Treasury prices had plenty of justification to extend their rally late last week as US equities showed signs of faltering and sentiment was obviously undermined following the conflict between the US Treasury Secretary and the Federal Reserve Chairman on Thursday afternoon. In retrospect, we also think the uptick in initial claims on Thursday gave a significant leg up to those predicting the economy is about to stall. The initial path of least resistance is pointing down in treasuries, as the markets are overbought from a 3-week low to high rally of nearly 5 points in bonds. Furthermore, it would appear as if vaccine news over the weekend produced additional hope of and end the pandemic in the foreseeable future.
In retrospect, dollar bulls are very discouraged given the tight sideways action in the dollar last week in the face of day after day of record US infection counts. The bull camp might also be disappointed in the failure to see the dollar flight to quality gains in the face of a rise in US initial claims and in the wake of a political conflict between the US Treasury Secretary and the US Federal Reserve. Therefore, one wonders if the dollar has lost its flight to quality standing and instead is under the microscope for a possible economic setback. The Dollar technically broken out to the downside early this week with the lowest trade since the early September low.
We continue to use the phrase “whistling past the graveyard” to describe the action in the equity markets as unrelenting new daily record infection counts only resulted in a slight liquidation last week. However, the trade is on edge with recent suggestions to rotate from stay-at-home stocks to opening-up stocks putting some investors in a precarious position given the prospect of a return to stay at home. However, it is possible that the markets could draft some support from the Treasury Secretary action to pull back unused stimulus funds from the Fed with the intention to prod Congress to appropriate the unused money in some form of stimulus.
GOLD, SILVER & PLATINUM:
While the US dollar forged a fresh lower low for the move to start the new trading week, the gold and silver trade are not benefiting from that early action. Apparently, risk off/flight to quality markets like gold, silver Treasuries and the dollar are undermined as a result of fresh upbeat vaccine news with the AstraZeneca/Oxford vaccine reportedly preventing an average of 70% of Covid-19 cases. Furthermore, there were also strides made in actual therapeutic treatment of those with Covid-19 thereby extending the recent drumbeat of gains against the pandemic. While gold ETF’s saw an inflow last Friday the inflow was minimal at 35,538 ounces and silver ETF’s saw a 4th straight day of reductions with a 2.5 million ounces outflow.
If it were not for strength in other base metals prices recently, consistently positive Chinese scheduled data, and declining exchange warehouse stocks, we would be skeptical of copper’s current price structure. Furthermore, the copper market is short-term overbought from two-day gains of $0.13 and the market has also been presented with the end of one mining strike in Chile at the Candeleria Mine. Fortunately, for the bull camp, the weekend brought a-number-of very positive developments regarding vaccines and treatment and that combined with a weaker dollar and positive global equities underpins prices against the need for normal corrective balancing. In fact, with last week’s Shanghai copper stocks decline, those stocks are at the lowest level since December 2014. It should be noted that another copper mine in Chile has received notice that its workers union is planning to strike this week.
After seeing the latest favorable vaccine and therapeutic news, we suspected crude oil prices would be extending last week’s rally on the upside. Additionally, the crude oil market is deriving lift from a downside breakout in the US dollar, news that India bought 20 million barrels of crude for early delivery next year and from a very sharp gain in Brent crude oil futures at the start of this week. Countervailing the positive Indian oil purchase news is the fact that Indian October crude oil imports were down by more than 20% relative to last year’s imports. On the other hand, the Indian January purchase has been touted as the largest purchase since the beginning of the pandemic. Even the supply front is contributing to the upward track in crude oil prices as Yemeni forces reportedly fired a missile that hit a Saudi Aramco oil company distribution facility in Jeddah.
The soybean market seems to be preparing to ration supply “if” harsh weather develops in the next month for southern Brazil and Argentina. January soybeans closed 3 1/2 cents higher on the session Friday but near 15 cents off of the contract high. The market already took out Friday’s highs. The market closed 33 cents higher for the week. Futures remain extremely overbought and vulnerable to a pullback. January soybean oil closed lower on the session after a contract high and the key reversal is a bearish technical indicator. Vegetable oils have led the soybean complex higher recently, but with COVID-19 cases spiking around the world, biodiesel usage is likely to take a hit. This along with expectations for record palm production in 2021 could lead to a near term top for soybean oil. What happens with biodiesel mandates in Brazil and Indonesia will be an important force. In addition, just how quickly India vegetable oil recovers will also be a significant force.
While the longer-term fundamentals are turning more positive, the short-term news is mixed and the market looks a bit vulnerable to a short-term correction. March corn closed 1 cent higher on the session Friday but 5 cents off of the highs. The market closed 8 3/4 cents higher for the week. US exporters announced the sale of 131,000 tonnes of US corn to unknown destination, and also 158,270 tonnes of US corn to Mexico. The market remains extremely overbought, and the divergence in technical indicators suggest a loss in upside momentum. Traders are nervous that the spike in virus cases will significantly reduce ethanol demand and spark a jump in ethanol stocks. Traders also see the short-term weather in South America as a little less supportive than earlier last week.
