In our opinion, the treasury markets have finally returned to classic fundamental behavior after deviating from those principles for the last 6 months. In other words, surging inflation and aggressive rate hike potential should have kept treasury prices glued to the June lows but instead, treasuries were seen as a flight to quality instrument. Now it appears that pockets of the world might not be able to contain inflation and the treasury market might have to raise expectations on the size of upcoming rate hikes (perhaps beyond 75-basis points). It should be noted that German producer price index readings for July jumped by 5.3% on a month over month basis and by 37.2% on a year over year basis!
Fear of a European recession is front and center early this week, especially with a temporary shutdown of the critical Nord Stream 1 pipeline supplying parts of Europe with gas resulting in a surge in retail gas prices. The markets also see significant slowing concerns in China where the Peoples Bank of China again reduced key lending rates overnight. Anxiety toward the global economy is also confirmed by the ongoing surge in the dollar (the euro broke the buck early this week) as that highlights growth anxiety.
Psychology has shifted in the currency markets with the dollar clearly back in control of the actively traded currencies. In addition to flight to quality buying from economic and inflation fears in China and Europe, the dollar is also seeing money flow from equity market funds toward US treasury instruments. In the near term, this increased bargain-hunting demand (resulting from the recent jump in rates) could suddenly expand foreign purchases seeking significantly higher US yields. At least for the near term the dollar is “King” as fears of a serious recession in Europe has put the euro, Pound, and the Yen almost in freefalls on their charts.
The equity markets obviously suffered a significant outflow from risk off conditions fomented by a combination of hawkish Fed commentary, fear that European and Chinese inflation might not be contained and from growing expectations of a European recession contributing to slowing of the global economy. In fact, the market today embraced poor earnings and a cut in forward guidance from John Deere, which is a key bellwether stock. However, in a positive development, General Motors has restored its quarterly dividend after 2 years on hiatus, and that signals management confidence in getting beyond the chip shortage. Global equity markets at the start of this week were lower with the exceptions the Shanghai Composite.
A noted downside extension early this week (after a significant downside extension last Friday), leaves the technical picture in the S&P very negative into the US trade. Apparently, a Chinese rate cut and emerging expectations of a slightly smaller US rate hike next month has had little supportive influence for stock prices. However, with a very large net spec and fund short (the largest since 2012) the S&P has already factored in a large amount of recession prospects. The Commitments of Traders report for the week ending August 16th showed E-Mini S&P Non-Commercial & Non-Reportable traders are net short 336,521 contracts after net selling 46,013 contracts.
Not surprisingly, the Dow futures are also off sharply and have extended the washout pattern from last week. In fact, with severe recession fears flowing from Europe, a surging US dollar and higher taxes (legislation from Washington usually results in higher taxes with the current round of legislation likely to cost small businesses more in audit fees than costs from increased taxes) and therefore large brick-and-mortar companies in the Dow are vulnerable to big picture issues.
GOLD, SILVER & PLATINUM:
With the dollar index forging another new high for the move and the 3rd highest daily trade of 2022, initial weakness in gold and silver is fully justified. While gold ETF holdings on Friday increased by 69,512 ounces, last week gold ETF holdings declined by 307,558 ounces. Similarly, silver ETF holdings on Friday fell by a very significant 1.8 million ounces, with a weekly reduction of 1.38 million ounces last week. Chatter regarding the magnitude of the next US interest rate move (more news on that front is expected from the Fed symposium on Friday) and an established uptrend in the dollar leaves the bear camp in gold and silver in control. Granted, some Fed members have contrasting views, and therefore action in equities is likely to be the best proxy of the market’s expectations on the magnitude of next month’s hike.
With the palladium market rejecting the vicinity of $2,102 on two occasions last week, the early failure of that level today suggests the correction off the August high looks to extend. While the net spec and fund long in palladium remained net spec and fund short last week, the short positioning was likely moderated with last week’s sideways chop and therefore fresh selling could surface and foster a quick return to $1,980.
Unlike palladium, the platinum market is in freefall with the market sliding to a fresh low for the month of August. Last week, platinum ETF holdings declined by 14,941 ounces and are now 12% lower year-to-date. Obviously, the platinum market is heavily impacted by the fear of aggressive US rate hikes which in turn are thought to be slowing the economy and hindering global auto sales. Also, unlike palladium, the platinum market maintains a moderate net spec and fund long positioning which could allow for additional stop loss selling.
While the ability to consolidate on the charts and reject the $3.5420 level offers technical support to copper, lingering demand fears offer fundamental resistance. Fortunately for the bull camp, last week both LME and Shanghai warehouse copper stocks declined sharply with evidence of extreme tightness in China surfacing frequently. In fact, industrial power cuts (because of extreme heat) were included in Sunday’s emergency response in China which should tighten copper supplies inside China even further. Last week, Shanghai copper warehouse stocks declined by 10,606 tonnes (-25.4%) and reports that 200,000 tonnes of copper have gone missing inside China should discourage traders from pressing the short side at last week’s low.
The crude oil market at the start of this week is faced with mixed fundamentals as reports that OPEC+ failed to meet their production targeting by 2.9 million barrels per day in July is a major supportive supply development within an environment rife with global recession fears and expectations of energy demand destruction. In fact, Chinese apparent oil demand in July fell 9.7% on a year over year basis and economist expect Chinese demand to soften even further because of high prices/less disposable income. In addition to the weekend shutdown of natural gas flow through the Nord Stream 1 pipeline, the energy markets are supported by export reductions of Kazakh oil via Russia again because of damaged equipment! Yet another supportive weekend development is a week over week decline in global crude oil in floating storage of 5.6% with European stocks down by 35% in one week!
