We suspect part of the rally in treasury prices late last week was the result of the oversold status into month end with December bonds on the month following by roughly 11 points. As for the Fed’s favorite inflation measure (core personal consumption expenditures), the results were mixed with some components showing moderation and others remaining at elevated levels. Certainly, US personal spending came in stronger than expected, but market sentiment was shifted positive in the wake of subsequent soft data from Chicago purchasing managers and Michigan consumer sentiment! Despite rumors of an unfolding European bank crisis, US treasury prices this morning are trading only marginally higher.
In fact, with the UK government apparently reversing last week’s tax rate cut promise that should rekindle noted slowing fears in the UK. In fact, S&P cut the UK rating after the announcement to roll back tax cuts by reducing UK sovereign debt supply to “negative” from “stable”.
While the dollar initially managed to reject the spike down new low for the move last Friday, fresh chart damage and nondescript US scheduled data left the greenback off balance. However, despite last week’s reversal of trends throughout the currency markets, fundamentals remain bullish to the dollar and particularly bearish to the Pound and euro. In fact, the bounce in the Pound last week is likely a one-off reaction to the Bank of England surprise UK bond market intervention, and the bull camp can hardly expect a repeat of that action soon. While the dollar has not seen noted flight to quality buying from two potential earth-moving financial sector problems early this week, the trade has clearly moderated its entrenched and aggressive bullish view in place from February into last week’s high.
We see the downtrend in the euro remaining in place with recent gains off the lows largely the result of technical balancing and not economic change. Euro zone economic news confirmed weakening in the European economy with Spain, France, Germany, and the euro zone posting soft global manufacturing PMI readings for September. In general, Japanese Tankan manufacturing survey readings were disappointing for the 3rd quarter and that contributes bearish domestic forces in the Yen trade. With the BOJ last week increasing its intervention rhetoric and seeing fresh intervention threats from the Japanese Finance Minister today the trade will likely attack the Yen to “draw out” BOE action while the downside breakout is likely to extend this week.
The action in the equity markets in the early trade last Friday was impressive given a string of negative overnight corporate news stories. In addition to predictions of ongoing slowing in the global merger and acquisition market, the trade could have been undermined by negative Nike, Boeing, and Meta news. It is likely that the markets saw some fleeting support from month and quarter end short covering and from JP Morgan’s intentions to higher 2,000 engineers. Global equity markets at the start of this week were mostly lower with markets in Japan and Russia managing to buck the trend and post gains.
Like other sectors of the market, Dow futures remain aggressively net spec and fund short, with the trade adding to their bearish bets last week. Dow Jones $5 positioning in the Commitments of Traders for the week ending September 27th showed Non-Commercial & Non-Reportable traders added 4,584 contracts to their already short position and are now net short 20,427 contracts. We suspect the Dow will extend on the downside as financial sector stocks see liquidation from financial sector rumors and fear of increased energy cost pressures (crude oil futures up more than $4 early this week) as large companies remain sensitive to significant overhead.
With the NASDAQ futures failing at critical support at the start of this week in the wake of record Tesla deliveries (possible because of supply chain fears), the bull camp is not finding support from the tech sector. The Commitments of Traders report for the week ending September 27th showed Nasdaq Mini Non-Commercial & Non-Reportable traders were net short 22,022 contracts after increasing their already short position by 1,421 contracts.
GOLD, SILVER & PLATINUM:
A lack of significant reaction in gold to weekend rumors of financial trouble at a Swiss money center bank highlights the gold market’s inability to embrace classic flight to quality concerns. Some talking heads Monday morning wondered if the European banking system is threatened with a “Lehman-like moment” but if that were the case, the US dollar and US treasuries would be significantly higher. Apparently, the gold market shifted its focus at the end of last week toward a slight decline in US treasury yields, and that combined with a new low for the move in the dollar last week gives gold and silver a slightly positive outside market bias to start the new trading week. In a very minimal demand benefit, the Indian government reduced the gold and silver import prices subject to importer taxes and perhaps some of that discounting will be passed on to consumers.
While we lack a definitive opinion on palladium with the market last week swinging wildly with a range of $240, pushed into the market, we are a seller with prices high in the last two months range. The most recent positioning report showed Palladium maintaining a net spec and fund short which is likely a combination of residual bearishness by investors and those fearing recession.
With weeklong holidays in China potentially sapping the market of bargain-hunting buying and ongoing global recession fear, the bull camp was fortunate to see news last week that Chilean August copper output declined by 9.4% over year ago levels. It should also be noted that Shanghai copper warehouse stocks fell by 6,438 tonnes or 17.4% in a single week. The markets also saw cash market estimates of a decline in available physical copper inside China of 10,000 tonnes on the week. Limiting the copper market on the upside are comments from Goldman last week discounting the potential of the situation in Russia creating significant tightness in the global copper and nickel markets.
We expect volatility in crude oil to extend into the new trading week, with fears of demand destruction periodically surfacing in the face of the potential for OPEC+ to reduce output by one million barrels per day. The bullish reaction in prices early this week is likely the result of trade talk that the OPEC+ production cut could exceed 1 million barrel per day level. However, OPEC+ members have been unable to produce to their production ceilings, and therefore a reduction in allowable output will be easily complied with. Adding into the bull case at the start of this week is a 17% week over week decline in global crude oil floating storage. In an under the radar bullish development the trade has been presented with signs of significant cutbacks in Russian oil exports with Russian Arctic exports falling to a 9-month low (that could be seasonal) and reports that Russian Pacific shipments have reached multiyear lows.
