The treasury markets finished another volatile trading week with the low to high range nearly 6 full points! In retrospect, it is likely that treasuries bonds saw a significant wave of technical short covering just ahead of the election off the idea that widespread looting and rioting would create some flight to quality into treasuries. However, the US nonfarm payroll report in general shows ongoing recovery even if the recovery fails to give off the impression of holding its strong momentum seen in the March through July timeframe. With surprisingly positive vaccine news early this week (90% effective and more effective than the normal flu and Chicken pox vaccines), the risk-on environment is extended, and Treasuries are likely to return to the November lows.
While there was not a specific “risk on” vibe flowing from equities or better than expected US jobs news, the dollar continued to liquidate late last week and in-the-process fell back within striking distance of the 2020 low. However, it is possible that the currency trade saw the US payroll data as “good enough” to suggest the recovery is continuing even if the pace of recovery appears to be slowing. However, the surging US infection rate increases the potential for official restrictions of activity ahead and that could suddenly turn the head of the dollar away from the downside. While the dollar has not seen significant downside extension action off the very favorable vaccine news early this week, the trend remains down.
The stock markets waffled around both sides of unchanged late last week as it appeared that election uncertainty was continuing to narrow throughout the trading session despite the fact that there will likely be significant legal challenges from the incumbent President into the coming weeks. However, press outlets are attempting to fan fear of the record amount of daily infections and given that total of 120,000 per day is hard to discount that threat against stocks this week. Global equity markets were initially higher at the start of this week with some gains nearing 2%, but favorable vaccine news launched prices sharply higher with the Dow showing gains near 1,400 points. With fresh new highs for the move in several market measures, very favorable Chinese economic news, the potential for fresh Japanese stimulus and lower US political anxiety, the bull camp should extend its control aggressively this week.
The S&P enters the news week soaring and a significant amount of optimism should be seen despite Press attempts to cite the remaining negatives. Obviously, the market’s capacity to “look beyond” the crisis was justified. Despite the uptrend since the March lows the net spec and fund long in the E-mini S&P remains well below levels considered to be overdone and therefore the overall technical condition of the market should allow for more gains. The Commitments of Traders report for the week ending November 3rd showed E-Mini S&P Non-Commercial & Non-Reportable traders are net long 91,332 contracts after net selling 33,689 contracts. Critical support is seen at a series of closes last week at 3511.75 and near-term upside targeting is seen up at 3700.00.
GOLD, SILVER & PLATINUM:
Both gold and silver prices have started the new week out with extensions of last week’s rally, with fresh higher highs. Bolstering the bull case is an ongoing “relative calm” in US politics, signs of Chinese growth from imports/exports, a residually low US dollar and reports that Chinese gold consumption in the 3rd quarter recovered significantly. Granted the wedding season in China bolstered the 28.7% jump in demand in the quarter ending September, but that also suggests that Chinese gold consumption began to recover in the summer or just 5 months after China declared their infection curves were coming under control. It should also be noted that 3rd quarter consumption of gold coins and bars in China jumped by nearly 67%. Traders might expect Chinese gold consumption to continue to recover following a significant jump in October country overall exports and imports.
With the passing of the US election, an agreement between Codelco and a major Chinese buyer (with respect to treatment charges for 2021 purchases), Chinese steel prices hitting the highest since July of 2019 and strong Chinese import/export data it is clear that the potential for stronger Chinese copper buying remains in place. In fact, Chinese unwrought copper/copper product imports year to date (at the end of October were up 41.4%) over year ago levels with copper ore and concentrate imports up only 0.8%. In our opinion, the lower copper ore imports were mostly the result of Chinese desires to import finished products instead of making the products domestically. Furthermore, with a decline in weekly Shanghai copper stocks last week, an ongoing strike in Chile and declining LME copper warehouse stocks, the bull camp has several themes working in its favor.
Obviously, the news of a 90% effective vaccine shifts the entire fundamental perspective in favor of the bull camp with many weeks of demand destruction fears tempered psychologically and eventually in reality! Therefore, key fundamental and technical reversal action last week has itself been reversed! In fact, recent news of the ongoing powering up of Libyan production is now offset but the question becomes how quickly the vaccine can begin to open-up the economy. However, a longer-term negative was seen at the end of last week following news that US oil and gas drilling rigs in operation last week posted an 8th straight week of gains. According to Reuters, that is the first 8-week string of production increases since June 2016.
As the smoke clears from the election and the global economy improves in 2021, and once the virus becomes available to at least 50 million people in 2020, and billions of doses for 2021, a move towards back to normal for the global economy is a very bullish force. Agricultural markets are likely to see a bigger impact from the threat of inflation. The massive amount of money spent on propping up the US economy in 2020 and the likelihood that whoever the president is will support another stimulus package should be supportive to the economy, but the US will still be faced with a massive debt burden that could trigger a significant downtrend in the US dollar in the next few years.
