Written Commentary
BONDS:
While last Friday’s latest personal income, personal spending, PCE and core PCE readings were in-line with trade forecasts, there was a sizable decline in the goods trade balance and a better than expected reading on consumer sentiment. Later in the day, the Fed’s Williams said that the Fed is at or near a peak for the Fed Funds rate, and that monetary policy is having the desired effect on the US economy. Treasuries were unable to hold onto early strength but closed last Friday with moderate gains. In retrospect, the flight to quality threat from a US government shutdown has temporarily abated but the bounce last week of 2 1/2 points in bonds and 1 1/2-point rally in notes should have corrected the oversold condition from the aggressive March washouts and that should provide fresh selling impetus this week.
CURRENCIES:
The Dollar remained under pressure through midsession, but was able to recovery a large portion of early losses by the close of Friday’s trading session. While the increasing likelihood of a US government shutdown was a source of pressure, several better than expected reading for key US data helped the Dollar regain strength late in the day. The Canadian dollar found early support from a better than expected Canadian GDP reading, but fell back to a new 2 1/2 week low before closing with a heavy loss. With higher interest rate expectations returning to the fray and disappointing Chinese and German manufacturing PMI data, the dollar has come back into vogue.
With the euro posting a low to high bounce last week of 130 points, the oversold condition is partially balanced allowing for a fresh wave of selling. Not surprisingly, the Pound bias is down with Nationwide housing prices in September contracting again as that partially countervailed a slightly better-than-expected manufacturing PMI reading for September. The massive range/reversal last Friday combined with a definitive downside extension this morning leaves the charts in the Canadian dollar patently bearish.
STOCKS:
Global markets held onto a positive tone early but took a negative shift late in last Friday’s trading session. There were few signs of progress on avoiding a government shutdown, which put increasing pressure on many market sectors. In addition, there were reports that the UAW may expand their strike to additional facilities which also eroded global risk sentiment. US equity markets turned back to the downside and finished Friday’s trading under pressure.
Investors remain skittish because of fears of progressively higher US interest rates. In short, positive US economic data looks to be negative for stock prices. With the Dow charts unable to forge a noted recovery retracement from the very aggressive September washout and tracking lower, the bear camp remains in control as the fear of higher rates and more importantly the fear of rotation away from equities hangs in the marketplace giving confidence to the bear camp. In addition to negative big picture macro forces returning, the NASDAQ is confronted with a bevy of bearish tech sector headlines.
GOLD, SILVER & PLATINUM:
While the recovery in the dollar is not significant early this week, and the slide in treasuries has not resulted in higher highs in (an upside breakout) in treasury yields, outside forces have clearly shifted back in favor of the bear camp. Apparently, China released its manufacturing PMI readings for September which countervailed recent signs of green shoots and a measure of optimism that was associated with the upcoming extended holiday. Once again, the US Congress “kicked the debt problem down the road” with a continuing resolution pushing the threat into mid-November. With the gold market last week posting a high to low slide of $84, the fear of a US government shutdown resulted in the market returning to a classic physical (nonfinancial) commodity market personality. Therefore, both gold and silver look to remain hostage to the action in the dollar and US treasuries.
With the Chinese on holiday and platinum unable to display follow-through in either direction last week, we see the January contract caught within a range defined as $949 and $895. Palladium positioning in the Commitments of Traders for the week ending September 26th showed Managed Money traders are net short 9,358 contracts after net buying 87 contracts.
COPPER:
Despite the Chinese economy on an extended holiday, negative headlines continue to flow the world’s largest copper consuming nation. In fact, a softer than expected Caixin manufacturing PMI reading counters a recent emerging pattern of more upbeat Chinese economic headlines. Furthermore, according to Bloomberg, Chinese investors think the worst of the property sector woes are yet to pass. Fortunately for the bull camp the copper market has held a moderately significant net spec and fund short recently and that could mitigate the magnitude of fresh selling! However, copper at the end of last week forged a bounce of $0.13 and that probably balanced the oversold condition thereby allowing for some fresh selling this week.
ENERGY COMPLEX:
While crude oil prices are higher early this week and press coverage suggests the “global tight supply situation” theme will continue to lift prices, we see the retrenchment off last week’s spike high combined with disappointing Chinese manufacturing data signaling an interim top. In fact, with the disappointing Chinese data joined by evidence that Asian crude oil imports last month declined for a second straight month the tight supply situation is showing signs of moderating. However, there will be an OPEC meeting on Wednesday and if prices continue to fall back from last week’s high and especially if November crude falls back below $89.00 there should be definitive continued commitment to production restraint.
With RBOB rejecting a probe below $2.40 again and Russian oil refiners reducing daily throughput rates last month to the lowest level since May, the odds of temporary respect of the $2.40 level have increased.
Gas (RBOB) positioning in the Commitments of Traders for the week ending September 26th showed Managed Money traders net sold 13,221 contracts and are now net long 51,421 contracts. However, the diesel market appears to be untethered with gasoline given the market’s aggressive rejection of the slide below $3.20 last week, which is likely the result of ongoing global ULSD tightness fears like those in the crude oil market. The natural gas market continues to be very difficult to predict as prices continue to coil in a tight range with the market embracing oversupply and merely consistent demand.
