Despite the significant reversal in treasuries at the start of last week, we see the trend remaining up going into this week. While fears of overtightening by the Fed causing a recession provided the brunt of the rally off the November lows, the bull camp appears to have shifted its focus and is not as concerned about a Fed inspired recession, but the trade is seeing softer US numbers and bouts of flight to quality buying. In our opinion, a solid bull market manages to shift its fundamental focus in order to maintain trend action. In retrospect, treasuries were technically overbought into last week’s high and perhaps overcompensated for the increased shift toward a 25-basis point rate hike next week. However, global commodity and equity market sentiment feels mixed to start the week which will see scant data from the US early this week.
In retrospect, the action in the dollar market last week showed a lack of commitment by the bull and bear camps. However, renewed flight to quality buying interest in the dollar from increased economic anxiety is likely to extend into this week. The dollar is garnering additional buying interest from growing negative sentiment toward the Japanese Yen as respect for the Japanese central bank has declined sharply and internal Japanese economic data has been very soft. Even though the dollar recoiled from the probe down the charts at the start of this week, the dollar last week was unable to sustain gains in the wake of supportive fundamental developments.
With the trade in the euro unconcerned about overtightening by the ECB and the ECB promoting hawkish policy moves ahead the uptrend in the euro looks to extend despite periodic disappointment from euro zone data. With the British Pound forging an upside breakout early this week, it is clear the trade has upgraded the view toward the UK economy which in turn has fostered inflows to the Pound and away from the US dollar. While the Yen remains in a technical uptrend, confidence in the Bank of Japan continues to deteriorate and fear of recession from overtightening should leave the Yen out-of-favor going forward. While the Canadian dollar is likely to remain within the recent consolidation bound by 75.09 and 74.00, the Canadian dollar should benefit from the potential for further declines in the US dollar.
We suspect that a large portion of last Friday’s gains were the result of profit-taking by those pressing the short side of the markets earlier this week. However, the markets did get a lift from favorable Netflix subscriber numbers as analysts think negative impacts from raising prices will continue to be less than feared. The markets also benefited from somewhat favorable US existing home sales readings which were not as soft as feared. While the aggressive liquidation pattern earlier in the week may not have run its course, the feel is that the markets are reflecting less economic anxiety. Other bullish headlines at the end of last week came from upgrades of Costco and Boeing.
With a 3 day high posted early this weekend global macroeconomic psychology in better position than was presented at the beginning of last week, the bull camp in the Dow Jones could benefit from soft data instead of faltering in the wake of soft data. In other words, with the FOMC meeting approaching and sentiment favoring a smaller rate hike, last week’s low of around 33,000 could be considered a very key value zone. While legal problems for Elon Musk and news of job cuts at Spotify undermine sentiment toward the NASDAQ at the start of this week, hope for favorable big tech earnings and a recently balanced overbought technical condition should improve the performance of the NASDAQ relative to other sectors of the market.
GOLD, SILVER & PLATINUM:
Last week, the gold market managed to extend gains in the face of periodic adversity from strength in the dollar. However, the dollar failed to leave a sideways consolidation despite developments that should have resulted in a strong close last week. Fortunately for the bull camp, the gold trade appears to be capable of shifting its fundamental focus among various bullish forces with buying off flight to quality surfacing several times last week. Furthermore, interest rates appear to have steadied at levels notably below the levels seen throughout most of the 4th quarter of 2022. In a modest intermediate supportive development, the government of India is set to cut gold import duties to reduce smuggling with predictions that the government would bring the gold import duty rate below 12%. The move to reduce gold import duties in India could revive domestic refining which has been idled because of unprofitable conditions.
The March silver contract has clearly lost upside momentum with prices consolidating in a $1.50 range over the last 35 days. The silver market is likely to track physical commodity market developments and potentially track in sync with equity prices.
Obviously, the platinum market enters the new trading week in a less vulnerable liquidation mode, as global risk off concerns from last week were missing in the early going. Unfortunately for the bull camp, the latest net spec and fund long in platinum remains significantly overbought and that should leave the market vulnerable to failures at key support areas.
As indicated in other coverage at the start of this week, the Chinese government apparently thinks that 80% of the population may be infected in this Covid surge, and that could foster hope that infections will peak soon. In fact, if the country has 80% infected and/or exposed, that could lead to a period of natural immunity. Over the weekend, the copper trade was presented with an International Copper Study Group prediction that the global refined copper market shifted into a deficit of 89,000 tonnes in November after posting a surplus of 68,000 tonnes in October.
The outlook for the crude oil market remains in favor of the bull camp into the new trading week. In fact, with early signs of strength and a trade above last Friday’s strong finish should leave the bear camp on a back foot. While we have doubted the effectiveness of the Russian oil price cap, an extension of the price cap probably provides a measure of lift to prices. In fact, a very impressive close on Friday leaves the bull camp hopeful that the $80.00 level will become a plateau of support. The bull camp should be emboldened by recent demand news flow documenting strong demand from India and China with both countries indicating they will boost imports this year.
Clearly the diesel market challenged the gasoline market as the leadership market last week with a 2-day high to low rally of $0.24. Fortunately for the bull camp, the net spec and fund long before the massive rally showed a very modest net spec and fund long.
