Like the equity markets, the Treasury markets continue to look beyond significant near-term, medical, political, and economic threats as prices fell nearly 1 point in bonds in the face of a contraction in US Non-Farm payrolls. However, it is likely that new highs in equities combined with a jump in earnings in the jobs report keeps hope of inflation and climbing rates in the equation. Technically, Treasury prices forged a fresh lower low early this week which suggests the market has a prevailing downward bias into the new trading week. Typically, a surprise nonfarm payroll result fosters 2 days of market reaction but last week’s disappointing nonfarm payroll report had almost no supportive influence on prices leading many to conclude that some form of long term “adjustment” in pricing/yields is underway.
In our opinion the Dollar, Euro, Swiss, and Yen all posted temporary countertrend corrective action at the end of last week. However, the dollar probably saw some fresh flight to quality buying in the wake of a US nonfarm payroll contraction which is the first monthly loss of jobs since April. The Dollar continues to show short covering and perhaps is beginning to see flight to quality buying off an extension of record daily US infections, a delay in US stimulus, a clear trend of softening US data and what from appears to be a full-blown Congressional attempt to remove a President before his term ends next week. Therefore, we expect additional hard fought and measured gains in the Dollar. In fact, with a net spec and fund short in the Dollar last week, the bull camp should benefit from ongoing technical short covering. The January 5th Commitments of Traders report showed Dollar Non-Commercial & Non-Reportable traders reduced their net short position by 109 contracts to a net short 14,727 contracts.
The equity market discounted record daily US infections, patently disappointing monthly payroll data and a very concerning letter from the speaker of the house to the members of the house suggesting nuclear weapons should be guarded against the use by an unstable president and posted new highs. Clearly a number of financial markets continue to maintain the capacity to look through the crisis to better times ahead, and that is likely the result of stimulus expectations and hope of an acceleration of vaccinations.
GOLD, SILVER & PLATINUM:
While February gold managed to reject a lower low dip early this week, the charts were damaged again, and the bias remains down despite the higher early trade. Obviously, hot Chinese inflation provides some long interest as inflation in China could result in China becoming an inflationary spark for the rest of the world. However, a portion of the trade think the Chinese inflation was a one-off event caused by extreme cold but in our opinion, inflation is a rise prices regardless of the origin. It is difficult to ascertain the current focus of the gold and silver trade as last week’s hard break appeared to be the result of views that political uncertainty in the US might moderate.
The January 5th Commitments of Traders report showed Platinum Managed Money traders added 2,466 contracts to their already long position and are now net long 20,583. Non-Commercial & Non-Reportable traders are net long 34,985 contracts after net buying 1,826 contracts. With a relatively small net spec and fund long in platinum, a decline to $1,000 could almost completely liquidate the net spec and fund long. The January 5th Commitments of Traders report showed Palladium Managed Money traders were net long 4,091 contracts after increasing their already long position by 800 contracts. Non-Commercial & Non-Reportable traders were net long 4,313 contracts after increasing their already long position by 863 contracts.
While March copper reversed from a new high last Friday and has extended the chart damage early this week, the uptrend looks to remain intact. However, the market is significantly overbought, the Dollar is stronger and LME copper stocks posted an unusual daily build of 2,525 tonnes Monday morning. We would also note weakness in Chinese Steel rebar prices (Industrial material prices in China have been a leading indicator for copper) but that outside market pressure might be largely offset by hot Chinese inflation readings. However, the market was also presented with news that Peruvian copper output in November declined 2.4% because of Covid-19 precautions.
While the crude oil market has managed to discount further delays in recovery of US and European energy demand, we wonder if that capacity is about to run out. In fact, we see softer US data, further delays in US stimulus checks, a rising Dollar and signs that China might be poised stem rising industrial material prices as a bearish cloud hanging over an overbought market. We also think crude oil is running ahead of its internal fundamentals, off the idea that supply will be restricted from OPEC+ over the mid-term as that reduction might only last a couple months. Furthermore, statistics pegged global floating storage of crude oil continued to run 51% above year ago levels last week with some traders indicated that is a sign of softening global demand. It should also be noted that adjusted for the rally after the last COT report was measured, February crude oil into the high Friday had rallied $2.75 from the report and that could put the net spec and fund long up to some of the highest levels since April of 2019!
There is some rain in the forecast for this week, but Argentina looks completely dry for January 16th until January 23 and this will likely be seen as a very bullish factor. March soybeans posted a new contract high this morning. On top of the potential production losses in Argentina, China has resumed the purchase of US soybeans with a Friday purchase of 204,000 tonnes of US soybeans. March soybeans closed sharply higher on the session Friday and pushed to new 6 1/2 year highs. Talk of China buying US cargoes plus a drier forecast for Argentina helped to support. For the week, March soybeans closed 63 3/4 cents higher. Meal closed moderately higher but did not reach a new contract high and soybean oil closed slightly lower on the day with an inside trading session. The Commitments of Traders report for the week ending January 5th showed Soybeans Managed Money traders are net long 175,827 contracts after net selling 20,660 contracts for the week. Non-Commercial & Non-Reportable traders were net long 234,115 contracts after decreasing their long position by 9,267 contracts. For Soyoil, Managed Money traders are net long 112,917 contracts after net selling 72 contracts. Non-Commercial & Non-Reportable traders were net long 156,907 contracts after increasing their already long position by 2,753 contracts.