While the diesel market continues to show the most vulnerable action of the complex, traders should fear a sudden Russian hold back of diesel exports as the Russian president is clearly tightening the screws on Europe with his shutdown of natural gas flow.
In our opinion, the natural gas market will continue to correct off weakening shoulder season demand, record US gas production, and from reports that Russian gas flows remain steady at the start of this week. We also see thickening resistance in US gas prices following a larger than anticipated EIA working gas in storage injection reading last week and from the likelihood that gas supply in the US backed up because of the hurricane last week. However, with the Nord Stream 1 pipeline shuttered before the explosions hit other pipeline sections last week, and the Russian national gas company seemingly poised to break off business relations with the only major remaining Russia to Europe pipeline (through Ukraine), it certainly appears Putin is using energy as a military weapon.
While a bit oversold technically, the close below 1372 1/2 for November soybeans is a bearish development. While the USDA news was bullish for corn and wheat, the news for the soybean market was bearish. Strength in the other grains might help support soybeans temporarily. November soybeans closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since August 4. A bearish USDA update plus good harvest weather ahead helped to pressure. The Quarterly Grain Stocks report showed US soybean stocks at 274 million bushels on September 1, above the average expectation of 243 million and near the upper end of expectations from 215 to 275 million.
December corn closed higher on the session last Friday but nearly 20 cents off of the highs of the day which came in after the USDA stocks report. The report showed US September 1 corn stocks at 1.377 billion bushels versus an average expectation of 1.495 billion (range 1.095-1.633 billion). This was down from the 1.525 billion forecasted in the September USDA supply/demand report (2021/22 ending stocks) and up from 1.235 billion on September 1, 2021. The report news was bullish for the corn market, with 2022/23 beginning stocks coming in 148 million bushels below the USDA estimate from the supply/demand report earlier this month. Looking at the supply/demand outlook for 2022/23, we lowered the beginning stocks figure and left the other data unchanged from the September USDA report. The lower stocks suggest that usage might be higher than the current USDA forecast.
The USDA report news was bullish and the wheat market seems to have more upside potential over the near-term. December wheat closed sharply higher on the session Friday and the buying pushed the market up to the highest level since July 11. Bullish data from the USDA and continued escalation of Black Sea war issues helped to support. US September 1 wheat stocks came in at 1.776 billion bushels versus an average expectation of 1.793 billion (range 1.663-1.950 billion) and 1.774 billion on September 1, 2021.
The short-term cash fundamental news remains bearish with the steep decline in pork cutout values seen recently. However, the market is oversold technically and is still holding a much wider discount to the cash market than normal. The USDA pork cutout, released after the close Friday, came in at $95.96, down $1.29 from Thursday and down from $100.05 the previous week. This was the lowest the cutout had been since February 8. December hogs closed moderately higher on the session Friday with a quiet inside trading day. December hogs are trading at a massive discount to the cash market and the USDA report was bullish. Hog numbers are well below expectations and below the low-end of trader expectations. This was the ninth consecutive quarter of year over year declines in hog supply. Hogs held for slaughter are down 1.5% from year ago.
While the cattle market put in a sweeping reversal on Thursday, which suggested that a short-term low might be in place, a continued sharp decline in beef prices and a jump in weights remain as bearish short-term factors. Beef prices are down to the lowest level since March 29 of 2021. December cattle closed moderately lower on the session Friday after an early rally to a four session peak failed to attract new buyers. Open interest remains in a downtrend on the break which suggests long liquidation selling.
Cocoa’s near-term demand concerns will remain a front and center issues for the market as long as high inflation levels and sluggish global risk sentiment dominate news headlines. Cocoa’s late-September rebound of 158 points from Monday’s 26-month low has been fueled largely by bullish supply developments that can help the market see upside follow-through early this week. December cocoa continued to build on early strength as it reached a 1 1/2 week high before finishing Friday’s trading session with a moderate gain. For the week, December cocoa finished with a gain of 107 points (up 4.8%) which was the first positive weekly result in 4 weeks as well as a positive weekly key reversal.
Coffee’s volatile price action during late September was unable to prevent the market from posting a second positive weekly result in a row. While the out-of-home demand outlook may be weakened by sluggish global risk sentiment, coffee continues to have bullish supply factors that can support prices early in the fourth quarter. December coffee was unable to shake off early pressure as it finished Friday’s trading session with a sizable loss. For the week, however, December coffee finished with a gain of 1.10 cents (up 0.5%).
Global recessionary fears have been the key factor to drive the cotton market sharply lower over the past month, down about 26%. While the market fell to the lowest level since July 15 on Friday, open interest continues to advance and reached the highest level since April 13. Higher interest rates are likely to reduce consumers spending on apparel, while recent strength in the US dollar could curb the global appetite for US exports. The higher close Friday after making the new low from an extremely oversold condition might be a sign that at least a temporary technical recovery bounce may be in order. South and North Carolina produce about 7% of US cotton.
While it has avoided a sharp downside move since late July, sugar has had trouble sustaining any recovery move since reaching a 2022 high in April as it held in a tight range from mid-August to mid-September and seen coiling action over the past two weeks. Recent supply news has been bearish and outside market action has been negative. This could be setting sugar up for another downside move. March sugar was unable to sustain upside momentum yet again as it finished Friday’s outside-day session with a mild loss. For the week, however, March sugar finished with a gain of 4 ticks (up 0.2%) which was a second positive weekly result in a row.
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