Written Commentary
BONDS:
In retrospect, the treasury markets were primed for another sweep of disappointing US scheduled data and instead was presented with the opposite. In fact, the composite manufacturing and services components of US PMI last Friday were all better than expected and improved from the prior month. It should also be noted that euro zone business activity picked up which serves to deflate significant anxiety generated by evidence of very hot European inflation earlier in the week. Therefore, the reversal from a 4-day high in bonds was justified by last Friday’s data and perhaps was largely profit-taking selling from those with gains off the bounce from the Wednesday lows.
CURRENCIES:
A summary of last Friday’s action in the currency markets is boring as somewhat mixed but partially offsetting euro zone data left little direction while a prevailing negative view toward the dollar was countervailed by better-than-expected US PMI data. Since we expect ongoing macroeconomic concerns this week, we expect both the euro and the dollar to continue to trade within recent ranges. Therefore, we remain the most bullish toward the Swiss franc but acknowledge the potential for very significant volatility in that currency. With a 5-day low in the early trade this week, expectations of soft US data ahead, the GOP willing to expand the US deficit by $1.5 trillion and ongoing chatter of a rate hike from the Fed in the first week of May, the currency markets will be presented with a key decision on the value of the dollar during the coming 2 weeks. In the past, significant debt ceiling concerns resulting in the threat of a shutdown of the US government have resulted in flight to quality flow “toward” the dollar.
STOCKS:
Once again, equity markets held together rather impressively in spite of continued ongoing angst over the economy and generally unappealing and uninspiring corporate headline news flow. However, the bull camp was assisted last Friday by better-than-expected US composite manufacturing and services PMI readings (preliminary for April) with the PMI also above prior month figures. Not surprising, corporate earnings flow again prompted some skittishness among investors, but it should be noted that the net spec and fund short positions throughout stock index futures markets are heavily bearish already.
As indicated already the E-Mini S&P net spec and fund short positioning has reached the highest level since 2012 and a return to the 4100 level would probably put the net spec and fund short at the largest level since the financial crisis. Typically, investors do not like uncertainty, and it appears that over the coming weeks uncertainty from the likelihood of a down to the wire fight over the US debt ceiling will undermine stock prices until June. In the near term, ongoing corporate earnings flow and US scheduled data are likely to direct the market with targeting for the week down at 33,500.
GOLD, SILVER & PLATINUM:
At least to start out this week, gold and silver are tracking positive partially off a slight downside breakout in the dollar. With a range down move on Friday, the path of least resistance remains down in gold. In retrospect, the silver market shows significantly less liquidation potential than gold. However, last week, silver ETF holdings saw significant outflows indicating a moderation of investment interest and/or liquidation by “traders” possibly for short-term purposes. In fact, seeing silver falter last week in the wake of an extremely bullish Silver Institute assessment of supply and demand in the world silver market should be disappointing to both short-term and longer-term investor bulls.
While the massive range up extension on Friday in platinum was impressive in its own regard, seeing the sharp gains in the face of lower gold action and negative global economic sentiment is even more impressive. Even though it might be premature we think the upward track in platinum can extend with buyers potentially entering the long side because of signs that platinum is set to regain a larger portion of its discount to palladium.
COPPER:
Despite a very supportive headline touting a 36% jump in Chinese electric vehicle registrations resulting in electric vehicles reaching 23% of all vehicle sales in China the copper market at the start of this week is not benefiting from Chinese copper demand hop. Given the downside breakout last week and declining open interest, we see the downside track continuing but losing momentum at the April low of $3.9355. Tight supply should continue to defuse losses off the macro condition with LME copper stocks 2,705 tonnes away from 17 1/2-year lows. It should also be noted that Shanghai weekly copper warehouse stocks were down for the 8th straight week last week.
ENERGY COMPLEX:
While June crude futures have posted a double low early this week with the Friday low at $76.72, the bias in the market remains down with prices extending declines despite evidence of expanding weekly road and air traffic in North America, Europe, and Asian-Pacific regions. However, negative macroeconomic sentiment (fear for deteriorating energy demand) and the potential for less refinery demand for crude because of softening crack margins the bear camp picks up where it left off last week. It goes without saying that tech signals continue to project prices lower unless big picture macroeconomic sentiment improves and is confirmed by consistent gains in global equity prices.
Like the crude oil market, the gasoline market recoiled from last week’s sharp range down move with a bounce of $0.08 but the most recent net spec and fund long is likely understated with the close Friday $0.11 below the level where the last positioning report was measured. Even though reports from Europe indicate the oversupplied diesel market is moderating, both distillate and diesel stocks hold surplus readings versus year ago levels.
BEANS:
July soybeans closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since March 31. News that at least two cargoes of Brazil soybeans have been sold into the US helped drive the market lower. Brazil soybeans are trading at a $2 per bushel discount to the US market and this has added to the outlook for poor exports. With tight old crop supply, the market is still seeing old crop futures at an inversion and the big Brazil discount may attract more imports to the US. Ideas that US planting progress will proceed in the weeks ahead was also seen as a bearish force.