The corn market recovered from early weakness at the start of this week as a $3.35 rally in crude oil plus concerns over inflationary expectations into 2021 are factors which improve the demand outlook. If the weather in South America is poor because of La Nina, the global production deficit will be even larger than current expectations. However, because of the late start to plantings, Brazil producers may have shifted more than 1 million hectares to corn. For the Conab corn production estimate, traders see corn production in Brazil at 111.4 million tonnes (range 104.5-116.4 million) as compared with 105.2 million tonnes projected in October.
The wheat market was trading moderately lower on the session until the vaccine news was released. Outside market forces are bullish and could help support short-term buying, but fund traders might be concentrating more on commodities which are more closely correlated with the economy. December wheat closed 7 1/4 cents lower on the session Friday, and this left the market up 3 1/2 cents on the week. There remains some crop issues, but it will take an enormous drop in production in order to avoid record world ending stocks. For the USDA Monthly Supply/Demand report, traders see wheat ending stocks near 881 million bushels, (range 858-901 million), as compared with 883 million bushels in the last USDA update.
The hog market action last week was negative but with vaccine news this morning, all commodity markets should get a good boost. More stimulus, plus ideas that the global economy will be very strong in 2021, plus massive deficits are factors which may attract fund traders to all commodities. December hogs traded near unchanged early Friday but the market closed sharply lower on the day and experienced the lowest close since October 7. The continued sharp break in the lean index helped to trigger the selling. The CME lean index as of Nov 4 was 71.52, down from 72.05 the previous session and down from 75.49 a week before. The USDA pork cutout, released after the close Friday, came in at $82.95, down $2.18 from Thursday and down from $83.04 the previous week.
The USDA boxed beef cutout closed $1.77 higher last Friday at $214.32. This was up from $208.10 the previous week and was the highest the cutout had been since October 12. On Friday cash live cattle traded mostly steady with earlier in the week, which was up $1-$2 from the week before. As of Friday afternoon, the 5-day, 5-area average price was $106.48, up from $104.41 the previous week. With the solid gains in the beef market and the uptrend in the cash market, buyers could remain active short-term. While slaughter for the week was down 1.5% from a year ago, beef production was up 0.4%. December cattle closed slightly higher on the session Friday and the buying pushed the market up to the highest level since October 16.
2020 has been a bad year for cocoa as demand took a severe hit in the US and much of the world, but as the virus fades and demand turns more positive, the market should be in a position to seek higher prices. If inflation becomes a factor, end-users will want to expand the pipeline after the slow consumption in 2020. March cocoa was able to build on its late-week recovery move with a moderate gain for Friday’s trading session. For the week, March cocoa finished with a gain of 33 points (up 1.4%), a second positive weekly result over the past 3 weeks and a positive weekly reversal from Monday’s 3-month low. Improving global risk sentiment in the wake of the US election helped to soothe cocoa’s near-term demand concerns.
Coffee demand took a big hit in 2020, and the market also experienced a near record harvest from Brazil. However, as demand improves, inflation picks up, the US dollar drops, and the focus shifts to the possibility of a much smaller Brazilian crop for 2021, the market should be set for a rally. March coffee was able to maintain upside momentum as they finished Friday’s trading session with a modest gain. For the week, March coffee finished with a gain of 1.60 cents (up 1.5%) which broke a 3-week losing streak and was a positive weekly reversal from Wednesday’s 3 1/2 month low.
December cotton sold off sharply last Friday, giving back most of its gains from earlier in the week and approaching its lows from Monday. Increasing coronavirus cases in the US and around the world have resurrected concerns about textile demand going forward. For Tuesday’s USDA Crop Production and Supply/Demand (WASDE) reports, the average trade expectation for US production is 16.56 million bales (range 15.90-17.00 million) down from 17.05 million in the October report. US exports are expected to be around 14.69 million bales (range 14.00-15.90 million) versus 14.60 million in October. US ending stocks are expected to come in around 6.61 million bales (range 5.65-7.00 million), down from 7.20 million in October. This would be down from 7.25 million bales in 2019/20 but up from 4.85 million in 2018/19 and still the second highest since 2007/08. World ending stocks are expected to be around 100.92 million bales (range 99.00-102.07 million), down from 101.13 million in October and 103.84 million in September but still a record level.
Sugar continued its volatile whipsaw price action through the first week of November, and in spite of mixed signals from key outside markets is back to within striking distance of posting a new 2 1/2 year high. The market continues to have a very large net spec long position and a bearish global supply outlook, and that combination leaves sugar vulnerable to additional long liquidation early this week. March sugar was able to shake off early pressure before finishing Friday’s outside-day session with a sizable gain. For the week, March sugar finished with a gain of 55 ticks (up 3.8%) which was a seventh positive weekly result over the past 8 weeks.