The dollar index continues to be king with soft economic data, fear of further losses in equities and unrelenting infection problems throughout the world, the currency index appears to be settling into an uptrend. Obviously, the primary currencies under pressure because of the deteriorating global economic condition are the euro and Swiss franc which could have significant declines ahead. Even the British pound would appear to be vulnerable after avoiding some of the aggressive selling seen in the euro and Swiss franc las week. Given the currency trade’s tendency to micro-manage action in the markets, the setback in the dollar early this week is perceived as something of significance.
Surprisingly, the Japanese Yen traded higher early this week despite the modest risk on environment. However Japanese leading and coincident economic indicators for July were significantly above the prior month providing some respect for the Japanese economy. Furthermore, the Yen last week rallied in the face of dollar gains and in the wake of US equity market gains. Therefore, it is possible that the Yen could reverse the late September downtrend with a trade back above 95.13. While the Swiss franc rejected the probe below 1.08 from last week, the charts remain distinctly negative from the entrenched downtrend from the middle of the month. In our opinion, without a very distinct extension of risk on, the current rally is highly suspect.
The Treasury bond market surprised late last week with a quasi-upside breakout on its charts after a recent pattern of sideways coiling. While the miss on the durable goods headline reading was not significant and it remained in positive territory for the 4th straight month, that reading kept alive the idea that US growth was moderating. With equities under pressure last week, fears of an escalation of US tariffs this week and a high level of volatility in equities, the path of least resistance looks to remain up in bonds and notes. Historically, many markets have reached key tops or bottoms following extreme predictions from professional traders. Recently a respected economist/trader suggested that rates would remain low “forever” and while that might have been partially tongue in cheek, that type of view has been echoed by many other analysts.
With a significant washout for the week, the bear camp should be emboldened even if it would appear as if the December S&P found some sort of credible support at the 3200.00 level. Apparently, the hope for stimulus progress failed to propagate and without a strong likelihood of progress in the short term, it could be difficult for the equity markets to throw off the current downtrend/correction. On the other hand, Boeing saw positive news after a European regulator indicated they will likely lift the ban on the 737 Max in November. Global equities were mostly higher early this week with markets in China and Australia forging very minimal declines. Apparently, the Chinese equity markets were not lifted by news that Chinese industrial profits in the country expanded for the 4th straight month last month. Obviously, indications from the Leader of the House of Representatives that a stimulus package could be reached has added to the recovery bias in stocks from late last week.
GOLD, SILVER & PLATINUM:
Weakness in the gold and silver prices early this week is a very bearish development as a number of factors should have provided lift to the markets. In fact, last week gold and silver appeared to be tracking physical commodity market developments and yet further strength in equities and upbeat Chinese data has been discounted in favor of ideas that the pace of Chinese growth is leveling out. Even more disappointing to the bull camp is the fact that the dollar is showing signs of weakness and Nancy Pelosi has indicated there is a chance for a stimulus package and yet gold and silver are under pressure. So far, gold has not benefited from signs that the US election might offer significant turmoil from a mechanical perspective, as there have been several instances where full trays of mailed ballots have been tossed out or found in odd places. However, the internal developments in the political race are likely to ratchet up some safe haven interest into the debate on Tuesday.
Not surprisingly, the copper market has shown some bullish reaction to news that Chinese corporate profits managed to gain for the 4th straight month. However, some economists suggested the reading represents a “cresting” of the recovery and that discourages some buying. While global equity markets were higher early this week, Chinese equity market action was negative to copper prices as was a report that Chinese aluminum “supply/imports” have reached unprecedented levels. On the other hand, the trade is pointing out the fact that aluminum inventories inside the country are not building from the massive incoming flow and that has been interpreted as a sign of strong consumption for copper and iron ore markets in the last several weeks. While the copper market fell back from the level where the last positioning report was calculated, the net spec and fund long in that report was a new record high.
The crude oil market generally coiled within a range last week, but technical traders will suggest the coiling pattern still had a very modest upward tilt, which in turn extended the recovery from the September 20th low. In fact given a risk-on condition early this week, word that floating storage is now 33% below the June highs and signs of a reversal down in the Dollar the bull camp looks to have some protection against bearish news. Unfortunately for the bull camp, Brent crude spreads might be negative to prices this week and initial news this week has already offered fresh fears of demand destruction from a large drop of August global refinery activity off the unrelenting virus spread. In fact, Indian August crude runs were down by 26.4% from year ago levels, which in turn represents an 8.7% decline from July.
Traders believe that China may have slowed their buying of US soybeans, and this along with an active harvest over the weekend were seen as factors to limit the bounce on Friday. November soybeans closed higher on the session Friday after the break to the lowest level since September 16th failed to attract new selling interest. This left the market down 41 cents for the week or down 3.9%. Exporters announced the sale of 100,000 tonnes of US soybean meal to unknown destination. The Buenos Aries Grains Exchange sees the 2020/21 soybean crop for Argentina at 46.5 million tonnes as compared with 49.6 million last year. La Nina dry conditions have traders nervous over potential production problems ahead. Keep in mind that the USDA forecast is 53.5 million tonnes so if the exchange estimate is correct, world ending stocks would be adjusted lower by 7 million tonnes. If so, this would drop the world’s stocks/usage to 23.4%, the lowest since 2013/14 season. Traders continue to monitor the dryness situation in parts of Argentina and Brazil with a La Nina threat.