CORN:
The lack of a significant rain-making system in the Midwest for the next two weeks helped to spark more selling. July corn closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since March 24. The close below 616 1/4 is a bearish technical development for the market. Continued weakness in corn prices in Brazil is seen as a bearish force as producers are harvesting a record crop, and this is coming on the heels of the soybean record crop so storage space is very limited.
WHEAT:
July wheat closed moderately lower on the session Friday and the selling pushed the market down to the lowest level since March 24. Talk of rain for the Kansas region over the near term plus a sluggish export pace are factors which kept sellers active. The 1-5 day forecast models show near 1 inch of rain for the southern two thirds of Kansas with 1 to 2 inches for much of Oklahoma. The 6-10 day forecast models show much below normal temperatures for the region and normal to below normal precipitation. The 8-14 day forecast models are mostly dry with cool weather.
For the Canadian wheat crop, traders expect planted area at 26.4 million acres, 25.5-28.4 range, as compared with 25.2 million acres planted in 2022.
HOGS:
June Hogs experienced a key reversal on Friday, which suggests a short-term low may be in place. With stochastics readings at 18.4 and 19.2, the market is extremely oversold. A key momentum indicator (the Relative Strength Index/RSI) is suggesting a bottom is close at hand. When the market posted a new contract low on March 23, RSI was at 14.6; when it posted another new low on April 6, RSI was at 25.3; and when it posted another one on Friday, RSI was at 32.8. The triple divergence indicates a loss in downside momentum. The USDA pork cutout released after the close Friday came in at $79.23, up $2.45 from Thursday and up from $77.27 the previous week. This was the highest the cutout had been since March 27. There is a seasonal tendency for pork prices to increase during the spring, but so far this year, values have only stabilized, which could mean that there is plenty of upside potential ahead. The US hog inventory as of March 1 was well off the highs of a few years ago, and it was only slightly higher than last year. If pork exports hold steady or at least are not down significantly from last year, the hog market may see higher trade over the near term.
CATTLE:
The cattle market managed to hold shallow support on the break Thursday, and the hook reversal is a positive technical development. The stiff discount of June cattle to the cash market is a positive force. Beef production was down 7.4% from a year ago last week and this is a bullish force. The USDA Cattle on Feed Report showed placements for the month of February at 99.4% versus trade expectations of 95.6% and a range of 92.5% to 99.0%. Marketings came in at 98.9% of last year as compared with the average estimate of 98.8% and a range of 97.2% to 99.8%. Cattle on Feed supply as of April 1st came in at 95.6% of last year versus average trade estimate of 94.9% with a range of 94.3% to 95.4%. The report news was bearish as placements came in well above trade expectations and even above the range of expectations. With the big discount of June cattle to the cash market, however, corrective breaks might continue to be shallow. Cash live cattle traded in moderate to low volume on Friday close to unchanged from Thursday, which was about $1.50 lower than the previous week. As of Friday afternoon, the five-day, five-area weighted average prices was $178.39, down from $179.87 the previous week.
COCOA:
While two of the 3 major regions saw year-over-year grinding increases, a disappointing result from North America showed that near-term demand concerns have not been fully resolved. While the market continues to have a bullish longer-term supply/demand outlook, cocoa remains vulnerable to a near-term pullback this week. July cocoa bounced back from early pressure to reach a new multi-year high before finishing Friday’s outside-day trading session with a moderate gain. For the week, July cocoa finished with a gain of 86 points (up 3.0%) and a fifth positive weekly result over the past 6 weeks.
COFFEE:
Coffee’s April rally appears to have run out of near-term steam as focus is shifting back to the supply side of the market. Unless a “risk on” mood redevelops in global markets early this week, coffee prices are likely to remain under pressure. July coffee continued its pullback from 6-month highs as they reached a 1-week low before finishing Friday’s trading session with a third sizable daily decline in a row. For the week, July coffee finished with a minimal loss of 0.05 cent, which broke a 2-week winning streak and was a negative weekly reversal.
COTTON:
July cotton closed around unchanged on Friday after spending the session in the bottom portion of Thursday’s big range-down move. The dollar was lower, crude oil was higher, and the stock market was higher, all of which should be supportive to cotton. The market saw pressure late last week on increased chances of rain in West Texas, an area that suffered debilitating drought last year and has only seen moderate improvement this year. The trend appears to be turning wetter, which could put additional pressure on cotton this week. The 6-10 and 8-14-day forecasts now have above average chances of rain for the region, up from normal to above normal recently.
SUGAR:
Last Friday’s pullback resulted in sugar posting a fourth negative daily key reversal so far this month. With the market still extremely overbought going into the early stages of Brazil’s Center-South cane harvest, there is an increased chance that sugar prices could see extended downside follow-through early this week. July sugar opened strong and reached a new 11-year high, and then turned back to the downside as they finished Friday’s trading session with a sizable loss. For the week, however, July sugar finished with a gain of 88 ticks (up 3.8%) and a fifth positive weekly result in a row.
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