The latest Japanese CPI came in below trade forecasts while there were indications that the Bank of Japan will keep policy unchanged at next week’s meeting, both of which provided a mild boost to risk appetites. In addition, the latest UK retail sales reading came in higher than expected. While there were no major US economic numbers for the market to digest, Canadian retail sales were highest than estimates while the Canadian new housing price index was in-line with forecasts. Treasuries have held within inside-day ranges and went on to close to mild gains during Friday’s trading session.
The Dollar was able to extend its recovery move to a 1 1/2 week high before finishing last Friday’s trading session with a moderate early gain and a positive weekly reversal from Tuesday’s 15-month low. While there were no major US economic numbers for the market to digest, weaker than expected readings for UK CPI on Thursday and Canadian retail sales on Friday provided the Dollar with underlying support. In contrast, the Japanese Yen came under severe pressure due to a lower than expected Japanese CPI reading as well as the prospect of steady rates and policy at next week’s BOJ meeting. The Dollar forged a higher high to start the new trading week and appears poised to fill a gap up at 101.295/101.315.
Global markets were able to build upon a positive early tone, but then lost some of their strength by the close of last Friday’s trading session. Reports that China would introduce stimulative measures for their property and automotive industries gave early support to many market sectors. American Express and Schlumberger saw positive earnings results that gave a further boost to sentiment coming into early action. However, news that the Nasdaq stock index would see a special rebalancing over the weekend caused a mild flare-up of risk anxiety.
Following volatile price action, the major US stock indices fell back from their early highs as the Nasdaq index closed in negative territory. The S&P is showing initial positive action this week and that highlights confidence in the US economy to withstand what could be the last rate hike of this year. While the Dow futures remain just under last week’s upside breakout, the large company index has remained relatively stronger than other sectors of the market through the recent corrective dip. The NASDAQ remains the most vulnerable of the actively traded stock index futures contracts with negative legal/union related developments involving Elon Musk and the potential for additional trade barriers in the global chip markets after Japan joined the US battle against China in the chip trade war.
GOLD, SILVER & PLATINUM:
We think the gold market is lucky to be holding above last week’s lows in the early trade this week given a fresh higher high in the US dollar and in the face of almost certain rate hikes from the US and Europe later this week. In retrospect, investors remain cool toward gold and silver, with ETF holdings last week declining by 257,337 ounces in gold and by 6.4 million ounces in silver. Year-to-date both gold and silver ETF holdings are both more than 2% lower! With the dollar rallying 160 points last week, the Thursday/Friday reversal in August gold of $40 was clearly deserved and likely sets the stage for more declines early this week.
The charts in the September silver contract have also broken down with last Friday’s 7-day low and little in the way of support from the major two-day rally 2 weeks ago of $1.80. While silver has managed to track better than gold in the face of risk on conditions, we suspect silver will fall in line with gold this week and slide on the charts in the wake of further gains in the US dollar. With platinum prices tracking lower early this week following reports of a 13% decline in Amplats platinum production (profits down 71%) and in the face of a bullish price outlook from UBS, it is clear the bull camp lacks motivation. While the October platinum contract was down $34 from the COT report mark off the net spec and fund long is still in the upper 25% of the net spec and fund long range since May 2021.
Despite hope remaining eternal on additional Chinese stimulus efforts, copper prices have started the week out on a downward track and a failure to hold last week’s low at $3.781 could open the door for a quick down move to $3.7665. In retrospect, the inability to hold rallies on 2 occasions last week in the wake of yet another Chinese stimulus announcement is very disappointing to the bull camp. In fact, with the Chinese government offering specific assistance for the automobile and electronics industries, the inability to launch on the upside highlight a lack of interest by the bull camp. Unfortunately for the bull camp, recent exchange warehouse stock data has also favored the bear camp, but that was offset by very aggressive commentary from a major copper mining CEO who indicated copper prices will have to be significantly higher to expand production to meet the demand from the energy transition.
With a higher high extending last week’s recovery and putting crude oil prices into a fresh upside breakout, the bullish tilt from last week has been extended into this week. While there have been recent signs of softening US energy demand, signs of residual strength in Asian demand have apparently taken precedence. In another sign of residual Asian demand and Russian compliance with output reduction agreements, reports are Russian discounts on sales to China have narrowed and that should embolden the bull camp. On the other hand, the prospect of tighter supply has also been a key element of the bull case with the primary catalyst hope and recent evidence of reduced Russian August shipments. Another minimal fresh supply-side development for crude oil is a 2.2% decline in floating storage from weekly figures provided by Vortexa.
In the diesel market, a bearish Bloomberg weekend article indicated US diesel demand was softening along with jet fuel and gasoline demand! Therefore, with the September diesel contract this morning sitting $0.15 above the level where the last positioning report was measured, the net spec and fund long is likely approaching the largest level since October 2021.
While the natural gas market will continue to get support from hot temperature forecasts, there were suspicions about the upper end temperatures forecasted in last week’s trade and some chatter suggesting heat might not entrench. In fact, the 7-day forecast shows extreme heat limited to Southern California, Southwest Arizona, and a large portion of Kansas and that is certainly not a bullish forecast for the end of July in the US.