Traders will monitor harvest results over the near term closely as very strong demand could cause a tighter corn stocks situation if yield begins to come in below expectations. If corn yield in the October report is adjusted down to 176 bushels per acre, and China buys an extra 8 million tonnes from the US, ending stocks could drop below 2 billion bushels which would be a five year low. December corn managed to close higher on the session Friday even with a strong US dollar and expectations for an active harvest over the weekend. The demand tone is strong and open interest has been steady which might suggest that long liquidation selling is not a huge issue. In fact, the COT report showed fund traders as significant new buyers, not in long liquidation mode. For the week, December corn closed 13 1/4 cents lower.
Russian wheat prices pulled back this week after seen gains the previous three weeks. The winter wheat crop is about 60% planted which is about normal for this time of the year but the topsoil is dry and crops will run out of time for development without some good rain soon. Producers need rain to advance the planting progress and this will become a more important issue just ahead. December wheat closed moderately lower on the session Friday with an inside trading day. It was the lowest close since September 16th and the market closed 30 3/4 cents lower on the week or down 5.3%. A rally in the US dollar to the highest level since July 23rd was seen as a negative force.
December hogs opened sharply lower on the session Friday after the bearish Hogs and Pigs report, but the market closed sharply higher with an outside-day up. The buying pushed the market up to the highest level since September 14th. The bearish hogs and pigs report was offset by very strong rally in both the lean index and also the recent strength in the pork product market. This suggests that short-term export demand is stronger-than-expected. The CME lean index as of Sep 23 was 73.70, up from 72.89 the previous session and up from 67.84 a week before. The USDA pork cutout, released after the close Friday, came in at $90.79, down 72 cents from Thursday but up from $86.46 the previous week and $72.30 a year ago.
The Cattle on Feed Report was bearish against trade expectations, especially for the deferred contracts. August placements came in at 109.2% of last year which was well above trade expectations for 5.8% above last year and near the high end of estimates. Marketings for the month of August came in at 96.9% of last year as compared with expectations for 96.6%. This brought the September 1st On-Feed number to 103.8% of last year, which was well above the average estimate of 103.3% and near the high end estimate. The higher than expected placements would suggest higher than expected slaughter for early 2021.
With global demand concerns a front and center issue, cocoa prices have been weighed down by a generally negative tone from its key outside markets. As the 2020/21 season starts later this week, however, several bullish near-term supply developments may help the cocoa market hold its ground above its mid-September lows. December cocoa was unable to hold onto moderate early support as it fell back on the defensive and finished Friday’s trading session with a sizable loss. For the week, December cocoa finished with a loss of 73 points (down 2.8%) which was a third negative weekly result over the past 4 weeks.
Coffee prices remain well below their early September highs, but they appear to have turned a corner after last week’s late recovery that came in spite of a record high Brazilian crop. While coffee prices are still showing a quarterly gain, they are on-track for a sizable monthly loss which may help to limit end-of-quarter long liquidation this week. December coffee was able to bounce back from a midsession pullback and extend its recovery move with a sizable gain during Friday’s trading session. As a result, December coffee finished with a weekly gain of 0.15 which was also a positive weekly reversal from Wednesday’s 9-week low.
The cotton market remains in a short-term consolidation period and the technical action improved with the rally on Friday. Open interest remains very high and it will take reports of significant damage to the cotton crop in order to expect a resumption of the uptrend. There have been significant flooding issues with bolls open, and we cannot rule out a resumption of the uptrend with 67.80 as next upside target for December cotton. There are concerns that the wet weather in the southeast is delaying the harvest, not necessarily damaging the crop. There are 1-3 inches of rain expected in the western part of the Carolinas. The 6-10 and 8-14 day forecasts are calling for below normal temperatures and precipitation across the Delta and southeastern US. West Texas is expected to see low rainfall as well, but temperatures are closer to normal.
Sugar remains on-track for a fifth monthly gain in a row and second quarterly gain in a row in spite of a bearish 2020/21 global supply outlook. This has resulted in a sizable build-up in sugar’s net spec long position, so sugar will need to receive sizable carryover support from its key outside markets to avoid additional month-end and quarter-end long liquidation. March sugar kept within a fairly tight range as it built on early support and finished Friday’s trading session with a moderate gain. For the week, March sugar finished with a gain of 13 ticks (up 1.0%) which is a second positive weekly result in a row. Thailand Sugar Mills forecast their nation’s 2020/21 sugar production at 7.2 million tonnes, which is on the lower end of recent trade estimates and would be an 11-year low, which provided the sugar market with underlying support as a large portion of their output shortfall will be reflected in lower Thai exports.