For the Week of June 1, 2020
While treasury prices showed some bounce off last week’s lows, the bull camp has to come away from last week’s action extremely discouraged. In other words, this week brought another wave of disastrous data and yet the net result in prices was simply sideways consolidation. However, there is a portion of the trade suggesting data has become less severe and that data will continue to improve now that the reopening has begun. It is also possible that Friday’s personal income figure combined with a sharp decline in the last consumer credit reading and talk of a record jump in savings suggest the US consumer is not completely injured.
While the trend appeared to have shifted down in the dollar and the trends in the euro and Swiss appeared to have shifted upward, all 3 markets probably were overdone from a technical perspective with last week’s action. We continue to suggest that the Pound, euro and Swiss are recovery currencies that need consistent hope of progress toward growth for the trade to accept the risk of currencies that have been out-of-favor for 3 months. With the dollar forging another lower low and the lowest trade since March 16th early this week, it would appear as if the world is looking beyond the coronavirus problem and embracing the idea that restart activity will result in some improved economic activity and therefore a decline in safe haven flows to the Dollar.
We suspect the combination of significant monthly and weekly gains provided some profit-taking incentive for equities late last week. Certainly investors were unnerved by portions of the scheduled data, but one could dissect the data and come away with an optimistic view. In other words, the sharp decline in consumer spending was to be expected given the shut-down however the trade did not expect a huge jump in income and a record increase in savings. Therefore, it is possible that consumers are more capable than many would have expected following the protracted lockdown of the economy. Global equity markets early this week were higher despite US riots, China using US protests against the US involvement in Hong Kong affairs and against reports of new infections in China. However, global markets might have seen support from a flow of positive PMI readings which investors see as a sign that the world economy is capable getting beyond the coronavirus shutdowns.
GOLD, SILVER & PLATINUM:
Surprisingly, the gold market has fallen back from its early-week high into negative territory despite an ongoing wave of geopolitical uncertainty from inside and outside of the US. Apparently China has openly questioned US officials if it is right for China to support the protests in the US as the US is doing in Hong Kong. However, economic news overnight was generally upbeat with PMI readings around the world more positive than negative. In fact the Chinese PMI actually returned to “growth” territory and that suggests at least one economy is coming out from under the virus disaster.
The July silver contract reached up to the highest level since February 25th early this week and weekend financial press coverage has become enamored with silver as an attractive investment. Furthermore, the financial press has aggressively touted silver to outperform gold and historic price relations indicate that could be the case. While the net spec and fund long in silver has risen over the past several weeks, the net long remains 50,000 contracts below the February highs leaving the market with buying capacity. Silver positioning in the Commitments of Traders for the week ending May 26th showed Managed Money traders are net long 26,570 contracts after net buying 5,453 contracts. Non-Commercial & Non-Reportable traders added 4,848 contracts to their already long position and are now net long 50,893.
The platinum market managed to reject a downside breakout below $850 on Friday as if that level is some form of support/value. The charts in platinum continue to be much more constructive than the charts in palladium, and platinum prices are certainly much cheaper than palladium on a historical basis. As in palladium, it will probably take significant gains in gold and silver to drag platinum higher with the market holding a relatively larger spec and fund long than palladium and with thick consolidation resistance seen just above the market at $900. The Commitments of Traders report for the week ending May 26th showed Platinum Managed Money traders were net long 13,619 contracts after increasing their already long position by 1,822 contracts. Non-Commercial & Non-Reportable traders were net long 25,693 contracts after increasing their already long position by 852 contracts.
The copper market early this week forged a higher high for the move off the better than expected Chinese manufacturing PMI for May. In fact the Chinese PMI data point rose above the growth/no growth reading of 50.0 and 3 other European countries showed better than expected PMI readings. Yet another positive for the copper market was seen from a large 6075 ton decline in LME copper warehouse stocks which followed another massive weekly decline in Shanghai copper stocks last week. However, the copper market should be held back by US protests and by ongoing political tensions between the US and China. On the other hand, it should be noted that Chinese copper concentrate imports from the US have resumed following tariff waivers and it is likely that global copper demand will inch up following reopening activity.
With the crude oil market forging another upside breakout early this week and doing so in the face of concerning US domestic problems and further US/China trade barrier action, the bull camp appears to have a hidden well of buying capacity. Apparently the $35 level in July crude is not an equilibrium price as Monday’s upside breakout pushed prices above that key psychological level. However, the market is garnering ongoing lift off news that US production fell again last week, that OPEC is living up to a large portion of its May production target, the US rig operating count dropped to the lowest level since June 2009 and perhaps most importantly that OPEC+ is discussing “extending the cuts”.
The soybean market was on a strong rally to start the month earlier this morning but China officials have ordered major state run firms to pause some purchases of farm goods from the US. This includes soybeans and pork as Beijing evaluates tensions with the US over Hong Kong. Chinese buyers have canceled an unspecified number of US pork orders. This news sparked a quick 15 cent break off of the highs. The market seems to be in a position to see a seasonal advance over the near term. The weakness in the US dollar, some uncertainty on the weather and news of more purchases from China are all factors which might spark the building of some weather premium over the near term. For the week, July soybeans finished with a gain of 7 1/2 cents.
Meal prices held within an inside-day range after Thursday’s key reversal. Elevated US/Chinese trade tensions continue to weigh on soybean prices as it may lead to lower Chinese purchases of US soybeans. A 1% gain in the Brazilian currency provided some measure of support to the soy complex as it benefits US exports at the expense of Brazil’s exports. The Brazilian currency has seen a strong rally off of its lows, which may slow sales from Brazil. The coronavirus is spreading quickly through Brazil, which could cause issues with agricultural production as well as transportation bottlenecks. This could impede their export capabilities, at least temporarily.
