In retrospect, we are very surprised in the treasury market’s slide last week as there appeared to be a number of concerning economic developments and enough concerning scheduled data points for prices to have held the gains forged in the first half of the trading week. Certainly, the favorable retail sales report offset the very concerning industrial production/capacity utilization readings, and it would appear as if a portion of the treasury trade continues to anticipate some form of stimulus agreement.
While the dollar index rate of gain last week was unimpressive, the charts have shifted positive but do not give off indications of a significant move directly ahead. Like a-number-of other financial markets, we suspect the currencies will become less volatile as traders become skittish about implementing new positions ahead of the highly uncertain election event. Obviously, the Swiss and euro appear to have turned and are likely to remain under pressure in the event that negative market sentiment extends into this week and that downside action could accelerate if infection counts in Europe over the weekend worsen. Obviously, the surprise flow of positive macroeconomic developments has undermined the dollar and rekindled fresh selling pressure. While some of the fundamental storylines are highly suspect in their potential to come to a favorable outcome, they are present and “hope” should create selling pressure in the dollar.
Relatively speaking, the US equity markets held up impressively in the face of last week’s deterioration in big picture conditions. Infection counts, failure to lead on stimulus, mixed US scheduled data, lockdowns in the UK and increased anxiety toward the coming election could have sent stocks sharply lower and anchored those prices to those lows. Like US scheduled data which continues to offer a mixed bag of results, the fortunes of companies are wide-ranging with Boeing seeing the reauthorization of its 737 Max in Europe, Pfizer getting a lift off its targeting for emergency use application of its vaccine and mostly favorable bank earnings offset by renewed potential for regulation of big tech and growing fear of restaurant failures.
GOLD, SILVER & PLATINUM:
With fresh hope for a stimulus deal fostered by the Speaker of the House in a statement over the weekend, positive vaccine news from the UK and noted weakness in the dollar to start today, the path of least resistance in the gold and silver markets is pointing upward. Furthermore, gold and silver should draft support from favorable Chinese economic news which showed better-than-expected retail sales and an overall growth level commensurate with pre-Covid-19 levels. In yet another supportive development, Citi has forecast gold will hit a fresh record before the end of the year and will average $2,275 an ounce in their base case for 2021! Citi also predicted that silver prices will rally another “70%” to over $40 an ounce in the coming 12 months. On the other hand, gold and silver are probably undermined by the revelation that both markets saw ETF holdings decline on Friday.
All things considered the bull camp in copper should be disappointed in the early action this week as a sweep of positive fundamental headlines should have boosted demand orientated buying for copper. In fact, very supportive Chinese economic data (particularly from industrial production and retail sales) should have stoked buying enough to put prices up to the highest level since mid-September! Furthermore, the bull camp should be disappointed by the fact that a mine in Chile will suspend operations due to the failure to reach a wage agreement with workers. Perhaps some in the trade were disappointed that Chinese GDP did not fully reach lofty expectations of an expansion above 5% but seeing record Chinese steel and aluminum output should facilitate an extension of bullish Chinese copper demand forecasts.
While we think the energy markets have already factored some portion of a gradual improvement in demand as the world comes out from under the pandemic, it would appear as if those expectations have been rekindled into the opening this week. Fortunately for the bull camp, the markets were presented with favorable Chinese economic data as China saw September crude oil production increase by 2.4% over year ago levels which in turn could have dampened Chinese crude oil import demand expectations. However, the bull camp in crude oil should be emboldened by evidence that Chinese demand/imports for a very long list of physical commodities continues to be very strong which in turn has countervailed suggestions that China will slow its purchases of crude oil now that buffer stocks have been rebuilt.
The bounce at the start of this week was impressive, but the trade action Friday was bearish and traders expect good rains of 1 to 3 inches in Mato Grosso this week and also good rains in other areas of Brazil. Plantings will still be delayed and the export window for the US will still be open into February. January soybeans tested Monday’s high with early strong gains on Friday, but the market closed moderately lower on the session and may be vulnerable to back-and-fill type action. The demand tone remains very strong but market technical indicators are overbought. On Saturday, Brazil announced that they will suspend tariffs on corn and soybean imports from countries outside the Mercosur trade bloc until January 15, 2021. The tariff is currently 8% and might encourage increased imports before their crops are harvested. Brazil was an aggressive exporter of both corn and soybeans early in the marketing year and prices are now very high, and livestock producers have pressured the government as surging feed prices have hurt margins. On top of solid weekly export sales, exporters reported daily sales of 175,000 tonnes of US soybeans to unknown destination, and also 216,150 tonnes of US soybeans to unknown destination.
On Saturday, Brazil announced that they will suspend tariffs on corn and soybean imports from countries outside the Mercosur trade bloc until January 15, 2021. The tariff is currently 8% and might encourage increased imports before their crops are harvested. Brazil was an aggressive exporter of corn early in the marketing year and prices are now very high, and livestock producers have pressured the government as surging feed prices have hurt margins. The lower close for December corn on Friday leaves the appearance of a spike top and would suggest at least a technical correction over the short-term. Open interest remains in an uptrend which is a positive, but the divergence in technical indicators suggests a loss in upside momentum, and the market may see choppy to lower trade short-term as the overbought condition is corrected.