Like the crude oil market, the gasoline market also posted an impressive rally off last week’s low of $0.19 and to extend last week’s bounce will require an improvement in the general economic outlook and perhaps strength in equity prices worldwide.
While October natural gas faltered at last Wednesday’s high and posted a quasi-double top, that double top was clearly taken out in action early this week with that pulse up move the result of another disruption of Russian supply flow into Europe. heat in the southwest of China has resulted in power cuts but that negative demand development is discounted in the face of fresh contract highs in US futures prices.
Unless China emerges as a major buyer over the near term, the soybean market may find a difficult time moving higher. With huge profitability, traders suspect South America will see a surge in production this year as acreage will expand. Argentine producers are still holding onto soybeans as a hedge against inflation, and this may support the products but not so much soybeans. With slow producer selling in Argentina and monthly crush coming in lower on the year for 7 consecutive months, meal exports from Brazil and the US might come in better than expected. If the Pro Farmer crop tour confirms the USDA yield outlook, production and yield will end up at a record high. In addition, world ending stocks are projected to reach the second highest level ever.
December corn closed moderately higher on the session Friday after choppy to lower trade early in the day. With uncertainty on the impact of China’s weather on their crop, plus China buying corn in the weekly export sales report plus uncertainty on US yields with the Pro Farmer tour this week, buyers turned active. Talk that cooler and wetter weather in Europe came too late to help the crop was seen as a positive factor. The 5-day forecast shows little or no rain for most of the Midwest. The annual Pro Farmer crop tour starts today and traders will monitor the tour closely as the results should allow a clearer sense of how crops are faring as the harvest draws nearer for the world’s top producer.
In just 64 trading days, December wheat is down as much as 42% to last week’s low. The market continues to struggle with record production from Russia and increasing exports out of Ukraine. Four more ships carrying grain and foodstuffs left Ukraine ports over the weekend, and this brought the total number of vessels to leave Ukraine Black Sea ports to 31. Indian officials have indicated sufficient wheat stocks and that no imports will be required. This comes after a report last week that India wheat reserves have declined in August to the lowest level for the month in 14 years due to record-breaking heat wave which in theory cut production and pushed up local prices.
October hogs managed to turn up Friday after key support at 92.50 was violated, but not for long. The close above this level is considered a positive development. The market is holding a much larger than normal discount to the cash market. Cash markets are drifting lower while futures markets collapsed last week. As of August 17, October futures closed at a 22.35 discount to the 2-day Lean Index as compared with the five-year average for this time of the year at 9.19. The CME Lean Hog Index was 120.60 on August 19, down from 120.62 the previous session and 121.86 a week prior. The USDA pork cutout, released after the close Friday, came in at $116.00, down $2.56 from Thursday and down from $120.41 the previous week. This was the lowest the cutout had been since July 11.
The cattle market rally has left futures in an overbought condition, but weights are down and cash cattle traded $2 higher last week. However, the USDA Cattle on Feed report carried a bearish tilt. July placements came in at 101.8% of last year versus trade expectations of 98.7% (range of 95.0% to 101.3%). This is outside of the range and considered bearish against trade expectations. Marketings came in at 96.1% of last year. The average estimate was 97.3% with a range of 96.0% to 102.1%. The lower than expected number is a bearish factor for October cattle. Cattle on Feed supply as of August 1st came in at 101.4% of last year versus the average estimate of 100.8% (range of 100.1% to 101.1%).
Since finishing June and starting July with a 6-session pullback, the cocoa market has extended a wide-sweeping coiling pattern as it has been unable to sustain upside momentum. Cocoa prices continue to stay clear of their mid-July lows and have recent supply-side developments working in their favor, however, as the market should be able to find its footing early this week. December cocoa started out with a gap-lower opening and remained on the defensive all day as it finished Friday’s trading session with a sizable loss. For the week, December cocoa finished with a loss of 20 points (down 0.8%) which was a third negative weekly result over the past 5 weeks.
Coffee prices have fallen well below their mid-August highs as the market is finding some relief from a tight near-term supply situation. The world’s top 2 Arabica-growing nations continue to have production issues, so coffee prices should remain well supported on near-term pullbacks. December coffee saw choppy early trading and a 1 1/2 week low at midsession, but regained their strength late in the day to finish Friday’s trading session with a mild gain. For the week, however, December coffee finished with a loss of 9.05 cents (down 4.1%) which was a second negative weekly result over the past 3 weeks.
December cotton closed higher on Friday, and the market appears to be consolidating its gains off the previous week’s USDA supply/demand report that showed US 2022/23 ending stocks are expected to fall to their lowest level on record. Keep in mind that in order to hold ending stocks at the record low of 1.8 million bales, the USDA had to lower exports to just 14.3 million bales, down 2.9 million bales from this season. The dollar was sharply higher, and the fact that cotton held up in the face of that move is impressive. The Texas crop is in big trouble after a heat wave and long-term drought that is only just ending.
While sugar could not avoid a weekly loss, the market received bullish supply news that fueled a sizable positive turnaround. If it can receive additional carryover support from key outside markets, sugar should be able to extend a recovery move early this week. October sugar was unable to hold onto mild early support and dropped down to a new 2-week low, but then turned sharply to the upside late in the day to finish Friday’s trading session with a sizable gain and a positive daily reversal. For the week, however, October sugar finished with a loss of 51 ticks (down 2.7%) which broke a 2-week winning streak and was a negative weekly reversal from Monday’s 4-week high.
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