For Soyoil, managed money traders were net long 3,984 contracts after increasing their already long position by 1,303 contracts. Non-Commercial No CIT traders were net short 12,468 contracts after decreasing their short position by 2,624 contracts. For soymeal, managed money traders net sold 12,371 contracts and are now net short 41,775 contracts. CIT traders were net long 74,197 contracts after decreasing their long position by 1,290 contracts. Non-Commercial No CIT traders were net short 33,716 contracts after increasing their already short position by 5,783 contracts.
With threats of less trade from China and less threat for dry weather in the 8-14 day models, the market is seeing fairly aggressive selling. One of the key factors that could shift trade psychology is the potential for stronger demand “if” the US dollar were to continue to weaken. The dollar experienced a downside breakout Friday and fell to its lowest level since March 16th this morning. The 7-day forecast models show very little rain across all of the Midwest, with the exception of Minnesota, Northern Iowa, Ohio and portions of southern Wisconsin.
For last week, July wheat finished with a gain of 12 cents. KC wheat reached a 2 1/2 week high while Minneapolis wheat closed above its 50-day moving average for the first time since early April. A mostly dry forecast over Plains growing areas for the next 2 weeks provided wheat prices with underlying support. The Dollar reached a new 2-month low, and that provides some benefit for US wheat in the global export marketplace. The “ring of fire” pattern coming this early in the year will help producers finish planting and encourage strong emergence. But if the pattern lasts longer, it could become a bullish influence. For hard red winter wheat, the hot and dry weather could cause further deterioration ahead of the harvest. The weekly export sales report showed wheat sales at 209,800 tonnes for the current marketing year and 496,500 for the next marketing year for a total of 706,300.
Talk that China has asked buyers of US soybeans and pork to hold off on purchases for now is a bearish development but there is clearly plenty of politics in the air and for now, China has recently been active buyers of both. July hogs closed sharply higher on the session Friday and managed to rally 282 points off of the lows into the close. The market traded moderately lower on the session and the selling has pushed the market down to the lowest level since April 24th before the rally. Traders remain concerned with the potential for increased slaughter and production in the weeks just ahead.
June cattle closed sharply lower on the session last Friday at 99.72 after an early rally to 101.40 failed to find new buying interest. Talk of the overbought condition of the market plus increasing weights and slaughter helped to pressure. Clearly, traders expect a sharp break in the cash cattle market over the next several weeks, and even bigger production increases into the July-September timeframe. Cash live cattle traded in lighter volume on Friday, mostly steady with the previous day. The 5-area, 5-day average price as of Friday afternoon was 116.16, down from 117.59 a week before. The USDA estimated cattle slaughter came in at 111,000 head Friday and 83,000 head for Saturday. This brought the total for last week to 524,000 head, down from 555,000 the previous week and down from 588,000 a year ago. The USDA boxed beef cutout was down $3.99 at mid-session Friday and closed $6.22 lower at $363.34. This was down from $401.81 the previous week and was the lowest the cutout had been since April 29.
Cocoa prices have had a difficult time over the past 3 1/2 months overcoming demand concerns created by global coronavirus restrictions. While they will not be fully soothed for some time, there is evidence to suggest that global demand has held up better than expected, and that may help the market break out of its recent consolidation zone. For the week, July cocoa finished with a gain of 60 points (up 2.5%) which broke a 3-week losing streak. Cocoa regained its strength Friday following the release of critical supply/demand data.
The coffee market will start this week squarely on the defensive after the July, September and December contracts reached new contract lows on Friday. The market is now well into “bargain” price territory. For the week, July coffee finished with a loss of 7.30 cents (down 7.0%) which was a sixth negative weekly result over the past 7 weeks. While the Brazilian currency regained 1.2% in value, that provided little carryover support to coffee. The Minasul co-op in south Minas Gerais reported that last week’s cold-weather event resulted in no major damage to the current crop, but there was some concern that heavy rains last week could have a negative impact on the quality of late-harvested coffee. Even so, there is a growing consensus that in spite of harvest delays, Brazil will have record high coffee production during the 2020/21 season.
The clash of strong export sales and some threatening weather with the outlook for huge ending stocks in the US “if” the weather is anywhere near normal has kept the trade choppy since May 13th. July cotton closed higher last Friday after trading to its lowest level since May 12th. For the week, the market was down 2 points as some consolidation continues. The market came in weak on concerns over US/China relations, reacted negatively to the export sales report, and drifted lower throughout the morning. The weekly export sales report showed US upland cotton export sales at 44,601 bales for the 2019/20 (current) marketing year and 171,8644 for 2020/21 for a total of 216,505. This was the lowest current crop sale (and the first time below 100,000 bales) since April 16. Total current and new crop combined were also the lowest since April 16.
Sugar prices have managed to hold its ground within its recent consolidation zone and above their 50-day moving average for the past 1 1/2 weeks, but that has been due in large part to carryover strength from key outside markets. Even if a global economic recovery from lower coronavirus restrictions improves demand prospects, the supply outlook remains firmly bearish which leaves the sugar market vulnerable to a sizable pullback. Sugar’s main source of strength came from the Brazilian currency which regained 1.2% in value and from sizable gains in crude oil which reached an 11-week high.
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