The wheat market remains in a steep uptrend with growing concerns for the winter wheat crops from the US and especially Russia. There is rain in the forecast, but not enough to ease concerns that portions of the crop in both countries will not be well-established ahead of dormancy. Increasing open interest is seen as a positive force and the market managed to trade up to a new contract high. The weekly export sales report showed that for the week ending October 8, net wheat sales came in at 528,450 tonnes for the current marketing year and 71,158 for the next marketing year for a total of 599,608 tonnes. Cumulative sales have reached 56.7% of the USDA forecast for the 2020/2021 marketing year versus a 5 year average of 53.1%. Demand has been very strong and global wheat prices remain in an uptrend. France’s soft-wheat crop was 12% planted as of Oct. 12, up from 6% a week earlier and compares with 16% at the same time in 2019.
The reversal for December hogs after reaching the highest level since November 29 of last year is a bearish technical development. While the discount to the cash market is a positive force, there seems to be some negative supply/demand factors to help rationalize a short-term peak. Germany is in talks with Asia about easing a ban on German pork due to African swine fever. There is talk of possible regional agreements as compared with a blanket national ban that is being imposed right now. Germany has confirmed 69 ASF cases since September 10 with all of them wild animals. China’s third quarter pork production was pegged at 8.4 million tons, up 18% from a year ago. This was the first quarter since 2018 to show a year on year increase in pork production. Traders expected production to be down another 20% for 2020, but production in the first nine months has only dropped 10.8% from a year earlier. The market is extremely overbought technically. April hogs closed moderately lower on the session and the selling pushed the market down to the lowest level since October 7th. The market is still operating under the negative technical influence of the October 14 reversal.
With a weakening cash market and the lowest beef prices since August 12, the market looks vulnerable to increased long liquidation selling from funds. Managed money fund traders are still net long 56,000 contracts so sellers could be more active on weakness. December cattle closed moderately lower on the session Friday and the selling pushed the market down to the lowest level since September 9. Continued fears that positive seasonal demand factors will NOT emerge this year has helped to pressure. A general sense that cash cattle prices could trend lower in the next few weeks has added to the bearish tone. Cash live cattle prices were weaker on Friday on moderately low volume. In Kansas 1,444 head traded at 106, down from 108 earlier in the week. The 5-day, 5-area average price as of Friday was 107.52, down from 108.36 the previous week. Cattle positioning in the Commitments of Traders for the week ending October 13th showed managed money traders net sold 2,978 contracts for the week and are now net long 56,038 contracts. Non-Commercial No CIT traders reduced their net long position by 3,907 contracts to a net long 35,716 contracts.
The cocoa market may have already priced in the global demand concerns with its pullback this month. There is a strong chance that West Africa’s production will be pulled lower by the dry conditions earlier this year. That and the potential for political tensions in that nation in front of their presidential election could lead to tighter supplies. This could have left cocoa undervalued at current levels. December cocoa was able to shake off early pressure and finish Friday’s trading session with a moderate gain. For the week, however, December cocoa finished with a loss of 71 points (down 2.9%) and a fourth negative weekly result in a row.
Coffee prices have received some bullish supply/demand developments over the past few weeks, but they continue to face headwinds from a near-record Brazilian 2020/21 crop. With a negative shift in demand from an area of recent demand-side strength, coffee may reach a new 2 1/2 month low before the market can find its footing. December coffee was unable to hold onto early strength as it finished Friday’s inside-day session with a moderate loss. For the week, December coffee finished with a loss of 4.30 cents (down 3.9%).
December cotton broke out of its recent trading range on Friday and traded to its highest level since February 20. Rains across the Delta and other cotton growing regions in the US are delaying harvest and raising concerns about quality. Also, a strong September US retail sales number on Friday, with clothing store receipts up 11% from the previous month providing encouragement on the demand front. There was also a report that China had ordered cotton mills to stop buying Australian cotton, which could help US cotton exports. US cotton export sales for the week ending October 8 came in at 118,690 bales for the 2020/21 (current) marketing year and 13,200 for 2021/22 for a total of 112,070. This was down from 193,475 bales the previous week and the lowest since August 6. Cumulative sales for 2020/21 have reached 8.233 million bales versus 8.929 million bales at this point last year and 9.123 million two years ago. The five-year average is 6.871 million.
Sugar prices were able to overcome last Monday’s wide-sweeping outside-day down to extend their streak of positive weekly results. While prices are back to within striking distance of its 2020 highs from mid-February, sugar continues to have bearish supply developments from its top 2 producers (who combined accounts for over 38% of global production) that leave the market vulnerable to additional long liquidation. March sugar was able to overcome weakness in key outside markets as they finished Friday’s trading session with a moderate gain. For the week, March sugar finished with a gain of 20 ticks (up 1.4%) which was a fifth positive weekly result in a row.
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