Written Commentary
BONDS:
With another sharp range down contract low in December bonds late last week, yields have returned to the highest levels since 2007! Sentiment remains so negative that a Friday story predicting the Fed might be less aggressive with their December rate hike failed to shift sentiment away from the downside. In fact, prices saw only temporary lift from a Fed member comment that the Fed does need to be aware of the potential to “overdo it”. While a slight dovish pivot in extremely hawkish US Federal Reserve dialogue/sentiment ignited optimism in equities and physical commodities last week, those hopes did not provide support or lift to US treasuries.
CURRENCIES:
The dollar index forged an extremely violent trade to end last week’s trading with a 230-point range and a poor close. Apparently, financial markets were roiled by a Fed watcher opinion that the Fed could in the year with a smaller than previously feared December hike. In our opinion, the US economy continues to have more capacity to stand up to higher rates than most other G7 economies, and therefore the dollar uptrend should resume next week. With the dollar breaking out to the downside to the lowest level since October 6th, hope for a slightly less hawkish US Fed remains in the marketplace at the start of this week.
However, the dollar should continue to see support from a vulnerable Yen and slightly less support from UK uncertainty with the most likely PM candidate apparently acceptable to UK financial instruments early this week. Unlike the dollar, the euro early this week failed to take out a downtrend channel resistance line on the upside with that level becoming a key pivot point. With residual support from the BOJ intervention threat and favorable Japanese Jibun bank manufacturing and services PMI readings for early October, aggressive selling interest toward the Yen on the current bounce should be slightly moderated.
Even the Canadian dollar managed an upside extension of last week’s late bounce, with the bounce probably largely a knee-jerk windfall from the breakdown in the dollar.
STOCKS:
In retrospect, the equity market performance last week was very impressive as the markets shook off significant increases in global sovereign bond yields, remained calm in the face of a 45% year-over-year increase in German PPI and managed to quickly discount negative news from the social media sector. However, the bull camp should be emboldened by the market’s ability to rally sharply off mere rumors of a less aggressive Fed!
Global equity markets at the start of this week were mostly higher with markets in London, Shanghai, and Hong Kong tracking lower. While Chinese GDP readings were somewhat positive, the trade is skeptical of the data and should be minimally discouraged by the totality of global PMI readings released. This week will bring a veritable avalanche of corporate earnings with roughly 120 companies in the S&P 500 reporting and 12 Dow companies reporting. In retrospect, recent strength in equities was in part the result of market optimism from earnings which have “stood up to” monetary tightening.
With a range up extension of last week’s rally pushing the Dow futures up to the highest level since September 13th, the market hopeful of a softening of the US Fed’s hawkish tone and generally interpreting corporate earnings in a positive light, the bull camp has the edge to start the new trading week. The NASDAQ probably saw headwinds from headlines that Tesla cut Chinese vehicle prices by nearly 10%, but the real fireworks for the NASDAQ will be seen later this week as big tech earnings roll in.
GOLD, SILVER & PLATINUM:
Initial weakness in the dollar translated into a temporary rally in gold to start the trading week. Given the one-way street to unending jumbo US rate hikes, it is not surprising that gold reversed direction aggressively at the end of last week in the wake of suggestions that November’s 75-basis point US rate hike might open the Fed to a slight moderation of the pace of increases in the December meeting. On the other hand, the Fed last week made it very clear that softening in the economy will not deter their battle against inflation, but that gold bearish theme was countervailed by words of caution from a Fed member indicating the Fed could not “overdo it”. In yet another inflation tempering US official commentary, the US Treasury Secretary indicated that inflation was not “embedded” in the US economic structure.
Given the silver market’s capacity to stand up to weakness in gold and significant strength in the dollar last week and in turn respect the $18.00 level over 6 trading sessions, the range up move on Friday could signal silver’s newfound bullish capacity especially if extreme hawkish Fed views are tempered further. It should be noted that the net spec and fund long in silver remains extremely low compared to the last 3 years but is not as liquidated as the gold spec positioning.
While the palladium market last week showed a significant rally off the $1,950 level and the market remains net spec and fund short, we see a negative demand environment keeping prices at the bottom of the last 3 months consolidation. In fact, the January platinum contract late last week regained a 5-month-old downtrend channel resistance line and managed that strength in the face of an ongoing pattern of outflows from platinum ETF holdings.
COPPER:
In addition to spillover lift from initial weakness in the dollar and generally positive global equity market action at the start of this week, copper is lifted by an increase in Chinese January through September copper concentrate and ore imports and from a minimally positive Chinese GDP release. Furthermore, Chinese unwrought copper imports rose by 9.8%. It should also be noted that Bloomberg rekindled concern for tight copper supplies inside of China by citing the comparatively low historical tonnage in bonded warehouses. Certainly, the tempering of US aggressive rate hike prospects, talk of reducing quarantine time for inbound Chinese travelers and hope for a Chinese infrastructure spending program provided copper with the basis for last week’s strong finish.