BEANS:
The breakout to the downside late last week was bearish and with funds still holding a long position of more than 30,000 contracts, soybean prices are likely to see further long liquidation early this week. With the Quarterly Stocks report now behind us, traders focus will now move to South American weather and US harvest, which made significant progress last week and over the weekend with clear skies across most of the Midwest. Harvest progress is expected to be around 25% complete. Some rain is forecast for the Western belt midweek and the eastern belt late this week, but coverage amounts do not look to be heavy enough to significantly delay harvest.
CORN:
Friendly Quarterly Stocks data was not enough to offset spillover weakness from wheat and beans and harvest hedge pressure and confirmed the fact that the carryout will likely stay over 2 billion bushels. The government remains open so harvest progress will be released Monday afternoon and is expected around 30% complete. Very good harvest weather over the weekend will continue into mid-week when the Western corn belt and southern Plains are expected to see rains. Eastern belt rains will hold off until the end of this week. Mississippi River levels have been in the news as a key stretch of the river is near a record low. It doesn’t appear that rains this week would be enough to ease the transportation problems.
WHEAT:
The bearish surprise Friday was not in the quarterly stocks number but, instead, US wheat production numbers increased significantly in nearly all categories of wheat with most coming in above the highest guess. This caught traders flat-footed after the recent consolidation and funds were reportedly heavy sellers of over 10,000 contracts. Open interest also rose 7655 contracts indicating new shorts were pressing the market down. Overall, US wheat supplies are low; however, demand is also low, and it doesn’t matter how low your supplies are if you have few buyers for those supplies. Black Sea news is also bearish with five more ships heading to Ukraine ports to load grain after three just left.
HOGS:
December hogs sold off on Friday in the wake of a bearish Hogs and Pigs report Thursday afternoon, leaving the market vulnerable to a test of support at the August low. The report showed September 1 supply came 100.3% of last year versus an average trade expectation of 99.2% and a range of expectations from 98.1% to 99.8%. Kept for breeding came in at 98.8% versus 98.7% expected, and market hogs came in at 100.4% versus 99.3% expected. The June-August pig crop was 100.4% of last year versus 98.6% expected. The report did confirm a reduction in the breeding herd, which is still supportive long-term, but the overall supply showed a larger supply than last year instead of smaller. The CME Lean Hog Index as of September 27 was 86.14, unchanged from the previous session and down from 87.17 the previous week.
CATTLE:
December cattle were lower last Friday in a reversal of last Thursday’s strong action, and they were back near the bottom of a two-week trading range. The market may have seen spillover pressure from sharp declines in the hog and grain markets. The USDA estimated cattle slaughter came in at 96,000 head Friday and 11,000 head for Saturday. This brought the total for last week to 612,000 head, down from 625,000 the previous week and 667,000 a year ago. The estimated average dressed cattle weight last week was 827 pounds, up from 826 the previous week but down from 831 a year ago. The 5-year average weight for that week is 832 pounds. Estimated beef production last week was 505.1 million pounds, down from 553.2 million a year ago.
COCOA:
Cocoa prices have fallen 9.4% in the past two weeks and have traded below the 50-day moving average for the first time since mid-March. This has alleviated an overbought technical condition and has even made the market short-term oversold. Prices have stayed above the 100-day moving average and far above the 200-day. A negative shift in global risk sentiment has weighed on prices recently, as traders worry about demand implications, especially with prices as high as they are. Renewed weakness in the euro and the British pound can also put pressure on cocoa, as it makes it more expensive to for European grinders to buy. A shift towards rainy weather over West African growing areas could benefit upcoming production, and this is especially important given expectations that El Nino will drier than normal conditions the region later this season.
COFFEE:
Coffee prices have fallen for seven of the past eight sessions and are this/close to the January low. While the market is well into bargain territory, it probably needs a bullish supply development to sustain any sort of recovery move. Brazil’s harvest is basically complete, but exports are likely to continue to be strong through the rest of the year. Their 2023/24 “off-year” Arabica crop is estimated to be 16.6% larger than the 2022/23 “on-year” crop. Concerns that the negative shift in global risk sentiment would weaken out-of-home consumption also weighed on prices last week. Vietnam’s coffee exports in September were down 32.7% from last year, and their 2023 total so far was 7.3% lower.
COTTON:
December cotton is back in the middle of its month-long range after a steep selloff on Friday and subsequent selling early this week. Steep declines in the corn, wheat, and soybean markets in the wake of the USDA’s quarterly grain stocks report appeared to encourage selling in cotton. Growers in Brazil are expected to export a record amount of cotton between July 2023 and June 2024, with the president of a growers group forecasting shipments of 2.5 million tonnes (11.475 million bales). Shipments in September hit an unprecedented 200,000 tonnes (918,600 bales). The most recent USDA supply/demand report put their 2023/24 exports at 11.8 million bales, up from 6.66 million last year. The strong export pace is eating into US sales. Cumulative weekly export sales for the marketing year that began on August 1 are the lowest since 2016/17.
SUGAR:
An improvement in India’s weather outlook leaves the sugar market vulnerable to a pullback, and the October contract expired Friday with a record delivery of 2.87 million tonnes, which is usually seen as a bearish signal. The India Meteorology Department said that India’s 2023 monsoon rainfall came in at 6% below the long-period average, which would put this year in the “below average” category. However, September’s rainfall was 13% above the long-period average, which was a significant improvement from August, and this has allowed reservoirs to reach 73% of storage capacity. The withdrawal of this year’s monsoon is running more than a week later than normal, which should bring heavier than normal rainfall in early October, particularly in south peninsular India.
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