Written Commentary
BONDS:
With a lower low in bonds late last week soundly rejected and a revival of US debt ceiling anxiety, the bullish reaction in prices is likely to extend into this week. In fact, seeing US treasury prices gain in the face of a better-than-expected personal income reading, a residually hot core personal consumption expenditure reading and in the face of a significant jump in the Chicago purchasing managers index for April highlight a very capable bull contingent. Even though there have been some positive US economic readings released over the last several weeks expectations for the US nonfarm payroll reading from last month on Friday call for a very small gain of only 181,000 jobs which would be the smallest gain since January 2020! In fact, J.B. Hunt trucking predicted a recession, but that should be offset by what is predicted to be generally positive ISM manufacturing readings for the US. We would not be surprised to see a return to the January/February and early April highs after Friday’s nonfarm payroll report.
CURRENCIES:
With the dollar forging a major range up extension and reversing aggressively from that rally last Friday, it is clear the bull camp lacks resolve and perhaps capacity. However, seeing euro zone inflation remain problematic has likely increased expectations of another 50-basis point ECB rate hike while expectations for the US hike next week calls for a mere 25-basis point move. In conclusion, last week’s corrective action in the currency markets has likely increase the attractiveness of long Swiss franc and Euro positions. While the most likely action in the dollar this week is to remain within a 150-point consolidation zone, we expect the dollar to fail in the wake of a US rate hike on Wednesday.
While the euro will be vulnerable to a measure of post US report pressure, we see uptrend channel support at 1.105. Seeing the Japanese Yen extend last Friday’s very significant downside washout highlights the trades entrenched bearish fundamental and technical views toward the currency. With the hyper volatile Swiss franc showing signs of a double top last month, the currency needs to respect a quasi-double low around the 1.120 level to avoid a failure to the next lower support point.
While the upcoming coronation of Prince Charles could provide psychological support for the Pound, that potential lift will likely be secondary to the recent shift up in the charts. A UK nationwide house price index reading for April is expected to remain in contraction territory, but the contraction is expected to be less significant than last month. With the Canadian dollar significantly oversold at last Friday low, aggressively bouncing from that downside breakout, and regaining the 50-day moving average there are signs of a technical low.
STOCKS:
The surprise rally in equities last Friday caught many traders off guard and potentially served to accentuate the rally with stop-loss buying. In a contrary and type view the markets might have accepted the prospect of failure of First Republic Bank and were also cheered by the release of the Federal Reserve assessment of the Silicon Valley Bank collapse. In other words, the Fed plan to revamp bank oversight provides investors with improved confidence toward the US banking sector. Global equity markets at the start of this week were surprisingly higher (several markets were closed for holiday) as the failure of First Republic Bank (the 2nd largest US bank to fail) could have rekindled financial sector contagion fears again. We sense a growing fear of recession in the US with Charlie Munger (Warren Buffett’s partner) warning of a possible commercial property induced bank failure wave. Furthermore, expectations for a rate hike on Wednesday and the softest of the US nonfarm payroll reading since the Covid lockdown period should discourage investors.
With the low to high rally last week of 132 points in the S&P forged on a minimal uptick in open interest and very modest gains in trading volume there is very likely a key pivot point/trend determining trade in the offing. As indicated already we see a very critical junction for stocks in the Dow this week, with the early edge leaning in favor of the bear camp. We are surprised with the NASDAQ’s initial higher high move this week, especially given Amazon concerns regarding its cloud business and because Twitter announced it would suffer a 10% cut on content subscriptions over 12-months.
GOLD, SILVER & PLATINUM:
Seeing the gold market track lower in the face of the official First Republic Bank failure highlights the market’s lack of sensitivity to flight to quality events. Furthermore, seeing gold and silver diverge suggests flight to quality sentiment is really moderating and the trade is possibly looking at silver as an undervalued commodity following the deficit projections from the Silver Institute. Last week gold ETF holdings increased by 105,274 ounces while silver ETF holdings increased by 4.5 million ounces which shifted silver holdings into a net gain year-to-date 0.4%. On the other hand, gold ETF holdings year-to-date have contracted by 0.3%. We give the edge to the bear camp this week with fear of the Fed dominating early in the week and the potential for a trend signal following the Fed’s decision on Wednesday.
