The Treasury bond market fell precipitously late last week in a fashion that suggests some type of major shift in psychology has taken place. In fact, the initial slide yesterday was forged despite softer than expected jobs readings and today’s slide is being forged without the benefit of critical US economic data. Perhaps the markets are buckling under the weight of comments from the Fed’s Mester and George that they favored November tapering. In our opinion, the market was not anticipating a November taper but instead was expecting the Fed to announce tapering in their December meeting. It should be noted that there is not a scheduled FOMC meeting in November!
Surprisingly, significant anti-capitalist/consolidation of power in China has not resulted in a significant jump in foreign buying of US treasuries. While the US durable goods reading early this week does not appear to offer up a significant reading, it is expected to post a gain that might add “minimally” to the early downward bias in bond and note prices. However, there will be several Fed speeches early this week with the Fed’s Mester already indicating she thinks the bar has been met to begin tapering. Some analysts and traders think tapering could be seen in November while others think there will be some further debate before official tapering begins.
The dollar index was one of the few markets to see classic flight to quality flow late last week. In our opinion, the dollar should have garnering flight to quality buying interest ahead of last weekend’s potential shakeout of the final outcome of the Evergrande situation in China. In other words, some traders were likely positioning for the potential breakdown of the conglomerate rather than be presented with the situation in the US market opening 12 hours after the event in Asia.
The dollar was poised to breakout to the upside perhaps because of the growing attractiveness of US treasury yields.
Like the US, the UK is experiencing economic headwinds from a shortage of labor and from gas shortages hindering economic activity. In our opinion, the Pound can rally, but should be sold on rallies expecting the June through September downtrend to ultimately control. Clearly, the Canadian dollar is attempting to track favorably with the US dollar. However, the Canadian dollar spiked higher toward a 5-month downtrend channel resistance line early on and has retrenched as if an interim top has been forged. In the near term, we expect the Canadian dollar to correlate positively with equity markets and the US dollar.
While the US equity markets followed international markets down into their opening and throughout most of the trading session last Friday, the market was able to reject big losses and avoided volatility. However, the markets should be on edge because of the potential final chapter in the Chinese real estate conglomerate story. However, the US dollar might find a surprising lift next week if US treasury yields continue to surge as that could attract interest rate differential inflows. Global equities markets were mostly higher at the start of this week, with the exceptions the TOPIX, SSE and Hang Seng trading lower. Apparently, the US equity markets were not undermined because of the highest treasury yields since July 14th, as the markets are following through on last week’s risk on optimism in the early trade. However, the equity markets will have several tests of their bullish resolve through 3 Fed speeches early this week! Given the treasury market breakdown the trade is obviously embracing hawkish Fed views while the latest US infection count was 130,638 new cases as of September 24th!
Clearly, the NASDAQ was lagging the rest of the markets at the start of this week with the index waffling around both sides of unchanged instead of extending higher like the S&P and Dow. While not a dominating view, growing interest in large caps leaves high-tech in less favor than other segments. The net spec and fund longs in the NASDAQ were modest in the latest positioning report, indicating the market retains buying capacity. The September 21st Commitments of Traders report showed Nasdaq Mini Non-Commercial & Non-Reportable traders added 6,234 contracts to their already long position and are now net long 7,663.
GOLD, SILVER & PLATINUM:
With the US dollar seemingly poised to breakout to the upside, equities tracking higher and another higher high for the move in treasury yields leaves the bear camp in control of gold to start the week. The charts in gold also favor the bear camp with the market so far in September unable to throw off a pattern of lower highs and lower lows. In the most recent positioning report, the net spec and fund long in gold declined by more than 25,000 contracts which continues a trend of long liquidation. The September 21st Commitments of Traders report showed Gold Managed Money traders net sold 25,801 contracts and are now net long 61,594 contracts. Non-Commercial & Non-Reportable traders were net long 220,791 contracts after decreasing their long position by 25,175 contracts.