A front moved through Argentina over the weekend with scattered showers. Many areas received 0.75-1.5 inches. Another couple of fronts are expected to move through this week, which may not be as organized as the last front, but are still forecasting similar amounts for the week. The outlook for better weather in Argentina for this week helped to pressure the market overnight. Exporters announced the sale of 220,000 tonnes of US soybeans sold to unknown destination. Brazil may export 93 million tonnes of Soybeans in 2023 compared with 78.9 million tonnes estimated for 2022, according to Safras & Mercado. Total supply of soybeans should increase by 16% to 157.2 million tonnes. Technically, March Meal experienced a key reversal on January 18 from an extremely overbought condition. The market experienced follow-through selling that helped confirm at least a near term top. Slow stochastics crossed over to the downside from 76.
A front moved through Argentina over the weekend with scattered showers of mostly 0.75-1.5 inches. Another couple of fronts are expected to move through this week, with similar amounts for the week. The market has closed lower for three days in a row as traders see better weather for the Argentina crop this week. In addition, traders are nervous over the potential for a big crop out of Brazil which could offset some of the smaller crop in Argentina. Export sales news was positive and outside market forces carried a bullish tilt.
March wheat closed moderately higher on the session Friday after choppy and two-sided trade. Export sales were little better than traders have seen recently, and the higher close even with better weather for the winter wheat crop areas was seen as a positive factor. In the US, bigger wheat plantings are expected to limit corn and soybean acreage this year as farmers seek to profit from soaring prices, according to a Farm Futures survey. Total wheat acres in 2023 may increase 7% to 48.8 million. If realized, that would be the largest crop sown since 2016. July Kansas City Wheat has consolidated in a choppy range since early December, but open interest has climbed from 145,888 contracts on December 6 all the way to 172,650 contracts this week.
In just 15 trading sessions, February Hogs prices fell from 91.60 to 76.40, a 16.6% drop. This pulled slow stochastic readings down to 8.68 and 5.55. There was a crossover on Friday to suggest a low is in place. The Relative Strength Index is all the way down to 21.1, indicating the market is oversold. February Hog basis is close to normal, but April Hogs are holding a larger than normal premium to the cash market. The buying has pushed the market up to a three session high, and technical indicators are extremely oversold. The USDA pork cutout released after the close Friday came in at $77.62, down 84 cents from Thursday and down from $80.15 the previous week. The CME Lean Hog Index as of January 18 was 73.28, down from 73.85 the previous session and 75.49 a week prior. The USDA estimated hog slaughter came in at 485,000 head Friday and 220,000 head for Saturday. This brought the total for last week to 2.531 million head, down from 2.684 million the previous week but up from 2.436 million a year ago.
The USDA Cattle on Feed report showed placements for the month of December at 92% versus trade expectations for 91% of a year ago with a range of 89.0-94.4 range. Marketings came in at 93.9% of last year as compared with the average estimate of 94.7%, 94.0-96.2 range. The Cattle on Feed supply as of December 1st came in at 97.1% as compared with trade expectations for 96.8% of last year with a range of 96.5% to 97.4%. A combination of slower than expected cattle marketings and placements not down quite as much as expected leaves a bearish tilt to the report. The break last week helped to correct the overbought condition. Technical indicators in the live cattle futures reached overbought extremes near the December 29 peak.
While it could not avoid a third negative daily result in a row, cocoa’s abrupt turnaround last Friday is more evidence that a longer-term low may be in. With the demand outlook showing signs of improvement, cocoa should be able to extend its recovery move early this week. March cocoa came under significant early pressure and fell to a 4 1/2 week low but rallied late in the day to finish Friday’s trading session with only a minimal loss. For the week, however, March cocoa finished with a loss of 82 points (down 3.1%) which broke a 2-week winning streak.
Coffee prices are on-course for a fifth negative monthly result in a row and have lost over 31% in value since the end of August. While the market continues to have a bullish supply outlook, coffee will need to see signs of improving demand in order to sustain a recovery move. March coffee was able to shake off early pressure to finish Friday’s trading session with a modest gain. For the week, March coffee finished with a gain of 3.10 cents (up 2.0%) which broke a 3-week losing streak.
Brazil and Colombia continue to have production issues that have strengthened coffee prices over the past 1 1/2 weeks. While the La Nina weather event is expected to finish by the end of March, it has resulted in drier than normal conditions in Brazilian growing areas and heavier than normal rainfall in Colombia’s growing areas. While there has been talk of good soil moisture levels in Brazil’s south Minas Gerais region, the 2023/24 crop had a disappointing flowering period last year which limit its ability to exceed this season’s production total.
The cotton market remains in an impressive uptrend and with China a more active buyer, and outside market forces holding a positive tilt, the market is threatening to move higher still. New crop December cotton pushed up to the highest level since September 2nd on Friday. China’s reopening is expected to spark increased economic activity and even before the reopening, China cotton prices have pushed higher. Crude Oil headed for a second weekly gain due to brightening economic prospects for China and expectations of a boost to fuel demand and higher oil prices make polyester more expensive. US cotton export sales for the week ending January 12 came in at 209,435 bales for the 2022/23 (current) marketing year and 23,928 for 2023/24 for a total of 236,363. This was up from 72,610 the previous week and the highest since September 1.
Sugar prices have found support from production issues in India, but there has been a change in this season’s export prospects. As a result, sugar is vulnerable to a near-term pullback this week. March sugar could not hold onto early strength and fell to a 1-week low, but rebounded late in the day to finish Friday’s trading session with a modest gain. For the week, however, March sugar finished with a loss of 1 tick which was third negative weekly result over the past 4 weeks and was a negative weekly reversal from last Wednesday’s 3-week high.
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