From a technical perspective, the platinum market is very vulnerable to a net spec and fund long position very near the highest levels in 14 months. As we have been indicating, the palladium market has failed to benefit from the potential for improved demand from China as has been the case in the platinum market. However, the trade is fully embracing the expectation that palladium will lose industrial market share to platinum and the platinum/palladium spread will continue to narrow.
COPPER:
Seeing copper prices post minimal declines early this week in the face of a discouraging Chinese April manufacturing PMI survey adds credence to the idea of value at last week’s lows. However, the soft Chinese data has instantly fostered calls for, predictions of and hope among Chinese companies of further Chinese government policy support. It should be noted that the markets were tossing around two different types of support plans last week, but those plans were not likely to be a direct benefit for copper in the near term. It appears that a small measure of risk on and slightly positive Chinese economic news resulted in copper rejecting the 4-month low and last week with the trade extending the recovery into a 2nd day during last week’s late trading. However, the copper market is facing talk of more consistent production from South America which could reduce price volatility and limit the magnitude of gains in copper.
ENERGY COMPLEX:
While the Friday rally back above the 50-day moving average was partially the result of lower US production, the oversold condition of the crude oil market from the May high to low washout of $7.00 added to the cleansing bounce. However, the fundamental outlook for energy demand has suffered a major blow following disappointing Chinese manufacturing PMI readings released overnight. Bearish supply side influences remain from last week’s news that big oil posted very significant profits from strong production and high margins. While it may not be a direct supply side support for the bull camp reports that a Ukraine drone caused a major Crimea fuel depot fire could heat up the war in Ukraine. While a quasi-triple low in June crude oil last week around $73.93 that level could lend technical support for prices to start the new trading week, but the potential for fireworks from the financial markets into the US Federal Reserve rate decision on Wednesday could produce a failure of that support. It should be noted that US crude output in February fell to a 3-month low at 12.4 million barrels per day while US oil and gas rig count readings have pretty much stabilized.
The bull camp continues to be “lucky” as weekly natural gas injections in the US continue to rebuild supply with the most recent surplus to the 5-year average reaching 22.2%, which is the highest since March. However, the market has also managed to hold up consistently over the last several weeks despite widespread expectations that both the US and Europe will see inventories build quickly in the shoulder season and yet the market has held up rather impressively to the evidence of Chinese slowing.
BEANS:
Short-covering seemed to be the key supportive force last Friday with the market turning higher for July soybeans with an outside-day-up. The rally in soybeans Friday took place in the face of indications from the Cargill Brazilian CEO that Chinese soybean demand for Brazilian beans is coming in softer than expected. However, it should be noted that the CIT positioning in soybeans has leveled out over the past several weeks after a precipitous liquidation. There have been no deliveries against the May soybean contract and also none for meal. There were 449 contracts delivered against May soybean oil which pushed the month to date total to 648 contracts. For the May 1 NASS March crush report, the average trade guess is 197.3 million bushels with a range of 195.6 to 200.0 million. With new capacity, traders may underestimate the size of the crush. The Oil stocks estimate is 2.414 billion pounds with a range of 2.390 to 2.450 billion.
CORN:
For the life of contract range, the 50% mark for July corn is at 571 3/4. The market came within 1/4 cent of this price on Friday and closed 13 cents up from the lows. Unlike soybeans and wheat, open interest in the corn market has declined significantly from earlier in the month, corn has returned to a long-term historic pivot price of $5.20 in the December contract and cold temperatures in the eastern Corn Belt in the coming 2 weeks could result in some frost damage, and therefore conditions for a bottom have improved. However, numerous indications of softening Chinese demand for US corn will continue to hang on the back of the market especially with the potential for the USDA report next week to highlight softer demand.
WHEAT:
Even though the wheat market rejected a new low for the move and closed higher on the day, the charts remain patently bearish and open interest is in a steep downtrend. The hook reversal after the market reached is a positive technical development. While there will need to be more rain in the central and southern Plains to make a market, a wave of precipitation certainly leaves a bearish element in the market. Similarly, French soft wheat crop ratings have reached a record high creating the potential for a good crop especially with ratings 94% in the good to excellent category.
