Written Commentary
BONDS:
On their face, last week’s US economic data was indicative of a positive (albeit slow) forward movement in the economy. On the other hand, the takeaway from last week’s inflation readings has prompted treasury selling off a slight increase in expectations of a US Fed rate hike in the coming weeks. While the US durable goods report was much stronger than expected in the headline figure, extracting transportation in defense orders from the durable goods sales showed extremely soft consumer purchases. In the end, treasury prices continue to erode despite fundamental evidence that would ordinarily have supported prices.
CURRENCIES:
Even though trade expectations for a US debt ceiling deal surfaced and in turn reduced financial and economic uncertainty, the dollar remained strong at the end of last week. However, US treasury yields continued to rise and that in turn should increase foreign capital flows toward the US which should result in even more gains in the dollar. Competition against the dollar is deteriorating with Germany thought to have entered a recession with this week’s GDP contraction. With another higher high for the move in the dollar at the start of this week, the upward track in the dollar from the early May low is extended.
STOCKS:
As indicated by Paul Tudor Jones earlier last week, the potential benefits from artificial intelligence could be the most important economic development in the last 75 years. In fact, optimism toward future AI revenues is so significant that the markets have managed to discount significant increases in US interest rates. The bullish glow from AI has also distracted investors from rotating from equities to attractive lower risk interest-bearing instruments. On the other hand, the surge in NVIDIA shares last week has reportedly resulted in $300 billion in gains in artificial intelligence related companies.
Global equity markets at the start of this week were evenly split with Asia performing slightly better than Europe. While the NASDAQ and big tech carried the bull banner throughout the month of May, prospects for other sectors of the market have improved with the weekend budget deal progress and signs that upward pressure on interest rates might have peaked for the near term. Obviously, the Nvidia story will continue to be the bull’s rally cry, but unfortunately Washington will periodically upset the apple cart until the June 5th deadline forces a deal.
GOLD, SILVER & PLATINUM:
With another new high for the move in the dollar at the start of this week, the slightly lower trade in gold and silver early this week was justified. While there appears to be movement closer to a debt ceiling deal in Washington, the markets have been baking a deal into the cake over the past 2 weeks and a very neutral agreement will probably result in many markets turning their focus to other fundamental issues. Fortunately for the bull camp in gold and silver, interest rate markets are somewhat supportive after pressuring gold and silver throughout most of May. Last week gold ETF holdings increased by 345,816 ounces with a single day inflow on Friday of 216,552 ounces which brings the year-to-date gain to 0.5%.
COPPER:
With LME copper warehouse stocks up every day over the last month, total LME copper warehouse stocks are now above the volume of supply held in Shanghai exchange warehouses, and for some that suggests there is less uncertainty with respect to availability of supply for Western users than in China. However, some see the pattern of daily increases in LME copper supplies as a sign of slack demand. However, Shanghai copper stocks have declined for 13 straight weeks and are likely to reach the lowest levels of the year in this week’s report.
ENERGY COMPLEX:
We are a little surprised with the weakness in crude oil prices at the start of this week as big-picture macroeconomic sentiment appears to be upbeat. However, the May rally consistently priced in positive demand with the rally early last week prompted by Saudi warnings for those short the market ahead of the OPEC+ meeting providing some additional lift. Obviously, the trade saw the Saudi threat as a signal of additional tightening by the cartel, but that supportive issue was eliminated by Russian statements late last week indicating there would be no change in the current OPEC+ production arrangement. Furthermore, the market is trading lower despite reported progress in a US budget deal and that along with weakness in the face of stronger equities highlights bearish control of energies from outside market forces.
BEANS:
With the very weak demand tone, the soybean market has failed to react so far to the recent dryness in parts of the US. November soybeans closed higher Friday as traders saw the recent dry weather, and the dry weather forecast as reasons to move to the sidelines ahead of the three day weekend. In the last seven days there has been no rain for Iowa, Minnesota, Wisconsin, Illinois, Indiana and Ohio. In the last two weeks, some areas of Minnesota, Iowa, Illinois, Wisconsin and northern Indiana have received 1/10 to 1/4 inch. The 5-day forecast shows some rain (1/4-3/4 inch) for Western Iowa with eastern Iowa looks very dry. Wisconsin and Illinois and northern Indiana stay dry.