While the Evergrande situation is anything but solved, seeing the government announce and prepare the markets for that situation probably removes the flight to quality benefits of an actual collapse for the gold market. From the virus front, the latest US daily infection count was 130,000 with the 7-day moving average as of Friday, September 24th falling to the lowest level since August 8th and that has tamped down uncertainty buying from the Covid story line. Going forward, the markets will be presented with a US durable goods reading today, and it should be noted that reading contracted last month and a similar contraction for the latest monthly reading should cause some fleeting buying in the gold market. In retrospect, news that China was moving to outlaw cryptocurrencies and outlaw crypto mining should have been a big benefit for gold, as an alternative flight to quality asset for Chinese investors, but no such chatter emerged.
We are surprised that copper managed to rally last week in the face of a wave of significant Chinese economic/political structural changes. Many of the new regulations were anti-open market and, in some views, anti-capitalistic and that could have sent copper tumbling. In looking back to last week’s news for justification of holding prices above $4.20 is the fact that Shanghai copper stocks have fallen to the lowest levels since May of 2009! Relatively speaking LME copper warehouse stocks are tight relative to history but not tight relative to the last 19 months. Another underpin for copper prices is the latest International Copper Study Group monthly supply and demand forecast which pegged the world copper market to have a 60,000-tonne deficit.
With another contract high range up move to start the new week, the bull camp picks up where it left off. While the crude oil market saw a flurry of bullish news from both the supply and demand fronts last week, and Goldman Sachs over the weekend raised their upside targeting by $10 per barrel from their previous forecast! However, the US Gulf production disaster is slowly normalizing, with the latest lost output forecast labeling the net loss to be above 30 million barrels! Even more impressive is the fact that crude oil prices forged new contract high/new highs for the year in the face of China’s first ever strategic oil sale at the end of last week. The amount of initial oil auctioned was 4.4 million barrels, with the overall strategic sales of 7.3 million barrels announced 2 weeks ago. In other words, instead of fearing the added supply from strategic Chinese sales, the market instead discounted the sales and looked forward to China’s restocking.
With the range up/contract high in ULSD early this week following last week’s impressive rally, the bulls have the bear camp on their heels. Current gains are partially the result of a US reopening of international air travel, but also because diesel/distillate inventories are still contracting. The sentiment in the trade is demand recovery in diesel and distillates is set to tighten supplies further even in the heating/cooling shoulder season.
Soybean prices held within a tight range last Friday trading with a minimal gain. For the week, November soybeans finished with a gain of 1 cent and a positive weekly reversal from Tuesday’s 3-month low. Soybean oil remained the strongest member of the soy complex as it extended its upside following from Tuesday’s daily reversal with a fourth positive daily result in a row. Meal could not find its footing as it reached a 2-week low before finishing with a mild loss. Improving weather over Brazilian growing areas was a source of early pressure for the soy complex. The five day forecast shows no rain for the Eastern Corn Belt with not much rain for Iowa and Minnesota but more than an inch of rain for much of Kansas and Nebraska. Heat is ideal for dry down as well. In addition, the 6-10 day forecast models show above normal precipitation for Kansas, Nebraska and South Dakota, with normal precipitation for the rest of the Western Corn Belt and below normal precipitation for the Eastern Corn Belt.
The weather in July is far and away the most important for the corn crop, but for soybeans, August is critical. Even if the weather in July is questionable, good rains in the last three weeks of August can have a big impact on soybean yields. For example, in 2005 dry weather caused extreme drought into the end of July for parts of the Midwest. The drought eased somewhat in August and especially in September after the remnants of Hurricane Katrina brought ample rains to the Delta and much of the Corn Belt. For corn, the final yield for 2004 was 160.4 bushels per acre. The 2005 forecast in September was 143.2 bushels per acre, and it eventually improved to 147.9, but it was still down substantially from the previous year. For soybeans, the final yield for 2004 was 42.2 bushels per acre.