Poland and four other European Union member states agreed to restrictions on Ukrainian grain products as part of an agreement with the bloc’s executive arm. The measures apply to wheat, corn, rapeseed, sunflower and sunflower oil and will be in place until June 5, with the possibility of being extended through the end of the year. Farmers are a key voter base for political parties in Poland ahead of October elections. The ban came as a surprise, since Poland has been among the staunchest supporters of Ukraine since it was attacked by Russia last year.
HOGS:
The hog market has been in a general uptrend since April 20 with a tightening outlook for supply, an improved export outlook, and stronger pork prices have trended higher in the latter part of last week. The weekly US export sales report was strong last week for the second time in three weeks. The USDA pork cutout, released after the close Friday, came in at $80.13, up $2.87 from Thursday and up from $79.23 the previous week. This was the highest the cutout had been since March 16. The USDA estimated hog slaughter came in at 450,000 head Friday and 47,000 head for Saturday. This brought the total for last week to 2.387 million head, down from 2.454 million the previous week but up from 2.367 million a year ago.
CATTLE:
The cattle market pushed through Thursday’s high on Friday but failed to follow through, and this action may become a disappointment for the bulls. A strong beef market last week was supportive, with the boxed beef cutout reaching its highest level since September 2021. This move offsets a mixed to slightly lower trend in cash cattle. The USDA boxed beef cutout was up 6 cents at mid-session Friday and closed 37 cents higher at $311.44. This was up from $306.60 the previous week and was the highest it had been since September 20, 2021. The cash live cattle market is divided, with prices in the northern regions running $5.50-$6 higher than the south. Iowa/Minnesota averaged $179.09 last week, with Nebraska at $178.38, Kansas at 172.92, and Texas/Oklahoma at 172.90. As of Friday afternoon, the five-day, five-area weighted average price was 177.18, down from 178.36 the previous week. The high price for cash cattle leaves speculators less aggressive at selling the big June discount.
COCOA:
Cocoa prices have had trouble sustaining upside momentum since reaching a multi-year high in mid-April as the market saw a “lower high” in each of last week’s sessions. While cocoa continues to have a bullish longer-term supply/demand outlook, this may set the stage for a sizable pullback in early May. July cocoa was able to rebound from a 1 1/2 week low to finish Friday’s trading session with a moderate gain. For the week, July cocoa finished with a loss of 46 points (down 1.5%) which broke a 2-week winning streak.
COFFEE:
Coffee prices had a sluggish finish to April as they only had two positive daily results over the final 8 sessions of the month. With Brazil’s Arabica harvest underway and likely to reach full speed by the end of this month, coffee may remain under pressure during the early part of May. July coffee was unable to hold onto early support as it fell to a 2 1/2 week low before finishing Friday’s trading session with a sizable loss. For the week, July coffee finished with a loss of 5.50 cents (down 2.9%) which was a second negative weekly result in a row.
COTTON:
July cotton closed higher on Friday but well off the highs of the day as it attempted to follow through on Thursday’s sharp rally. The market failed to take out Monday’s high, which may have been a disappointment to the bulls. The dollar rallied to its highest level since April 11 early in the session, but it ended up closing well off its highs of the day. A stronger dollar makes US export commodities more expensive. Crude oil closed sharply higher on Friday which could benefit cotton as higher price oil may increase the cost for man-made fibers. The weather forecast for west Texas is wet, which could help alleviate the dry conditions in that region and benefit the upcoming crop. The 1-5-day forecast calls for 0.1-0.5 inches, and the 6-10 and 8-14-day forecasts show above normal chances of rainfall.
SUGAR:
Concerns over tighter global supplies started an uptrend for the sugar market in early January which accelerated over the past five weeks with prices rising over 6 cents (nearly 30%) in value. While reduced exports and production have fueled concerns, increased sugar production should help ease supply concerns and usher in lower prices. July sugar held within a fairly tight inside-day range before finishing Friday’s trading at unchanged levels. For the week, July sugar finished with a gain of 2.01 cents (up 8.3%) which was a sixth positive weekly result in a row.
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