The forecast plus a continued surge in China corn prices are bullish short-term forces. There is some rain in the forecast for this week, but Argentina looks completely dry for January 16th until January 23rd and this will likely be seen as a very bullish factor. March corn closed higher on the session Friday but was unable to take out Wednesday’s high. The market remains extremely overbought technically, but a drier forecast for Argentina helped to support more buying. Open interest continues to surge higher as fund traders remain active. For the week, March corn closed 12 1/4 cents higher. The Commitments of Traders report for the week ending January 5th showed managed money traders were net long 349,888 contracts after increasing their already long position by 17,843 contracts for the week. CIT traders net bought 6,982 contracts and are now net long 409,078 contracts.
March wheat closed lower on the session Friday and pushed down to the lowest level since the previous Friday. The lower close for the week after making a six year high is considered a key weekly reversal and a bearish technical development. March Kansas City wheat also closed lower on the day and also experienced a key weekly reversal. The market may find support from the other grain markets to start the week but the USDA report may be a reminder that beginning world stocks for the 2021/22 season are at a record high. Wheat positioning in the Commitments of Traders for the week ending January 5th showed Managed Money traders net bought 11,850 contracts for the week and are now net long 25,210 contracts. CIT traders added 5,094 contracts to their already long position and are now net long 137,015. Non-Commercial & Non-Reportable traders were net long 26,152 contracts after increasing their already long position by 11,209 contracts. For KC Wheat, managed money traders net sold 1,103 contracts and are now net long 54,457 contracts. KC Wheat CIT traders hit a new extreme long of 72,959 contracts. This leaves the market overbought. Non-Commercial & Non-Reportable traders net sold 1,331 contracts and are now net long 56,560 contracts.
February hogs closed lower for the 4th session in a row on Friday. The market experienced pressure even with the strength in the cash and pork product markets. The market remains overbought and vulnerable to a pullback but that probably is with the February contract with the premium to the cash. The CME Lean Hog Index as of January 6 was 62.96, up from 62.42 the previous session and up from 59.86 the previous week. The USDA estimated hog slaughter came in at 487,000 head Friday and 391,000 head for Saturday. This brought the total for last week to 2.849 million head, up from 2.168 million the previous week and up from 2.695 million a year ago. Pork production reached 621.4 million pounds, up 6.1% from last year. If the estimated slaughter is not dramatically revised, both slaughter and production reached a new record all-time high for the week. Packer margins were high coming out of the holiday period and this helped the market quickly clean-up any hogs backed up.
The cattle market continues to consolidate near the December highs as a short-term negative demand tone clashes with the outlook for better demand once the vaccines are more widespread. The winter storms seem to have missed the southern and western Plains which is a slight negative. The surge in open interest in the last few weeks has been impressive. The USDA boxed beef cutout was up 74 cents at mid-session Friday and closed 99 cents higher at $206.80. This was down from $209.35 the previous week. Cash live cattle ended last week very close to where they were the previous week. In Kansas 1,072 head traded at 111-112 and an average price of 111.62. In Nebraska 865 head traded at 110. We estimate that as of Friday, the 5-day, 5-area average price was 111.41 versus 111.42 the previous week. February cattle closed moderately lower on the session Friday while June cattle closed slightly lower and near the highs of the day.
Cocoa prices continue to have trouble sustaining upside momentum as near-term demand concerns remain a front and center issues for the market. There will be critical demand data starting later this week that will provide evidence of cocoa’s demand outlook and if the market can hold above the mid-December lows, cocoa may be in a good position to begin a longer-term recovery move. March cocoa saw initial follow-through from Thursday’s positive reversal, but then it lost strength at midsession before it finished Friday’s trading session with a moderate loss. For the week, March cocoa finished with a loss of 87 points (down 3.3%) which broke a 2-week winning streak.
Coffee had a rough start to the new trading year, but a late-week recovery has lifted prices back to levels seen during their late December consolidation zone. While global demand will remain an area of concern over the next few months, coffee has a positive longer-term supply/demand outlook that can help the market maintain upside momentum this week. March coffee extended its January selloff to a new 4-week low, but then regained upside momentum to finish Friday’s outside-day trading session with a sizable gain and a positive daily reversal. For the week, however, March coffee finished with a loss of 4.55 cents (down 3.5%) which broke a 4-week winning streak and was a negative weekly reversal from last Monday’s 3 1/2 month high.
For Tuesday’s monthly USDA report, US cotton 2020/21 ending stocks are expected to come in at 5.39 million bales versus 5.70 million in the December report. US production is expected to come in at 15.66 million bales (range 15.10-16.00 million) versus 15.95 million in December. US exports are expected to come in at 15.02 million (range of 14.48-15.25 million) versus 15.00 million in December. World ending stocks are estimated to come in at 97.51 million bales (range 97.00-98.00) versus 97.52 in December. World production is expected at 113.80 million versus 113.90 in December. March cotton closed near unchanged on Friday after spending most of the day inside Thursday’s range.
While sugar managed to post a fourth positive weekly result in a row, it finished the week 73 ticks below last Thursday’s multi-year high. Global risk sentiment and energy prices may be moving in its favor, but sugar remains vulnerable to additional long liquidation early this week. March sugar had trouble sustaining upside momentum, but managed to finish Friday’s trading session at unchanged levels. For the week, March sugar finished with a gain of 11 ticks (up 0.7%). A positive tone to global risk sentiment provided sugar with early support as that points towards improving global demand prospects.
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