In retrospect, the bull camp in treasuries should have exited last week extremely discouraged in the market’s failure to sustain gains in what appears to be a noted letdown in optimism from global equities. However the markets were likely limited by better than expected US initial and ongoing claims data and perhaps because of signs of emerging inflation in the form of surging grain prices, silver prices and energy prices. Wild action in silver prices, strong energy prices, and soaring grain prices seem to be escalating inflationary expectations in the marketplace, but so far, we doubt Treasury prices are concerned with inflation, but that is certainly a prospect if material prices soar as they did in China.
While the British pound and Canadian dollar saw significant volatility last week, the action in the euro and dollar was surprisingly narrow. In our opinion, trends from the March through early December timeframe are poised to return to the currency markets as better sentiment toward global growth prospects is likely to build in the coming weeks off declining infections and accelerating inoculations. Keep in mind that the Swiss franc, euro and pound appear to be driven by recovery hopes. We are a little surprised to see the Dollar in favor early this week in the face of a risk-on wave in equities and physical commodities.
Many will suggest that the equity markets deserved some corrective action with overall macroeconomic conditions into the last high very uncertain due to the unrelenting surge of US infections. Furthermore, many investors were embracing fears that the South African mutation was resulting in faster spread of the virus. However the small trader/Reddit inspired battle with hedge funds created massive volatility in that in turn unnerved investors.
GOLD, SILVER & PLATINUM:
Shareholder activism has clearly increased interest in the Silver “Space” with silver futures, coins, bars, Silver I-Shares, and First Majestic Silver shares seeing a speculative buying surge. Apparently one thread on REDDIT’s Wall Street Bets saw 10,000 votes for silver as a short squeeze candidate. Keeping in mind that silver trading globally and in many different forms should make it difficult for a concentrated wave of securities speculative buying to move the world price of silver. However, the silver bull case appears to be ignited and it is possible that money will begin to chase money! Total ETF silver holdings remain near record levels, with holdings as of January 29th at 905 million ounces.
The copper market has started the week in a negative chart set up with disappointing Chinese January PMI data providing additional demand related selling. In fact, analysts labeled the official PMI reading from China as a report that gives credence to the idea that the Chinese recovery is waning! While not a significant impact on copper prices, iron ore prices softened in the wake of the disappointment from the Chinese manufacturing sector. In a slightly negative impact on copper, it appears as if the Indian government is poised to reduce its import duty on scrap copper which could increase competition for imports of refined copper supply in the months ahead.
While the crude oil contract rejected a 6-day low at the start of this week, chart damage was forged and suspicion toward the bull case is extended. However, it would appear as if a global risk on mentality is in place to start the new trading week, and that should partially offset energy demand disappointment from the slack Chinese PMI reading. However, it should be noted that OPEC+ compliance is thought to be back near 100% again, African crude flows to Europe are falling and there are some weather disruptions hindering flows from Russian ports. Therefore, the race continues between the probable return of demand and rising production, with soaring prices from the March low last year resulting in US production regaining traction and demand recovery seemingly slipping into the future.
With a shift to a dry pattern over the next week in Argentina and a continued dry pattern for eastern Argentina for next week, some stress could develop in areas which did not receive good rains recently. There is almost no rain for the next week for Argentina. Strong demand from China continues to provide underlying support, and tight supplies of vegetable oils has also supported. Traders are concerned that with near 8.5 million tonnes of Brazil soybeans scheduled to ship in February, a record for any month, that any transportation issues could impact.
With the recent inflationary tilt to commodity markets and the potential for a risk-on tone in the next few weeks, agricultural markets look poised for a resumption of their uptrends. If we continue to see support from outside markets, traders may want to concentrate on the agricultural markets that are facing global production deficits. It looks like the surge in demand from China will tighten US supplies even more and could result in significant global production deficits. The new contract high for the July/December corn spread is also supportive.
The technical action remains positive as wheat follows the other grains higher. The market faces a large Australia harvest, but this has been offset by stronger-than-expected demand from China, the potential for lower Argentine exports and fewer exports from the Black Sea region due to export taxing. Russia is considering a formula based tax on the wheat it exports after June 1, a month earlier than expected just last week. Traders expect news on the formula based wheat export tax this week. Ukraine has used 74.3% of its 17.5 million tonnes of wheat export quota for the 20/21 season, according to the economy ministry. As of February 1, Ukraine exports totaled 13 million tonnes, down almost 2.9 million from the same date last year. The 6 to 10 day forecast for the US Plains shows above normal precipitation but also below normal temperatures. March wheat closed 16 cents higher on the session Friday and this left the market with a gain of 28 1/2 cents for the week.
June hogs remain under the negative technical influence of the January 27 key reversal. The market is overbought and in need of a technical correction but the continued strong advance in pork cut-out values remains as a bullish force and has kept the market in a solid uptrend. Futures also hold a stiff premium to the cash market. The USDA pork cutout, released after the close Friday, came in at $83.70, up $1.85 from Thursday and up from $81.34 the previous week. This was the highest the cutout had been since November 9. As long as the export demand remains strong, the pork rally can hold. However, if China demand slows as their herd expands, the US will be forced to absorb extra supply. April hogs closed moderately higher on the session Friday and in the middle of the range. The market is attempting to hold a large premium to the cash market with expectations that pork values and cash hogs continue to rally sharply in the weeks just ahead. Solid export news last week plus continued talk that restaurants are reopening has helped to support.
The sweeping reversal after hitting the highest level since January of last year leaves the appearance that a significant top is in place for cattle prices. The market took out the range from the previous four trading sessions and the selling pushed the market down to the lowest level since January 22. Open interest is high and technical indicators turned lower on Friday. While cash markets traded higher last week, futures remain at a stiff premium to the cash. The continued strong advance in beef prices with talk of strong consumer demand due to more and more restaurants reopening has helped to support.
While cocoa has been unable to sustain a sizable upside move since late November, the market continues to hold its ground above the December and January lows in spite of significant near-term demand issues. Longer-term demand prospects are much more positive, and that can help cocoa prices extend a recovery move into early this week. May cocoa was able to shake off early pressure and finish Friday’s trading session with a moderate gain. For the week, May cocoa finished with a loss of 12 points which broke a 2-week winning streak.
While it finished January facing near-term demand concerns, coffee’s demand outlook should improve by mid-year as COVID shutdown restriction are relaxed. Brazil will start to harvest their 2021/22 “off-year” crop around that period, and expectations for both can help coffee to regain upside momentum early this week. May coffee reached a 2-week low before finishing Friday’s trading session with a moderate loss. For the week, May coffee finished with a loss of 1.20 cents and a second negative weekly result in a row.
May cotton closed moderately higher on Friday and continued to advance early this week. The market closed lower for last week after closing higher for four weeks in a row. January was the eighth month in a row that cotton closed higher. The dollar closed higher and the stock market lower, and both of those moves were negative for cotton. The trade is reporting active cash buying interest from mills, especially after the selloff last week. Export business continues to be strong, with another 376,305 bales of export sales reported last week. Sales have already reached 87% of the USDA’s forecast for the marketing year versus a five-year average of 75%.
While the market has seen coiling price action over the past few weeks, sugar prices have been resilient as they benefited from improved demand prospects. With energy prices likely to remain strong while inflation may be on the rise, sugar can regain upside momentum early in February. May sugar bounced back from an early 2-week low to finish Friday’s trading session with a moderate gain. May sugar finished unchanged for last week’s trading, but it posted a monthly gain of 40 ticks which was a ninth monthly gain in a row.
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