ENERGY COMPLEX:
From the news flow early this week, the bear camp has the edge in crude oil off signs of softer demand. Apparently, Chinese September oil imports and year-to-date oil imports contracted, and their fuel exports have exploded. While Chinese GDP readings on their face appeared positive, the trade interpreted the data as soft, and that demand negative was accentuated by mostly soft global PMI readings. However, the bear camp also saw news that crude oil in global floating storage over the last week increased by 2.4% but that bearish news was tempered by the fact that Asian-Pacific floating storage levels declined. Surprisingly, the energy complex did not benefit from the interest rate/commodity relief rally environment late last week
BEANS:
January soybeans closed higher for the third session in a row on Friday as the meal market has seen solid gains in the last two trading sessions. The low crush pace in Argentina may be seen as a supportive force for meal. Outside market forces were supportive with a sharp break in the US dollar, strength in the stock market and a more positive tilt to many commodity markets. A sharp rally in the soybean oil market last week has provided underlying support and strength in the products has left soybean crush margins near historic highs. Brazilian production was revised up by 3 million tonnes to a new record high 152 million tonnes in the last USDA update.
CORN:
For the month of September, China imported 1.53 million tonnes, down 56.6% from last year. Year to date corn imports have reached 18.46 million tonnes, down 25.9% from last year’s pace. December corn closed slightly higher on the session Friday, but the market still closed lower on the week. It was choppy and two-sided trade as the market found support from a surge higher in the stock market and a sharp break in the US dollar. Harvest remains active and traders remain concerned with the low water levels on the Mississippi, and a potential disruption in the flow of corn to the gulf. In addition, there are concerns for a rail strike if workers cannot agree. Cumulative export sales have reached 25.3% of the USDA forecast for the 2022/2023 marketing year versus a 5 year average of 35.5%. A private forecast showing mostly higher expectations for next year’s grain crops was seen as a negative factor last week.
WHEAT:
December wheat closed slightly higher on the session Friday with an outside day up which is a positive technical development. A sharp break in the US dollar and continued concerns with the Argentina crop helped to provide some support. Turkey bought 470,000 tonnes of milling wheat at an international tender. Talk of the oversold technical condition of the market helped to support as well. With a drought and a much smaller crop, Argentina’s 2022-23 wheat exports are now set to be worth $3.1 billion, 28% less than the $4.3 billion forecast at the start of the season in July, according to the Rosario Board of Trade. Production is estimated at 15 million tonnes, which would be the least in seven years.
HOGS:
December hogs have risen as much as 23% in just 13 trading sessions, and this leaves the market in a short-term overbought condition. The CME Lean Hog Index as of October 19 was 93.76 up from 93.20 the previous session and 92.67 the previous week. This leaves the market holding a discount of $4.08 to the cash as compared with the 5-year average discount at this time of the year of $4.48. As a result, the basis in no longer the positive force it has been over the past few weeks. The buying on Friday pushed the market up to the highest level since August 16th. The rally has left the market in an extreme overbought condition and up six of the last seven trading sessions. The USDA pork cutout, released after the close Friday, came in at $99.45, down $1.75 from Thursday and down from $100.23 the previous week. This was the lowest the cutout had been since October 5.
CATTLE:
The USDA Cattle on Feed report Friday showed placements for the month of September at 96.2% versus trade expectations for 96.4% (range of 91.8% to 99%). This is neutral against expectations. Marketings came in at 104% of last year. The average estimate was 104%. The Cattle on Feed supply as of October 1st came in at 99.1% of last year versus the average estimate of 99.1% (range of 98.2% to 100%). The news is completely neutral against trade expectations. December cattle experienced a strong outside-day trading session on Friday and jumped to a new contract high. While overbought technically, there is still no sign of a short-term peak as beef prices pushed sharply higher in the last two weeks during a period of higher production. Estimated beef production last week was 557.4 million pounds, up from 549.2 million a year ago. The USDA boxed beef cutout was up 11 cents at mid-session Friday and closed 9 cents higher at $253.71. This was up from $246.98 the previous week and the highest it had been since September 13. Cash live cattle were trading around $3 higher last week.
COCOA:
Mixed demand news was not enough for the cocoa market to regain upside momentum as it will start this week in close proximity to last Wednesday’s 3-week low. Until there are more signs that inflation levels are subsiding, cocoa could see further downside before it finds a near-term price floor. December cocoa opened under pressure and was unable to benefit from stronger outside markets as it finished Friday’s trading session with a moderate loss. For the week, December cocoa finished with a loss of 71 points (down 3.0%) which was a second negative weekly result in a row.
COFFEE:
Coffee prices have declined 27 cents (12%) in the past 8 sessions and reached a 14-month low. With the market technically oversold, a bullish supply outlook can help coffee regain and sustain upside momentum early this week. December coffee came under early pressure, but was able to rally back into positive territory before finishing Friday with a mild loss. For the week, December coffee closed with a loss of 5.80 cents (down 2.9%) which was a third negative weekly result in a row. Rainfall over Brazil’s major Arabica-growing areas increased the prospect for more flowering, and that weighed on coffee prices.
COTTON:
December cotton closed higher on Friday after trading to its lowest level since May 2019 earlier in the session and it appears that at least a short-term low is in place. It was the sixth straight time the market closed lower on the week. A possible technical reversal lower in the dollar was viewed as supportive. The stock market rallied after reports of some Fed members getting uncomfortable with pressing rates too much higher, and this was supportive to cotton as well. Traders remain focused on demand, as they fear a worldwide recession could significantly lower cotton consumption.
SUGAR:
Sugar prices remain on-track for their largest monthly gain since February, but they have clearly lost strength over the past week. Until the market receives fresh bullish supply news, sugar prices will have a tough time finding their footing. March sugar continued to see wide-sweeping coiling action with a downward bias as it reached a 2-week low before finishing Friday’s trading session with a minimal loss that was a fifth negative daily result in a row. A rebound in crude oil and RBOB gasoline prices provided the sugar market with early carryover support as that should help to strengthen ethanol demand.
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