The sharp drop in the US dollar and supportive economic/medical news helped to support the wheat market at the start of this week. The market remains in a choppy to lower trend in a wide consolidation. March wheat closed slightly higher on the session Friday and this left the market down 2 1/2 cents for the week. The market followed the other grain markets higher early in the session day, but a lack of follow-through buying early in the session helped to cause a selloff late. While a larger portion of the winter wheat growing areas moved into drought condition, there is rain in the short-term forecast.
December hogs closed higher on the session and managed to hold Thursday’s lows and bounce. February hogs pushed down to the lowest level since September 8th and closed sharply higher on the day with an outside day reversal. With the strong demand for export and slaughter well below year ago levels, the market may see follow through buying from Friday’s reversal type action. China imported 330,000 tonnes of pork in October, up 80.4% from a year ago. Cumulative imports for 2020 reached 3.62 million tons, up 126.2% from last year’s pace. The USDA estimated hog slaughter came in at 485,000 head Friday and 277,000 head for Saturday. This brought the total for last week to 2.711 million head, up from 2.683 million the previous week but down 2% from a year ago.
With a supportive USDA report, continued strength in the beef market and supportive outside market forces early this week, the market acts like a short-term low may be in place. The USDA boxed beef cutout closed 65 cents higher at $238.35. This was up from $225.98 the previous week and was the highest the cutout had been since June 9. The Cattle on Feed Report was considered bullish for the 2021 contracts and slightly negative for the cash market. Placements for the month of October came in at 89% from trade expectations for 91.1% of last year (87.3-95.5 range). This will leave less market-ready cattle available during February and March. Marketing’s during October came in at 99.9% of last year as compared with expectations near 100.2% of last year (98.5-102.4 range). This would suggest a few more cattle are available than expected early this month. As a result, the November 1 On-Feed supply came in at 101.3% of last year from expectations for 101.8% of last year, 100.9-102.6 range. The lower placements left the on-feed supply a bit lower than expected and the report is supportive. December cattle closed slightly lower on the session Friday and well up from the lows. The selling pushed the market down to the lowest level since October 29.
Cocoa prices have benefited from several bullish supply issues that have more than offset global demand concerns. After six positive daily results in a row, a new multi-year high and a huge weekly gain, however, cocoa has reached near-term overbought levels and may be vulnerable to a near-term pullback. March cocoa extended its upside breakout above the September highs before finishing Friday’s trading session with a sizable gain. For the week, March cocoa finished with a massive gain of 347 points (up 14.7%) which was also a third positive weekly result in a row.
After 10 positive daily results over the previous 11 sessions and more than 17.00 cents in gains from an early November low, a negative shift in global risk sentiment after Thursday’s close was the trigger for significant end-of-week long liquidation and profit-taking. While the tone of risk sentiment early this week may determine any downside follow-through, longer-term issues with Central American production, a slow start to Vietnam’s harvest and lower Colombian output should help coffee to hold its ground on any near-term pullback. March coffee ran out of steam after being unable to reach a new high for the move as it turned sharply to the downside before finishing Friday’s trading session with a heavy loss. For the week, however, March coffee finished with a gain of 5.85 cents (up 5.2%) which was a third positive weekly result in a row.
March cotton broke out of its recent consolidation on Friday and traded to its highest level since April of 2019 this morning. The market is balancing between concerns about expanding coronavirus infections and progress being made on the vaccine front. On Friday, there were reports that Pfizer and BioNTech were filing paperwork to get permission to mass produce their vaccine, which may have pushed the momentum towards the optimistic side of the pendulum. Keep in mind that the pandemic has led to the clothing and textile pipeline being close to full due to slow sales during the spring and summer. Those garments would likely need to be sold before manufacturers ramp up their demand for cotton. The latest weekly US export sales report showed the lowest weekly sales since early October and the second lowest for the entire marketing year. ICE exchange cotton stocks have been rising as well, which will weigh on prices going forward.
Sugar’s wild finish to last week’s trading kept the market in close proximity to last Tuesday’s multi-year high, but the market continues to have a very large net spec long position. With the longer-term supply outlook continuing to be bearish, sugar has reached near-term overbought levels and remains vulnerable to a sizable pullback in front of the Thanksgiving holiday. March sugar was able to make a sizable gain from midsession lows, but it still finished up Friday’s trading session with a mild loss. For the week, however, March sugar finished with a gain of 25 ticks (up 1.7%) which was a ninth positive weekly result over the past 10 weeks.