The treasury trade remains bullish toward prices despite the extension of last week’s reversal slide. In fact, many traders feel the treasuries are poised to rally off the end game of the US debt/debt ceiling battle and other smaller traders/investors think treasury prices are poised to rally when the Fed is forced to “cut” rates. In the near term, the path of least resistance is down with the charts pointing to a slide in June bonds to 129-26 and perhaps 129-18 before finding a solid low. Items providing support to treasuries include initial claims weakness (which posted the highest reading since October 2021 last week), the showdown over the debt ceiling deadline, signs of weakness in the Chinese economy and the potential for soft US data from the Fed Empire State manufacturing survey.
With a minimal bullish chart signal from a higher high posted early this week, the recovery action in the Dollar from last week looks to have extended. Perhaps the dollar is garnering lift from a downtick in German wholesale prices or there is hope in the trade of positive economic views from a pair of US Fed speeches today.
Like the dollar, the euro made a fresh breakout extension, but the extension was to the downside. The sellers are likely motivated by the contraction of euro zone industrial production and by a decline in in German wholesale prices for the first time since December 2020. With a downside extension in the Yen likely the result of a slightly stronger dollar and a very disappointing downtick in Japanese producer prices the fundamentals favor the bear camp. While the Swiss franc bulls are somewhat heartened by the quasi-double low early this week, the prospects of further strength in the dollar could result in the Swiss franc extending last week’s washout down to 1.1153. Like the Swiss franc, the Pound posted a double bottom low early this week, but the slide late last week violated several uptrend channel support levels. The Pound should draft support from news that UK public sector employers are expected to increase pay by the most since 2012. Despite the Canadian dollar rejecting a new low for the move, the path of least resistance from the charts remains down.
Global equity markets at the start of this week were higher except for the Russian and Spanish markets which traded fractionally lower. Earnings reports scheduled for release on Monday included several medical biomed/biotech companies, a foreign bank, and a computer software company. The S&P saw a somewhat impressive opening after a weekend, especially in the environment of the last 8 weeks. While the S&P is trading higher than the level at the last COT report measurement, the net spec and fund short registered the most significant bearish sentiment reading since the subprime/financial crisis.
While the net spec and fund short in the Dow futures is not as extreme as the S&P futures, the net short is moderately large versus recent history. The NASDAQ on the other hand has a residually positive chart set up, with uniform respect of uptrend channel support posted again.
GOLD, SILVER & PLATINUM:
With the significant jump in the US dollar at the end of last week, a new high in the Dollar early this week, a slight rise in US interest rates and softer than expected Chinese new loan data last week, the commodity markets are facing signs of slowing instead of signs of out-of-control inflation. Fortunately for the bull camp, the recent correction in gold prices prompted fresh buying interest in India after seeing those buyers back off with prices above $2,020. Unfortunately for the bull camp, soft US scheduled data, strength in the dollar and global economic slowing fears leaves global gold demand expectations disappointing and leaves the bear camp with an edge with respect to demand fundamentals.
Like the gold market, the silver market saw inflows to silver ETF holdings last week of 2.91 million ounces resulting in a year-to-date gain of 0.6% While the net spec and fund long positioning in silver was not as overbought as gold on a relative basis recently, the market was long enough to justify last week’s late selling wave.
As in other precious metal markets, the platinum market caved in off fears of slowing, tempering inflation prospects, higher interest rates, a firmer US dollar and disappointment in the magnitude of Chinese new loan demand. Not surprisingly, the palladium market saw a less aggressive liquidation than platinum and the rest of the precious metal markets last week. We attribute the relatively smaller losses in palladium to the heavy net spec and fund short the market has been maintaining consistently over the prior trading months.
As in most physical commodity markets, the copper market was very disappointed with the lack of positive forward momentum in the Chinese economy following a very discouraging new loan report. However, the copper market should be cheered by news of a Chinese central Bank liquidity injection and by the substantial decline in Shanghai copper warehouse stocks as they fell by 16,536 tonnes last week extending a streak of outflows. In other words, seeing warehouse stocks draw down over time should indicate industrial activity is beginning to draw down domestic supplies or is anticipating a winding up of activity.
In our opinion, the path of least resistance remains down in the petroleum markets with global demand concerns justified by recent soft scheduled data both inside and outside of China. Furthermore, euro zone industrial activity softened, and the trade expects to see a softer US Fed Empire State manufacturing reading. According to the Iraqi oil minister he does not expect OPEC+ to make additional cuts in their meeting next month and that should give confidence to the bear camp.
In another potentially supportive development, Russian oil export duties are scheduled to rise in June and that could discourage some Russian exports. With the very poor finish at the end of last week combined with the very moderate corrective ongoing action in gasoline relative to crude oil, the gasoline market looks vulnerable from a chart perspective. In fact, China on Friday issued its top refineries with 12 million tonnes of fuel export quotas with most of the quota allocated to diesel, gasoline and jet fuel and the remaining portion allowing for the export of bunker fuel.
While the most significant force in the natural gas trade is the market’s capacity to consolidate above the early May spike low, the market is still facing significant fundamental resistance from both supply and demand elements. In fact, last week the EIA natural gas in storage report showed an injection of 78 BCF which resulted in a surplus to the 5-year average of 18.4%. With US demand expected to be very low in the coming 2 weeks, the path of least resistance is down, especially with the surplus to 5-year average inventory level should grow.
