generally higher and European stocks trading weaker.
GOLD, SILVER & PLATINUM:
Gold and silver prices started the new week out firm with gold forging an upside breakout and climbing toward its 200-day moving average up at $1,862.90. While Chinese retail sales readings were a little disappointing, there was news that April Chinese crude steel output hit a record and signs of inflation are popping up throughout Chinese manufacturing industries, and therefore the markets start the week out with inflation news. While the dollar is not notably lower it appears to have extended its downward track from last week and that bullish outside market force is amplified by slight declines in US treasury yields. However, demand news from India is as negative as feared as Indian jewelers have apparently stopped buying and that softness in demand is verified as the Indian gold price discount has widened to $3.00 versus only $2.00 for ounce last week.
Last week, palladium ETF holdings increased by 7,900 ounces while platinum ETF holdings increased by 22,626 ounces. While the palladium market last week saw a low to high dive of $202, the market saw trading volume fall off on the washout suggesting long profit taking instead of fresh short selling. From a positioning perspective, the net spec and fund long in palladium is relatively benign but considering the relatively small amount of trading volume and open interest in the market, there is an undertone of rich pricing. However, extremely strong Chinese auto sales data, a rapid opening up of the US economy and reduction of restrictions in Europe should help underpin prices well above last week’s lows. Those looking to get long probably need to use stop prices below $2,797. The May 11th Commitments of Traders report showed Palladium Managed Money traders net sold 317 contracts and are now net long 4,111 contracts. Non-Commercial & Non-Reportable traders were net long 3,681 contracts after decreasing their long position by 197 contracts.
Despite signs that China is growing irritated with surging material prices and have threatened to restrict production to thwart speculators, steel prices posted record levels on record production. While Chinese retail sales were disappointing, Chinese April industrial output increased by 9.8% relative to estimates of 10% and that report provides fodder for ongoing strong Chinese copper demand. Another supportive development that has failed to support copper prices is news that workers in Chile have voted to reject a contract offer from BHP, which in turn increases the threat of a Chilean supply disruption. In our opinion, the inability to get a wage deal will result in an arbitration period that might not disrupt production immediately.
With the gasoline market flaring aggressively on the upside and crude oil forging minimal gains, it is clear that the focus of the energy complex is the Colonial product pipeline shutdown. Apparently, analyst suggest that widespread fuel shortages in the US could be seen if the pipeline remains shut for 4 to 5 days. Another supportive development for US crude is a report that significant amounts of crude is moving towards Europe with the recent slide in the dollar potentially giving US exporters a slight price edge. However, India appears to be moving toward a nationwide lockdown and that could make the demand loss from India even more severe than was expected. Fortunately for the bull camp, the US crude oil supply deficit to year ago figures leaves supply generally tight, especially considering that recent US export data has been very strong.
July soybeans closed sharply higher on the session Friday and into new contract highs, reaching a peak of 1599 1/2 and trading up to the highest level since October 2012. November soybeans also closed sharply higher on the day and posted new contract highs for the second session in a row. With the continued strong advance in corn, buyers turned active for meal and July meal pushed up to the highest level since January 20. Palm oil stockpiles in Malaysia rose 7.1% to 1.55 million tonnes in April from a month earlier. Weather and profitability are the key factors that affect planting decisions between late winter up until the crops are in the ground. The largest increase in soybean plantings was in 2014 with a gain of 3.346 million acres. May 2014 Soybeans rallied from $12.50 in early February to $15.32 by the end of April, significantly increasing the incentive to plant beans.
The corn market closed sharply higher on the session Friday and closed higher each day last this week to reach the highest level since March of 2013. Dryness in Brazil is bringing the crop size down every day that it does not rain. There is talk that the Brazil crop could fall to as low as 85 million tonnes, or down 24 million from the last USDA estimate, if there is no rain for the rest of the month. This seems unlikely but Brazil has entered the dry season and it cannot be ruled out.
The wheat market remains in a short-term downtrend and the weather forecast for the next two weeks would suggest improving crop conditions for many weeks ahead. The USDA report last week showed a hefty global supply, and the market seems to lack a major weather problem for key exporting countries. Traders continue to monitor the situation in the northern Plains, but there is rain in the forecast and there has also been talk of some issues in the Black Sea region, but nothing too serious. July wheat closed higher on the session Friday but well off of the early highs with an inside trading day. The market closed 54 1/2 cents lower on the week (down 7.1%) as improving weather which points to improving crop conditions in the US helped to pressure. A decent recovery for European milling wheat futures helped to provide some support.
June hogs remain in a short-term downtrend and closed sharply lower on the session Friday and this left the market down near 435 points (down 3.8%) for last week. The selling pushed the market down to the lowest level since April 30. Short-term cash news still carries a positive tilt, but traders remain concerned over the possibility of a taper-off for China pork demand as their pork supply grows.
June cattle closed down 82 points for the week last week. The market tested the $115 level but found support as traders see the strong trend in the beef market and the discount to the cash market as positive forces. The USDA boxed beef cutout was down 64 cents at mid-session Friday but closed 16 cents higher at $316.94. This was up from $305.88 the previous week and was the highest the cutout had been since June 2. Some areas of the country saw firm cash live cattle trade on Friday in moderate volume, in line with the trend for the week.
Cocoa was unable to shake off a volatile trading pattern last week as the ebb and flow of key outside markets have kept near-term demand concerns in a front and center position. The longer-term demand outlook remains positive, however, and there have been some bullish supply-side developments that can help cocoa remain fairly well supported on near-term pullbacks this week. July cocoa followed through on Thursday’s negative daily reversal as it was unable to overcome early pressure as it finished Friday’s trading session with a moderate loss. For the week, however, July cocoa finished with a gain of 11 points which was a second positive weekly result in a row.
Since reaching a contract high during the first week of May, July coffee has only had 1 positive daily result over the past 6 sessions and lost more than 10 cents (down 6.7%) in value. Although near-term European demand concerns have weighed on the market, coffee continues to have a bullish global supply outlook that can help the market find its footing this week. July coffee held its ground above Thursday’s 1-week low, but could not sustain a recovery move as it finished Friday’s inside-day trading session with a moderate loss. For the week, July coffee finished with a loss of 7.90 cents (down 5.2%) which broke a five week winning streak.
Rain coming to west Texas has turned the outlook for cotton bearish and has sparked some heavy long liquidation. After almost a year of dry conditions, the unirrigated regions of west Texas are finally starting to see chances of substantial rainfall. During the 24-hour period ending Sunday at 6:00 AM, Lubbock saw as much as 1.5 inches and over the last seven days, most of the region has seen anywhere from 0.5 to 2 inches. However, more is needed to restore soil moisture to normal levels.
Sugar’s Wednesday/Friday downdraft has taken prices more than 1.2 cents (down 7%) below their contract highs as bearish demand developments rattled an overbought market. While these demand-side issues may be a source of headwinds, sugar has bullish supply factor that can help prices find their footing early this week. July sugar rallied sharply during the first 30 minutes of trading, and then fell back on the defensive for the rest of the day as it finished Friday’s trading session with a moderate loss. For the week, July sugar finished with a loss of 53 ticks (down 3.0%), which broke a five week winning streak and was a negative weekly key reversal.
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