CORN:
There is a flash drought concern for areas near Chicago after May rainfall (most of which was the first half of May) reached just 0.42 inch which is down to 10% of the normal rain, and May 2023 continues on-track to finish the 2nd driest May of the past 153 years. December corn closed sharply higher on the session Friday and the buying pushed the market up to the highest level since May 8. Talk of the extreme oversold condition of the market with fund traders holding a huge net short position during the first dry period of the season helped to spark buying. A more positive tilt to outside markets added to the positive tone. July corn also pushed sharply higher on the day and up to the highest level since April 26. In the last seven days there has been no rain for Iowa, Minnesota, Wisconsin, Illinois, Indiana and Ohio.
WHEAT:
July wheat closed moderately higher on the session Friday and has stayed in a tight consolidation for the past seven trading sessions. July Kansas City wheat closed slightly higher on the day Friday after the rally above Thursday’s high failed to attract new buying interest. Some additional moisture in the forecast for the winter wheat belt helped to limit the buying. The 5-day forecast shows hefty rain totals for Western Kansas and the 6 to 10 and 8 to 14 day models are still showing above normal precipitation. As a result, the crop which did survive the drought should show significant improvement in the weeks ahead.
HOGS:
The hog market is extremely oversold technically and is probing for a short-term low. July hogs closed sharply lower on the session Friday and the market has posted new contract lows in six of the last seven trading sessions. Weights are much lower than normal and suggests producers are current with marketings, and the market faces seasonal tightening in supply in the weeks just ahead. This may support the cash market and July hogs are already trading at a significant discount to the cash. The USDA pork cutout released after the close Friday came in at $80.89, up $1.22 from Thursday but down from $82.47 the previous week. The CME Lean Hog Index as of May 24 was 80.80 up from 80.67 the previous session and up from 78.42 the previous week. This leaves August hogs at a discount of near $6.80 discount to the cash as compared with the 5-year average of $2.26 discount.
CATTLE:
August cattle closed higher on the session Friday but well off of the early high, and the early high was a contract high. The market is technically overbought and may be in need of some type of a technical correction. The short term fundamentals remain positive, however, and futures are at a discount to the cash market. Cash live cattle traded in Kansas in light volume on Friday at the top end of last week’s range. As of Friday afternoon, the five-area weighted average price was $177.56, up from $175.15 the previous week. This leaves August cattle trading near a $12.40 discount to the cash market as compared with the 5-year average discount of near $7.03. The USDA boxed beef cutout was up $3.95 at mid-session Friday and closed $3.99 higher at $303.93. This was up from $301.10 the previous week and the highest it had been since May 12.
COCOA:
Cocoa prices are on course for an eighth positive monthly result in a row but have only had one positive daily result during the past five sessions. While this leaves the market vulnerable to profit-taking and additional long liquidation early this week, cocoa continues to have a bullish supply/demand outlook going forward. July cocoa found early support, and then lost strength late in the day as it finished Friday’s outside-day trading session with a moderate loss. For the week, July cocoa finished with a loss of 77 points (down 2.5%) which broke a 2-week winning streak and was a negative weekly key reversal.
COFFEE:
Coffee prices went into the holiday weekend on a downbeat note as the market was pressured by bearish supply news. With two sessions left in May, coffee could be vulnerable to additional long liquidation early this week. July coffee was unable to hold onto early support as it fell to a 6 1/2 week low before finishing Friday’s trading session with a moderate loss. For the week, July coffee finished with a loss of 10.40 cents (down 5.2%) which was a second negative weekly result over the past 3 weeks.
COTTON:
July cotton reversed and closed sharply higher on Friday, taking back most of Wednesday’s and Thursday’s losses. Reports of good progress on a debt ceiling deal supported many commodity markets, including cotton. News over the weekend that a deal had been reached could also provide a lift to the market in the early going. Last week’s drought monitor showed significant improvement in drought conditions in some of the hardest-hit areas of Oklahoma and Texas as rain benefited rangeland, pastures, and summer crops. Still, even with abundant showers and thunderstorms, pockets of extreme to exceptional drought (D3 to D4) persisted in western and central Texas and across the northwestern half of Oklahoma.
SUGAR:
Sugar’s abrupt turnaround on Friday was able to break a 3-day losing streak, but that recovery may have been due in part to carryover support from key outside markets. With recent bearish supply news, sugar prices may fall back on the defensive going into month-end. July sugar was able to shake off early pressure with a late rally as they finished Friday’s trading session with a sizable gain. For the week, however, July sugar finished with a loss of 41 ticks (down 1.6%) which was a fourth negative weekly result in a row.
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