We see the retrenchment last Friday’s trade as a mere technical and fundamental balancing of the early December run-up. However, ongoing slowing fears, anxiety from declining equities, rising Chinese economic uncertainty and the passing of the latest rate hike barrage should set the stage for a recovery in prices this week. In a sign of potential overdone conditions, treasury bonds and notes failed to derive a lift from softer than expected S&P global manufacturing and services PMI readings. In retrospect, the treasury markets appear to have lost some bullish momentum with the March bond contract seemingly losing buying interest on trades above 132-00.
At times last Friday, the dollar index saw modest flight to quality buying interest from the sharp declines in US equities. However, US scheduled data points remain concerning and should thicken resistance over the dollar into next week. Sentiment has turned so negative toward the dollar that a portion of the trade thinks the euro zone economy could hold up despite comments from the ECB President indicating the markets were under stating the magnitude of the terminal rate in the euro zone.
In our opinion, the euro is set to extend its “win by default” against a sloppy dollar trade. While the Yen is likely garnering initial lift from the weakness in the dollar, the Bank of Japan has provided some support from reports the Bank of Japan will reconsider the government’s commitment to a 2% inflation target. We detected a temporary breakdown in the uniform uptrend in the Pound at the start of this week. However, the Pound should draft support from an article last week from London suggesting the BOE will continue to be “more hawkish” than current trade expectations.
Clearly, sentiment toward equities is mirroring the deterioration in the outlook for the US economy. In fact, residual anxiety from the central bank rate hike barrage continues to gloss over normal holiday optimism. Prior to last week, the equity markets had forged impressive action in the quarter and further declines this week might prompt additional long liquidation as fund managers and investors protect gains made from the October lows. Global equity markets at the start of this week were mixed with higher markets outnumbering weaker markets and weakness generally seen in Asian markets.
As indicated already, the March S&P has ranged down to start this week putting prices at the lowest level since November 10th and seemingly extending the bear’s control into the new week. As indicated several times last week, the Dow Jones has been unable to benefit from a series of very positive classic fundamental headline developments at key bellwether companies. While the NASDAQ did not make a fresh lower low in the face of weakness in other market sectors, the charts favor the bear camp and fundamental headline news remains negative.
GOLD, SILVER & PLATINUM:
The gold and silver bulls hope that the constant buzz of rising rates moderates this week with the markets potentially benefiting from talk that the Chinese government will step up to support its economy next year. In a surprising development, gold ETFs on Friday saw the largest inflow in 6-months with funds adding 177,397 ounces. For the week gold ETF holdings increased by 328,719 ounces, while silver ETF holdings declined a massive 8 million ounces last week. Unfortunately for the bull camp, gold ETF weekly holdings (since the beginning of July) have posted only two net weekly inflow readings. However, weekly inflows to ETF holdings were exclusively positive from mid-January through the end of April which in turn sparked the belief some investors were returning to precious metal investments. In the end, year-to-date gold ETF holdings have declined by 4% and silver ETF holdings have declined by 15%.
While the massive 4-day washout of $1.66 last week in Silver culminated in a very aggressive rejection of the $22.735 level given silver’s reliance on industrial/physical demand the outlook for the global economy remains a headwind for the silver bull camp. After several months of little if any bullish fundamental news, it was not surprising to see March palladium washout in the face of fear of global slowing from rising interest rates. However, the primary selling force in palladium last week was likely the escalating economic uncertainty of the economic situation in China. Given the prospect of ongoing macroeconomic spillover selling, near term downside targeting in palladium from the weekly charts is at $1,630! Not surprisingly, the platinum market weathered the big picture physical commodity market washout wave last week despite growing fear of softer platinum demand from China.
While copper futures are showing a positive trade early this week, the market will continue to be limited by the threat of slowing in China from explosive infection counts. However, the copper trade should see fresh support from news flow from a Chinese central economic conference at the end of last week as officials promised boosting the economy was going to be their primary focus in 2023. Another positive for copper prices is further tightening in Chinese copper (industrial) inventories which declined 12,400 tonnes to 81,900 tonnes which compares to 86,700 tonnes a year ago. We see the downtrend continuing in copper with the infection situation in China worsening and in turn fostering fresh short sales. In fact, if the Chinese government intention is to allow infections to flare and hopefully burn out, that should keep daily demand destruction pressure on copper prices.
We see the bear camp with the edge to start the new trading week as demand destruction fears are not being offset by tight supply signals. Not surprisingly, analysts have begun revising their crude price targets lower with Citi indicating softening demand and “ample” Russian and OPEC supply will pressure prices potentially to “soft floor” pricing at $70 because of strategic stockpile replenishment targeting. In other fresh negatives at the start of this week, crude oil stocks in Saudi Arabia (in the latest monthly figures) increased as did Saudi exports. However, global crude oil in floating storage last week declined by 27% reaching the lowest level since April 2020. In retrospect, the $7.00 rally off the December lows last week feels like an unjustified rally. Going forward, traders might expect news from the war and perhaps from Russia (regarding their official response to the price cap) to drive prices without notice.
A significant intensifying of Russia’s barrage of Ukraine, increased pressure on both armies from extreme cold and perhaps an increase in domestic opposition to Putin creates a backdrop for price volatility in thin market conditions.
While gasoline is trading positive to start this week, indications are that China will continue to export significant fuel supply especially if domestic demand softens from Covid problems. Last week, US EIA gasoline stocks reached the highest level since July and were above year ago levels for the first time since early April.