The USDA news was bearish across the board and shows a burdensome supply for the new crop season. This is especially true for world ending stocks, which came in at a new record high and outside of the range of estimates. The USDA report put US soybean production for 2023/24 at 4.510 billion bushels versus an average expectation of 4.496 billion. This was up from 4.276 billion in 2022/23 and a record high. Yield came in at 52.0 bushels/acre versus 51.9 expected and 49.5 in 2022/23. This would be a record high as well. US ending stocks came in at 335 million bushels versus 292 million expected and 215 million bushels in 2022/23. This would be the highest since the 2019/20 season. World 2023/24 ending stocks came in at 122.5 million tonnes versus 108.1 million expected and 101.04 million in 2022/23. This would be the highest world ending stocks on record, and it would be up 21.2% from 2022/23. The previous all-time high was 114.19 million tonnes.
Big ending stocks are anticipated for the new crop season if the weather is normal. The USDA report put US corn production for 2023/24 at a record high 15.265 billion bushels versus an average expectation of 15.140 billion and 13.730 billion in 2022/23. Yield came in at 181.5 bushels/acre (also a record) versus 180.8 expected and 173.3 in 2022/23. Ending stocks came in at 2.222 billion bushels versus 2.105 billion expected. This was up from 1.417 billion bushels in 2022/23 and would be the second highest since 1987/88. World 2023/24 ending stocks came in at 312.90 million tonnes versus 308.1 million expected and 297.41 million in 2022/23. This would be the highest world ending stocks since 2018/19.
July wheat closed higher on the session Friday but well off of the highs. US all wheat production for 2023/24 came in at 1.659 billion bushels versus an average expectation of 1.812 billion and a range of expectations from 1.691 to 1.924 billion. This was up from 1.650 billion in 2022/23. Hard red winter wheat production came in at 514 million bushels versus 594 million expected (range 492-712 million). Soft red winter wheat production came in at 406 million bushels versus 402 million expected (range 337-439 million). White winter wheat production came in at 210.2 million bushels versus 210 million expected (range 223-278 million). US 2023/24 all wheat ending stocks came in at 556 million bushels versus 608 million expected (range 535-690 million) and 598 million for 2022/23. World wheat 2023/24 ending stocks came in at 264.34 million tonnes versus 259.8 million expected (range 245-271 million), and 2022/23 ending stocks came in at 266.28 million tonnes versus 265.3 million expected (range 264-267 million) and 265.05 million in the April report.
June hogs closed slightly higher on the session Friday after choppy and two-sided trade. Continued concerns that there are some producers liquidating breeding stock has helped to pressure. If so, then we might be seeing support in the deferred contracts. However, February hogs have seen contract lows in three of the last four trading sessions. The USDA pork cutout, released after the close Friday, came in at $82.29, up 23 cents from Thursday and up from $79.67 the previous week. The CME Lean Hog Index as of May 10 was 75.40, up from 75.07 the previous session and 74.24 the previous week.
June cattle closed sharply higher on the session Friday as a bounce in beef prices and the discount of June cattle to the cash market helped to support. Beef production is down near 6% this quarter and weight data suggest that producers are current with marketing’s. The estimated average dressed cattle weight last week was 817 pounds, down from 818 the previous week and 818 a year ago. The 5-year average weight for that week is 814 pounds. Estimated beef production last week was 526.5 million pounds, down from 531.9 million a year ago.
Cocoa’s abrupt turnaround last Friday may set the stage for downside follow through early this week. With the market receiving both bullish supply and demand developments during the past few weeks, cocoa should stay fairly well supported on any near-term pullback. July cocoa experienced a negative daily key reversal. For the week, July cocoa finished with a gain of 53 points (up 1.8%) which broke a 2-week losing streak. A negative shift in global risk sentiment weakened the near-term demand outlook and put pressure on cocoa prices. In addition, sizable losses in the Eurocurrency and British Pound put carryover pressure on the cocoa market going into the weekend.
After falling back from a six-month high during the second half of April, the coffee market started May by holding in a consolidation zone. There has been some recent bullish supply development that should help to underpin coffee prices early this week. For the week, July coffee finished with a loss of 5.20 cents (down 2.8%) which was a third negative weekly result over the past 4 weeks. Global risk sentiment remains subdued which put additional pressure on coffee prices as that may weaken out-of-home consumption demand. The Brazilian currency reached a 3 1/2 week high, which provided carryover support to the coffee market. There is a growing consensus that Brazil’s 2023/24 “off-year” Arabica crop will come in above last season’s “on-year” crop, and this has weighed on prices over the past few weeks.
The USDA supply/demand report on Friday put US 2023/24 cotton production at 15.50 million bales versus an average expectation of 15.78 million bales and a range of expectations from 14.70 to 18.05 million and 14.47 million in 2022/23. Exports came in at 13.50 million versus 13.46 million tonnes expected (range 12.20-15.00 million). 2022/23 exports were revised higher to 12.60 million bales from 12.20 million in the April report. 2023/24 ending stocks came in at 3.30 million versus 4.18 million expected (range 3.33-5.05 million). 2022/23 ending stocks were revised down to 3.50 million from 4.10 million in April. World ending stocks for 2023/24 came in at 92.28 million bales versus 90.34 million expected (range 86.00-92.76 million) versus 92.63 million in 2022/23. The US numbers were bullish for old and new crop, with new crop coming in at the bullish end of expectations and old crop seeing ending stocks revised lower.
Sugar’s coiling action last week kept the market at the top end of its 2023 zone. An inability to climb above its late April high may be an early sign that sugar prices are getting top-heavy at their current levels and are vulnerable to a sizable near-term pullback. For the week, July sugar finished with a loss of 10 ticks (down 0.4%) which was a second negative weekly result in a row following 6 “up” weeks in a row. The likelihood that an El Nino weather event will occur during the early stages of India’s monsoon season continues to provide underlying support to the sugar market. An El Nino normally brings drier than normal conditions to India’s growing areas, but it does not necessarily mean there will be a drought. Out of the 14 growing years since 1957 that a drought has occurred, 13 of them have coincided with an El Nino event.
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