With a fresh contract low in June bonds and notes late last week, the pre-existing downtrend has extended beyond the nonfarm payroll report. We saw the report as mixed with the headline nonfarm payroll reading coming in stronger than expected and exactly on the prior month after a revision. Disappointment in the report came from a steady unemployment rate of 3.6% and declines in both average weekly hours and average hourly earnings. While some traders suggested the washout last week was overdone, a major historical adjustment is underway and may override short-term technical signals.
After a fresh contract high in the dollar, it initially rallied off of the latest US jobs report, but ultimately failed. We see last Friday’s action in the currency markets as pure technical balancing of pre-existing trends. However, the nonfarm payroll report probably did not raise prospects of a 75-basis point hike next month thereby prompting some longs to bank profits. With a 20 year high in the dollar index early this week, the uptrend in the dollar index lives on from rising US yields, and confidence that the US Fed will eventually halt the drag from surging rates before the US economy tips back into negative growth. On the other hand, we see very little confidence toward the euro zone and Chinese economies and therefore the dollar should continue to see flight to quality and economic uncertainty buying. The Commitments of Traders report for the week ending May 3rd showed Dollar Non-Commercial & Non-Reportable traders net sold 903 contracts and are now net long 35,670 contracts.
Surprisingly, the euro remained within the recent consolidation despite the range up action in the US dollar, we expect the euro to breakout down with the failure level on the charts at 1.0498. In fact, negative German economic data last week, a significant decline in a euro zone Sentix investor confidence reading and slightly disappointing French trade data fundamentals are not signaling an impending low.
With the dollar posting a 20-year high early this week, the fresh downside breakout in the Yen is a knee-jerk reaction and a fully justified fundamental reaction. The trade continues to have little respect for the near-term future of the Japanese economy and given rising JGB yields, the prospect of Japanese stagflation is building. In fact, the Bank of Japan continues to be steadfast in their decision to leave easing policy in place. Similarly, to the other actively traded nondollar currencies, the Swiss franc continues in a freefall with next support at parity of 1.00. As indicated last week, picking a low in the Swiss franc is like attempting to catch a falling knife.
While extreme volatility is not unusual in the equity markets, seeing a full week of wild gyrations serves to undermine investor sentiment. In retrospect, last week’s flow of earnings reports did not sure up confidence in the market and instead the rate hike dominated. Certainly, inflation fears could be tamped down by the declines in average hourly earnings and average weekly hours in April. Going forward, the bull case lacks a bullish fundamental capable of shifting the trend up. Global equities early this week were lower with the weight of last week’s US rate hike remaining on the back of the markets. With the added disappointment of slack Chinese import and export data, the highest treasury yields since 2014, the war, perpetual fears of higher interest rates and a measure of US slowing fears, the bear camp has a full quiver early this week.
Not surprising, the Dow futures broke out to the downside and traded at the lowest level since March 8th. Therefore, the trade continues to aggressively embrace the negatives and are discounting the few positives in place.
GOLD, SILVER & PLATINUM:
Clearly, the bottom has fallen out of physical commodities at the start of this week with gold forging a 3-day low. There was another fresh contract high (20 year high) in the US dollar, undying fear of higher rates, fear of slowing and most importantly, an ongoing inability to embrace geopolitical flight to quality developments which left the bull camp in distress. With palladium, platinum, and wheat the only physical commodities avoiding the broad-based washout, more downside is expected in gold and silver. Investors in gold remain cool to the yellow metal with ETF holdings last week declining by 383,632 ounces bringing year-to-date gains in ETF holdings down to 8.6%.
With the fresh low for the move in July silver, an unrelenting dollar rally, sagging global economic confidence and a strong enough US nonfarm payroll report to leave expectations of a 50-basis point rate hike next month in play. Silver ETF holdings last week increased by 494,901 ounces and are now 1.9% higher year-to-date.
With a massive range down failure to the lowest trade since January 20th last Friday, the June palladium market might have pushed its net spec and fund short closer to the record short of 4,084 contracts. The May 3rd Commitments of Traders report showed Palladium Managed Money traders are net short 701 contracts after net selling 118 contracts. While the July platinum contract failed at critical support, the market rejected a large part of a massive range down failure.
Adding into the big picture macroeconomic pressure on copper early this week is a 4% decline in Chinese April copper imports. However, January through April Chinese copper concentrate and ore imports were up 4.5% while January through April unwrought concentrate and ore imports increased by 0.9%. Nonetheless, Chinese copper demand fears are likely to remain in place as the zero tolerance Covid policy remains in place with only modest signs of hope flowing from Shanghai. Despite the copper market managing to throw off the initial wave of selling early last week, the market ran out of short covering fuel quickly and buyers were not interested in paying for July copper above $4.30.
With big picture macroeconomic slowing fears, a lack of loosening of activity restrictions in China, a 20-year high in the dollar index an upside breakout in US yields, and overall global psychology deflating with equity prices, energy demand fears are clearly justified. However, crude oil demand fear from China may be overstated with Chinese oil imports in April up 6.6% on a year over year basis. On the other hand, the trade is concerned about Chinese fuel demand. Even though Indian March crude oil imports increased by 4.2% over year ago levels, and India has indicated fuel prices are a severe drag on their economic activity. Fortunately for the bull camp, supply forces remain supportive with more Russian oil buyers stepping away from Russian supply in the face of huge Russian discounts.