Soybeans fell to the lowest price level in a week early on Monday as traders see better Argentina weather beginning later this week. Dry conditions are set to persist in most Argentine growing areas, though it may become wetter in parts of Cordoba province later this week. Traders are uncertain if this will be a significant shift in the weather, or if heat and dryness will return after that. March soybeans fell back to the lowest level since December 13 on Friday. However, minor support held and the market rallied back to trade higher. March soybean oil experienced an outside day down and closed lower while March meal traded sharply higher on the session and challenged the contract highs. A rally in the US dollar plus weakness in energy and the stock market helped to limit the buying early in the day.
Argentine weather is still dry over the near-term, but some traders see better rains by the weekend. Corn plantings have reached 42.6% complete as compared with 32.7% last week. March corn experienced choppy and two-sided trade on Friday with mixed fundamental signals. Traders see a dry stretch just ahead for Argentina, but also see increasing risk of declining global demand due to recessionary-type economies around the world. The corn market managed to close up 9 cents for the week. Weakness in the stock market was seen as a bearish force, and it did not help that the crude oil market was under significant pressure. Open interest continues to decline and reached the lowest level since 2013. Cash corn prices have traded higher in Brazil as higher Brazil exports recently and the possible increase in exports due to bombings in Ukrainian ports and possible drought issues in Argentina could all boost exports further. In the first 7 working days of December, Brazil exported 1.51 million tonnes of corn, which accounts for 44% of the volume shipped in December 2021.
With plenty of bearish outside market forces for last week, March wheat managed to close 19 1/4 cents higher for the week. China demand is still coming in better than expected, and there is still plenty of uncertainty about the US crop conditions in the spring. Increased bombing in Ukraine may have also provided underlying support. March wheat closed lower on the session Friday with a quiet inside trading day. Outside market forces carried a bearish tilt as the dollar continued to rally and the stock market continued to fall. This has traders nervous that global recession could limit new demand. India wheat stocks have fallen below a mandatory threshold limit known as buffer norms for the first time in nearly a decade. The lower production in Argentina has been offset by increases in production from other key exporters. Traders remain uncertain about the US winter wheat crop, but weather in the early spring is much more important for yield. For the month of November, China imported 1.01 million tonnes of wheat, up 35.4% from last year. Cumulative imports for 2022 reached 8.88 million tonnes, up 0.6% from last year’s pace.
The hog market experienced a very impressive rally on Friday and it appears mostly due to the oversold technical condition of the market and some short covering. Open interest is down to the lowest level since 2016 and with holiday-type trade it did not take much in the way of buying to trigger stops above Thursday’s high and above Wednesday’s high. China futures are down nearly 25% over the past two weeks and China import demand remains very sluggish. For the month of November, China imported 180,000 tonnes of pork, down 11.1% from last year. Cumulative pork imports for 2022 reached 1.56 million tonnes, down 56% from last year’s pace. In addition, some traders are looking at Brazil pork exports for 2023 to come in near 12% above this year. The hog market is technically oversold so we cannot rule out some further bounce, but the market does not seem to have the supply fundamentals for further strong gains. February hogs closed sharply higher on the session Friday after opening slightly lower on the session.
February cattle closed higher on the session Friday with a quiet inside trading session. The market seems to have the supply fundamentals to trend higher, but the short-term demand fundamental news is helping to limit the buying support. Given the tightening supply situation in 2023, corrective breaks look like buying opportunities. The USDA boxed beef cutout was up $6.58 at mid-session Friday and closed $8.53 higher at $262.83. This was up from $248.93 the previous week and the highest it had been since November 10. Cash live cattle ended last week nearly unchanged from the week before. As of Friday afternoon, the five-day, five-area weighted average price was 155.65 versus 155.69 the previous week. The USDA estimated cattle slaughter came in at 119,000 head Friday and 24,000 head for Saturday. This brought the total for last week to 629,000 head, down from 652,000 the previous week and 658,000 the year before.
While the market is heading for a second sizable global production deficit in a row, cocoa continues to face headwinds from near-term demand concerns. Cocoa prices continue to hold their ground above the 200-day moving average, however, as it is finding support from bullish supply developments. March cocoa started out under pressure and fell to a 2 1/2 week low before finishing Friday’s trading session with a sizable loss and a third negative daily result in a row. For the week, March cocoa finished with a loss of 29 points (down 1.2%) which was a second negative weekly result in a row.
Coffee’s demand issues returned to a front and center issue as they prevented the market from climbing above the early December high and its 50-day moving average. The global supply outlook remains firmly bullish, however, so coffee prices should remain well supported on a near-term pullback this week. After finding early support and reaching a 2 1/2 week high, March coffee turned sharply to the downside as they finished Friday’s outside-day session with a sizable loss that broke a 4-session winning streak.
March cotton managed to close higher on the session last Friday with an outside day up, and also closed higher on the week. While outside market forces carried a very negative tilt due to concerns for global economic recession, traders view the current set up for planted area in the US to drop off sharply. Some traders see a sharp drop in planted area for the coming season, and this continues to provide underlying support. The market has stayed in a consolidation pattern since early November and some traders see the price as too cheap. Even if planted area is down 15% from this year, if we assume 10-year average yield and 10-year average abandonment and this year’s total usage, ending stocks would still increase to 5.78 million bales as compared with 3.5 million this year.
Near-term bullish supply developments helped to lift sugar prices up to a new 5 1/2 year high last Thursday, but an inability to extend their rally does not bode well going into year-end. Unless it can find fresh carryover support from key outside markets, sugar will have trouble regaining upside momentum early this week. After seeing initial downside follow-through from last Thursday’s key reversal, March sugar was able to shake off early pressure and finish Friday’s trading session with a moderate gain. For the week, March sugar finished with a gain of 49 ticks (up 2.5%) which was a third positive weekly result in a row.
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