Wheat prices were able to shake off early pressure Friday as they climbed above their 50-day moving average and reached a 2 1/2 week high before finishing Friday’s trading session with a moderate gain. For the week, December wheat finished with a gain of 15 cents. A rebound in the Dollar put early pressure on the wheat market as that could make US wheat less competitive in the global export marketplace. Dry conditions in Canadian growing areas have resulted in a sharp decline in their spring wheat production, which provided underlying support to wheat prices. While the wheat market is not very sensitive to changes in economic conditions around the world, inflationary expectations can have a significant impact on the urgency of end users to get product bought.
The USDA September 1st Hogs and Pigs report was considered bullish. All hogs and pigs on September 1 came in at 96.1% of last year, which was well below the average trade expectation of 98.3% and even below the bottom end of the range of expectations (97.3%-99.8%). Kept for breeding supply came in at 97.7% of last year, which was below trade expectations of 98.9% of last year and below the range (98.3%-99.7%). Kept for market supply was 95.9% of last year versus an average expectation of 98.2% (97.2%-99.9% range). The pig crop for June-August was 94.0%, which was also below the average expectation and below the low end of the range 96.1% to 97.6%. The report looks quite friendly against trade expectations across the board.
The Cattle on Feed Report was considered bearish, particularly for the deferred contracts. August placements at 102.3% of last year were above the average expectation of 99.1% and very close to the upper end of the range. This means larger than expected supply 90-120 days out and is bearish for December and February cattle. These contracts also hold a huge premium to the cash market which adds to the bearish tone. August marketings at 99.6% of last year were below the average expectation of 100% and slightly above the low end of the expected range. This brought the on-feed number as of September 1 to 98.6% of last year versus an average expectation of 98.2% and a range of 97.7%-99.9%. This is somewhat bearish for the October contract.
Since falling back from a multi-year high early this month, cocoa prices have made three attempts to rally, all of which were followed by sharp selloffs. While the market rebounded on Friday, cocoa is likely to see further downside price action before it can find a near-term floor. December cocoa bounced back from a 3-week low at midsession, but could not climb out of negative territory as it finished Friday’s trading session with a moderate loss. For the week, December cocoa finished with a loss of 74 points (down 2.8%) and a second negative weekly result in the past 3 weeks.
Since plunging more than 42 cents below a multi-year high in late July, coffee prices has seen 2 extended recovery moves run out of steam. With signs that global demand is on the mend, however, coffee’s current recovery move has a good chance to reach 2-month highs by the end of the third quarter. December coffee extended its upside breakout move to a new 2-week high before finishing Friday’s trading session with a sizable gain and a fourth positive daily result in a row. For the week, December coffee finished with a gain of 7.95 cents (up 4.2%) which broke a 2-week losing streak and was a positive weekly reversal from last Monday’s 4 1/2 week low.
December cotton surged higher on Friday to close up for the fourth session in a row, and the market pushed to new contract highs at the start of this week. The five day forecast models show hefty rain totals for parts of the Delta but mostly Texas and heavy rains with bolls open could cause quality issues. In addition, pink bollworm has hurt the India crop and may lower the production outlook. The six-10 day forecast models show above normal precipitation for all of West Texas which is also supportive. Parts of West Texas show above normal precipitation for the 8-14 day forecast models as well. A further strong advance in the US stock market and news that China was the most active buyer in the weekly export sales report were seen as positive forces as well. The rally was especially impressive given the strength in the US dollar.
Sugar prices have stronger energy to provide underlying support, but have been unable to sustain upside momentum since a negative daily reversal at the end of August. Brazilian supply issues continue to underpin prices, however, so a fresh reminder of this season’s lower production could help sugar prices turn back to the upside early this week. March sugar was unable to extend last week’s recovery move as it came under early pressure before finishing Friday’s trading session with a sizable loss. For the week, however, March sugar finished with a gain of 7 ticks (up 0.4%) and a second positive weekly result in a row.
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