Treasuries have started this week within fairly tight trading ranges but Bonds and Notes both reached 4-week lows coming into Tuesday morning’s action. News that China has further reduced their Covid restrictions has helped to fuel a “risk on” rally in many market sectors and has put pressure on Treasuries early this week. While US economic and inflation data continue to show signs of softening activity and moderating inflation pressures, the markets generally expect the Fed to continue to raise rates next year which has left some fear that a recession will take place. Stronger than expected US third quarter GDP readings, strong personal income results for November, and US jobless claims remaining close to their lowest levels since September signal that the potential for a soft landing (or better) has improved.
While the Dollar extended a coiling price pattern since the start of last week, the longer-term trend continues to head to the downside going into year-end. Relaxation of more Chinese Covid restrictions have given more fuel to a post-holiday “risk on” mood that has put early pressure on the Dollar. Recent US economic numbers have provided mixed results that have not been uniformly strong enough for the Dollar to regain upside momentum, and it is unlikely to put any brakes on its pullback unless there is a flare-up of risk anxiety early this week.
The Euro extended its recovery move through the weekend and is in striking distance of reaching a 1-week high. While there have few Euro zone data points for the market to digest, news that German 2-year yields have reached their highest levels since 2008 have helped to underpin the Euro early this week.
While the Yen remains within the upper portion of last Tuesday’s updraft, it was on-track for a fourth negative daily result in a row. The Swiss franc pivoted back to the upside with sizable gains early this week. The Pound has underperformed since mid-December as it has struggled to climb back above the 200-day moving average and remains below its November month-end close. The Canadian dollar was able to extend its recovery move back above the 50-day moving average Last week’s data included stronger than expected readings for Canadian GDP and Canadian CPI.
Global markets have started the holiday-shortened week with a mildly positive tone. Chinese and Japanese equities saw a second day in a row with moderate gains, while major European stock indices and US stock index futures are showing moderate early gains. China has taken further steps to reduce their Covid restrictions including removing a quarantine requirement for overseas visitors. Japanese unemployment had a surprise downtick, while Japanese retail sales and Chinese industrial profits came in lower than trade forecasts. The market experienced an impressive rally Tuesday morning and also saw a recovery bounce on Friday, but the market is still inside of Thursday’s big range down day.
Strong economic data is considered bearish to equity markets as that could trigger fears of recession from overtightening. The lack of urgency from investors to own equity markets along with decent returns for Treasury Notes are factors which might limit the upside on this rally. Technically, the Dow remains oversold and vulnerable to year end short covering, but it appears that investors may be waiting for a better sign of a short-term low before new buying can begin.
GOLD, SILVER & PLATINUM:
China has further reduced its Covid protocols, and this gave the gold market a boost overnight on ideas it would support demand from the world’s largest consumer of gold. Starting in January, inbound travelers to China will no longer be subjected to quarantine. February gold was higher overnight, advancing Friday’s gains but still inside Thursday reversal lower. The market responded positively on Friday to the release of the November PCE. The PCE is often referred to as the Fed’s favorite inflation reading. It was up 0.1% in November (+5.5% year over year) after climbing 0.4% in October (6.1% annually). Core PCE was up 4.7% annually.
March palladium gapped higher at the start of this week and traded to its highest level since December 16. China’s further relaxation of Covid policies may have given a lift to the market on ideas it would boost the auto sector, which is a key source of palladium demand. This comes after the market rejected a downside breakout on Friday. The platinum managed money position is coming off its largest net long since March, but it is still well below its record of 53,000+ from January 2020.
Copper prices spent last week in a tight consolidation zone, but it has broken out to the upside with a gap-higher opening and a sharp rally on Tuesday. March copper finished last Friday with a strong gain and a third positive week in the past four. It has reached its highest level in six weeks and is on-track for its first close above the 200-day moving average since June. Chinese equity markets had a positive start to the week following news than more Covid restrictions are being relaxed, and that should provide copper with carryover support. Weekly Shanghai exchange copper stocks fell for the fourth time inf the past five weeks on Friday, reaching their lowest levels since late September which also bodes well for Chinese demand. LME copper stocks increased on Friday, but they remain close to last Thursday’s six-week low.
The crude oil market found some fresh supply-side support and could be ready to extend its recovery move early this week. February crude oil finished Friday with a moderate gain and a second positive week in a row, and it has followed with further gains early this week as it reached its highest level in 2 1/2 weeks. News that China will further relax its Covid restrictions has been a major source of strength. This follows last week’s threat from Russia to cut its crude production by 5%-7% if the EU and G7 nations introduce a price cap on Russian oil purchases.
RBOB and ULSD both finished Friday with strong gains, and they reached new highs for the move at the start of this week. This is due in large part to US refinery shutdowns from the severe winter storms that moved across the US last week and into the weekend. This year was initially expected to be the third-busiest holiday driving season on record, but the winter weather interrupted travel.
Natural gas was able to find its footing late last week, but the market has fallen back from its overnight highs and is only modestly higher this morning. Last Friday’s positive daily reversal was due in large part to the severe cold that marched across much of the US. This brought record high US gas demand and a sharp drop in production. Demand should ease this week, as the 6-to-10-day forecast calls for above-normal temperatures east of the Mississippi River.