While the gasoline market has lagged the ULSD market consistently over the past several months, the market came alive and became the leadership market last week. Furthermore, the gasoline market overnight managed another higher high for the move before falling back from ongoing concern toward fuel demand from the two largest countries in the world (China and India). We suspect support is the result of seasonal marketing chain buying for the coming summer, international arbitrage opportunities and a refinery operating rate of only 88% as that is likely to keep US gasoline supplies in a tightening pattern. In fact, EIA gasoline stocks have contracted for 6 weeks in a row and current stocks are 11 million barrels below the 5-year average for this specific week of the year.
Obviously, the massive reversal range down in July natural gas from its high last Friday (a high to low daily range of $1.00) puts the bull camp back on its heels to start the new trading week. The bear camp should also be emboldened by news that the Russian national gas company (Gazprom) continued to book transit of gas through Ukraine with several days of interrupted flow now on the books! Furthermore, with heating demand in the northern hemisphere falling consistently and European entities quickly filling all storage capacity available, the added gas flow into Poland is a negative for US gas futures prices.
July soybeans traded sharply lower on the session Friday and the selling pushed the market down to the lowest level since April 7. Bearish outside market forces plus a second day in a row of sharp losses for Malaysia palm oil were seen as negative forces. In addition, traders see better weather for planting ahead which added to the bearish tone. July soybeans closed 62 3/4 cents lower for the week. China April soybean imports reached 8.079 million tonnes, according to customs. Soybean imports year-to-date fell 0.8% y/y to 28.36 million tonnes. July soybean meal remained in a long liquidation selling trend and pushed down to the lowest level since January 31.
The shift in the weather forecast for the Midwest helped to spark aggressive long liquidation selling late last week with July corn losing 28 3/4 for the week. The 1-5 day forecast models show hefty rain totals for the Dakotas and Minnesota, but less than 1/2 an inch for Iowa while most of the rest of the Midwest looks dry. The 6-10 day forecast models shifted overnight to show normal temperatures; not much above. The 8-14 day is cool, but dry. July corn closed sharply lower on the session Friday as a forecast for much warmer weather this week helped to bring about ideas that planting progress will be more significant just ahead.
The selling pushed the market down to the lowest level since April 14.
Longer-term yield concerns for the US crop with some weather forecasters indicating a hotter and drier longer-term trend for the US weather, plus increase concerns for the crop in France due to hot and dry weather helped support last week. Weakness in the other grains helped to pull the market lower early Friday, but buyers turned active. July wheat closed slightly higher and managed to hold minor support and closed up 20 3/4 cents from the lows of the day and up 52 3/4 for the week. The 1-5 day forecast models show 1 to 2 inches of rain for parts of the Dakotas and Minnesota. Kansas and Oklahoma look mostly dry.
June hogs closed sharply lower on the session Friday as the 2-day rally failed to attract new buying interest. Traders remain concerned with the sluggish demand tone, and the lack of an uptrend in the cash market during a seasonally strong timeframe has helped pressure. The CME Lean Hog Index as of May 4 was 100.96, down from 101.04 from the previous session and 101.81 the previous week. The USDA estimated hog slaughter came in at 457,000 head Friday and 48,000 head for Saturday. This brought the total for last week to 2.427 million head, up from 2.389 million the previous week and 2.396 million a year ago. Estimated US pork production last week was 525.2 million pounds, up from 518.7 million the previous week but down from 526.4 a year ago.
While June cattle continue to hold a stiff discount to the cash market, short-term demand fundamentals still look negative and weights remain stubbornly high. As a result, if producers make a move to clean up any backlog of heavier weight cattle, there could be a short-term bulge in beef production. In addition, traders see demand as a negative force as consumers are left with very high food and energy prices, and excess spendable income on luxury items such as steak is limited. June cattle closed sharply lower on the session last Friday as sluggish beef market during the period of typically higher seasonal beef demand is a concern. The USDA boxed beef cutout was down 48 cents at mid-session Friday and closed 74 cents lower at $254.44. This was down from $260.78 the previous week and was the lowest the cutout had been since March 10. Not much change in cash cattle prices last week from the week before.
Cocoa’s downdraft has taken the market down to its lowest price level since mid-December. Although it has fallen well into “bargain” price territory, cocoa still has to face near-term demand concerns that may keep the market on the defensive early this week. July cocoa was unable to shake off early pressure and fell to a 4 1/2 month low before finishing Friday’s trading session with a moderate loss. For the week, July cocoa finished with a loss of 75 points (down 2.9%) which was a third negative weekly result over the past 4 weeks as well as an outside-week down.
Coffee prices have been unable to sustain upside momentum in over a month and are on the verge of falling to their lowest levels since early November. While the supply side of the Arabica market remains generally bullish due to production issues in Brazil and Colombia, coffee needs to see clear improvement in near-term demand prospects in order to extend a recovery move. July coffee followed through on Thursday’s outside-day down session as it reached a 7-week low before finishing Friday’s trading session with a heavy loss.
July cotton closed sharply lower for the second day in a row last Friday after trading to the lowest level since April 27. The market has gotten increasingly volatile as it has repeatedly made new contract highs. Another steep selloff in the equity market and a higher dollar raised concerns about demand. The 1-5-day forecast calls for rainfall of up to 1/4 inch in west Texas, which is an improvement from yesterday’s forecast.
However, the 6-10 and 8-14-day forecasts call for below normal chances of rain and above normal temperatures, which could only make the drought situation worse.
Sugar’s abrupt week-ending turnaround has lifted prices well above last week’s lows. While strength in key outside markets should provide a source of support, sugar may need to also see bullish supply-side news in order to extend a recovery move. July sugar was able to shake off early pressure and rally to a 1-week high before finishing Friday’s outside-day session with a sizable gain. For the week, July sugar finished with a gain of just 1 tick, but that broke a 3-week losing streak and also resulted in a positive weekly reversal from last Wednesday’s 7-week low.
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