Not surprisingly, the soybean trade continues to show dramatic shifts in its views toward the weather and the status of the US soybean crop. In fact, late last week the trade was discounting the potential for entrenched, widespread extreme heat, but has embraced the hotter and drier forecast again this morning. However, the latest US drought monitor showing some improvement, the extension of the cooler and wetter general pattern through the weekend, the potential for improved US soybean crop conditions readings this afternoon are high. While we think corn crop conditions will deteriorate that is the result of the longer and more significant stress and lower crop condition in corn and from the soybean plant’s ability to pause/withstand adversity. On the other hand, the potential for renewed stress is obvious with forecasts for 100 degree temperatures likely in the central and southern Plains and in the Southwestern Midwest.
Russia struck port facilities along the Danube River over the weekend in a bid to further limit Ukrainian’s export capabilities. This escalation, along with hot temps and mostly dry weather this week in the Midwest, turned prices up at the start of this week and DEC corn took out last week’s highs and looks poised for more gains. With some Ukrainian grain looking to be “stranded” in country as Russia hits the ports, Ukraine’s export pace will likely slow dramatically and give a bullish backdrop to prices, especially in the face of less-than-ideal weather here in the US. Also, crop conditions this afternoon are expected to be steady or lower.
In an escalation of the war Sunday night, Russia attacked grain storage facilities along the Danube River for the first time. There can now be no doubt that Russia is trying to shut down Ukraine’s food export capabilities and that can only be construed as very bullish to prices. NATO-Ukraine Council will meet Wednesday to discuss any new ideas to keep shipments moving but already, Black Sea shipping traffic last week fell 35% from the previous week. Prices have reacted violently higher overnight, not only reacting to the Black Sea events, but also the weather for the Midwest looks mostly dry through late this week with temperatures rising and the Canadian Prairies likely to see only limited relief. Last week’s highs on DEC at $7.68 3/4 look easily reachable and the late June highs of $7.84 1/4 are now in the markets sights as well.
The heat wave heading to the Midwest looks a little less severe than it did last week, and producers may be less concerned about weight gain. October hogs were lower on Friday, as the market was likely disappointed at the feeble attempt to build on Thursday’s rally. Hogs traded to their highest level since early April last week, and longs may have been anxious to take profits ahead of the weekend. The 6-10-day forecast is still calling for much above and above temperatures across most of the US, with conditions most extreme in the south and less so in the north. The USDA pork cutout, released after the close Friday, came in at $114.13, down 23 cents from Thursday and down from $114.82 the previous week. The CME Lean Hog Index as of July 19 was 103.60, up from 103.30 the previous session and 100.29 a week prior.
Friday’s Cattle on Feed report was bearish, particularly for the deferred contracts, with June placements coming in at the top of the range of expectations and above a year ago, but the cattle market may be able to quickly move past the report and focus on the tight supply. The report showed placements for the month of June at 102.7% of last year versus trade expectations of 98.4% and a range of expectations from 96.0% to 102.7%. June marketings came in at 95.0% of last year versus 95.1% expected (range 94%-96%). June 1 on feed supply came in at 98.2% versus 97.7% expected (range 97% to 98.9%).
The cocoa market has digested disappointing demand news over the past few weeks as the three major processing regions (Europe, Asia and North American) all reported second quarter grindings that were 5.7% or more below last year’s level. Cocoa prices have resilient as they continue to find support from bullish supply development and are on course to reach a new 12-year high early this week. September cocoa reversed Thursday’s selloff and was back in bullish mode as it finished Friday’s outside-day session with a moderate gain. For the week, September cocoa finished with a gain of 63 points (up 1.9%) and a third positive weekly result over the past 4 weeks. The cocoa market shifted back to focusing on tight near-term supply and the threat to the upcoming 2023/24 crop from black pod disease and El Nino.
After reaching a six-week high in early June, the coffee market fell 32.75 cents (down 17%) by the end of the month with the main source of pressure an outlook for a stronger Brazilian 2023/24 crop. With Colombian supply issues and an improving global demand outlook, coffee may be undervalued at current price levels. September coffee reached a 2-week high before finishing Friday’s trading session with a sizable gain. For the week, September coffee finished with a gain of 1.05 cent (up 0.7%) and a positive weekly reversal from last Tuesday’s 5 1/2 month low.
December cotton had a wild day on Friday, trading to its highest level since February and then falling back below Thursday’s low before settling in middle of the day’s range. News that China will issue 750,000 tonnes in sliding tariff rate cotton import quotas to non-state-run firms sparked heavy buying by speculators. But expectation that most of the cotton purchased would come from Brazil sparked selling. The document announcing the tariffs did not specify when the quotas will be issued. At the high, the market had rallied 5.6% on the week and 12% from the low on June 27, and traders may have been anxious to take profits. Extreme heat in China’s Xinjiang region, the southwestern US and Texas have growers concerned about the crops, but some relief could be coming next week.
Sugar prices have only had one negative daily result over the past 9 sessions as they have climbed up to 4-week highs. Although the market may have to face bearish supply news later this week, sugar should remain well supported during today’s action. October sugar extended its July rally to its highest level since June 23 before finishing the day with a sizable gain. For the week, October sugar finished with a gain of 0.69 cent (up 2.8%) and a third positive weekly result in a row.
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