The short term trend is up with the market moving to the highest level since December 1 on Friday. There is still enough uncertainty on the Argentina weather outlook, and outside market forces carry a bullish tilt which should help support the market early today. Exporters announced the sale of 150,000 tons of US corn sold to Mexico on Friday. Traders believe Brazil fuel policy could change over the near term in favor of ethanol. Talk that an unfavorable tax law will expire in Brazil on December 31 is seen as a positive influence for corn. Brazilian corn exports have been much higher than the volume shipped last year and there are more ships getting ready to set sail in the coming weeks.
The wheat market remains in a short-term uptrend as cold-weather uncertainties helped to support late last week. There will not be good readings on the extent of damage in wheat fields which were uncovered. Egypt is tendering for wheat with the lowest offers coming out of Russia. India plans to provide free grain to near 800 million people for one year, a move that could help the ruling party receive political benefits. The government is expected to spend near $24.1 billion on the program, according to the food minister. In spite of record wheat production in Brazil this year, wheat prices are trading very high in some regions, and near record highs. In Brazil, Conab estimated the output near 9.55 million tonnes, a record and 24.4% higher than that in the 2021/22 season.
The USDA Hogs and Pigs report released after the close last Friday showed December 1 US hog supply at 98.2% of last year versus an average trade expectation of 98.5% and a range of expectations from 98.3% to 98.8%. Kept for breeding came in at 100.5% versus 99.5% expected (range 99.0% to 100.0%). Market hogs came in at 98% versus 98.4% expected (range 98.2% to 98.7%). The September-November pig crop was 98.7% of last year 98.4% expected (range 97.9% to 99.2%). The report is bullish against trade expectations, with market supply coming in well below trade expectations. Both the total supply and kept for market came in below the range of expectations, which is supportive for February and April lean hogs.
The shift in US beef production from the fourth quarter this year to the first quarter of 2023 shows a near record decline, and this is a bullish supply factor. The USDA boxed beef cutout was up $6.32 at mid-session Friday and closed $6.74 higher at $271.95. This was up from $262.83 the previous week and highest was the highest it had been since July 19. Tyson Foods, Inc. suspended and/or reduced operations at some US meat facilities late last week because of the storms, and cattle slaughter was down 10.1% from the previous week. The USDA Cattle on Feed report, released after the close on Friday, showed placements for the month of November at 97.9% of last year versus trade expectations for 95.4% and a range of expectations from 91.8% to 98%. Marketings came in at 101.2% versus an average expectation of 100.9% (range 99.9%-101.3%). On feed supply as of December 1st came in at 97.4% versus 97.1% expected (range 96.5%-97.6%). Placements coming in a bit higher than expected is slightly negative for April live cattle. On the other hand, marketings coming in at the high end of trade expectations suggests producers are more current with marketings than expected, which is slightly positive for the February contract.
Cocoa’s 3-day rally going into the holiday weekend lifted prices up to their highest level since April. If global markets can regain and sustain a positive risk tone, cocoa should be able to maintain upside momentum going into year-end. March cocoa held within a fairly tight early range before rallying through midsession to a new 8 1/2 month high, and in spite of a late pullback finished Friday’s trading session with a moderate gain. For the week, March cocoa finished with a gain of 153 points (up 6.2%) which broke a 2-week losing streak. While they showed mild pre-holiday strength, gains in the Eurocurrency and US equity markets provided cocoa with carryover support.
Coffee prices have had a bumpy ride since reaching a 17-month low in late November as they have been unable to climb back above their December highs. If recent short-covering has run its course, coffee may have a downbeat finish to the year. March coffee followed through on Thursday’s late rebound as it reached a 1-week high before finishing Friday’s trading session with a sizable gain. In addition, this was March coffee’s first close above the 50-day moving average since late September. For the week, March coffee finished with a gain of 7.60 cents (up 4.6%) which was a second positive weekly result in a row.
Coffee continues to find support from the ongoing La Nina weather event which is having a negative impact on South American production..
The cotton market continues to see a clash of supportive outside market forces, strength in the stock market and in crude oil, as compared with very poor export sales news and increasing demand concerns. Outside market forces carried a positive tilt this morning which may help support. However, the decline in open interest as the market tested the November 16 high last week is a negative development. Light trading volume seems to be adding to the choppiness. The market recovered some on Friday after a limit down move on Thursday. Ideas that the cold weather could support energy prices has helped to provide underlying support.
Sugar prices are well into overbought territory after 6 positive daily results in a row and a rally to 5 1/2-year highs. With short-term supply tightness and signs of improving demand, sugar can maintain upside momentum through year-end. March sugar was unable to hold onto early strength but rebounded from a late pullback to finish Friday’s trading’s session with a mild gain. For the week, March sugar finished with a gain of 89 ticks (up 4.4%) and a fourth positive weekly result in a row.
Crude oil and RBOB gasoline extended their recovery moves up to 3-week highs, which provided sugar with carryover support as that should strength near-term ethanol demand.
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