The Treasury market tracked positive late last week, but remained stuck within the recent consolidation range as if waiting for signs of which way the infection flare is headed. Limiting bonds and notes on the upside were favorable US scheduled data from Services, Manufacturing and Composite PMI readings for January (preliminary). In our opinion, seeing infections jump back above 200,000 next week could set the stage for an upside breakout in Bonds toward 170-00. While global equity markets are not throwing off definitive economic concern early this week, the mixed openings combined with disappointing German business moral, a wave of US travel restrictions from countries with mutated virus strains and a looming US Federal Reserve meeting leaves the bull camp with an edge.
The Dollar initially managed to respect even number support at 90.00 late last week. However, the lack of strength in the index in the face of a risk-off condition flowing from infection predictions and a lack of focus on the stimulus in Washington highlighted a bull market insensitive to bullish fundamentals. On the other hand, strength in the Euro and Swiss franc was very impressive and that was managed in the face of conditions that could have sunk high flying recovery currencies. The Dollar did not seem to be under pressure from news that China last year topped the list of countries with the largest foreign direct investment flow, which in turn pushed the US out of the top 5 in foreign direct investment.
The Pound remains undaunted and retains the role of leadership currency to start the new trading week. In fact, the Pound seems to have ignored news that infections from the new South African Covid-19 strains are surfacing in concerning numbers in the UK. Furthermore, the Pound remains strong despite very dire economic projections from a former Prime UK Minister but perhaps the trade is cheered by reports of quicker UK vaccinations. Obviously, the Canadian was technically overbought into last week’s highs with some traders also suggesting it was fundamentally overbought. However, the Dollar looks to remain off balance and the Canadian seems to have respected 21-day moving average support.
The stock market followed international markets lower late last week as we think that dire infection and death count forecasts from the US President prompted a shift in overall market sentiment in favor of the bear camp, or at least prompted longs with profits to bank and move to the sidelines. Disappointment from IBM and Intel earnings and weakness in those share prices likely contributed the corrective action. Global equity markets at the start of this week were mixed with markets in Asia generally higher and the rest of the world tracking lower. Economic news of importance included a 6-month low in German IFO business morale. The markets appear to be anxious to start the week because of a flurry of US travel restrictions and from news that the impeachment trial scheduled for February 5th remains a priority to the Democrats over finishing and distributing a stimulus package. Infections yesterday in the US were 171,844 cases with the current hotspots New York, South Carolina, Georgia, and Arizona.
GOLD, SILVER & PLATINUM:
While expectations remain upbeat for a US stimulus package, it would not appear as if effort on the assistance is a high priority in Washington and without signs that the US economy will be cushioned into the end of the pandemic, deflationary fears are likely to hold gold and silver prices down. In fact, seeing the US move to restrict incoming travel from a long list of countries with new virus mutations adds to the deflationary/slowing environment and that thickens overhead resistance. From a technical perspective, February gold sees resistance from last week’s consolidation highs. The action in the dollar index has been less important to gold over the last 25 days because the dollar has been locked in a tight range just above 90.00 and is offering little trend direction.
While we do not think the platinum bull trend has come to an end, we do see some two-sided corrective action ahead unless global equities resume their upward march. Unfortunately for the bull camp, the net spec and fund long in platinum into the high Friday was probably the largest since last February and therefore some additional back and fill action is likely. The January 19th Commitments of Traders report showed Platinum Managed Money traders were net long 20,404 contracts after increasing their already long position by 346 contracts. Non-Commercial & Non-Reportable traders were net long 35,228 contracts after increasing their already long position by 206 contracts. The charts in the palladium market favor the bear camp with demand expectations neutral at best, spillover pressure from gold and silver likely early this week. The Commitments of Traders report for the week ending January 19th showed Palladium Managed Money traders net sold 157 contracts and are now net long 3,233 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 442 contracts to a net long 2,974 contracts.
Like a number of other physical commodity markets at the end of last week, the copper market fell back sharply in sync with a number of physical markets. A portion of the current weakness might be fear of an upcoming lull in Chinese manufacturing copper demand during the New Year holiday, but a nagging return of infection headlines from Jilin province in China should be discouraging buyers and encouraging sellers. In a longer-term bullish development direct foreign investment in China topped the list of global investment flows and that should bolster views toward the Chinese economy ahead. Furthermore, the copper market should be underpinned by ongoing declines in LME and Shanghai copper stocks with the Shanghai copper stocks last week falling to the lowest levels since December 2011.
While the bull camp has had the ability to absorb bearish supply and demand news consistently for the last 10 months, we get the sense that bearish fundamentals are stacking up and prices are expensive in the face of a 58-million-barrel year over year US surplus. We would suggest that expectations for a recovery in US energy demand continue to be pushed farther into the future and it is also possible that the Chinese are slightly forward bought after building storage aggressively into the winter. Certainly seeing 5 straight weeks of increased US refinery operating activity will serve to increase the call/demand for physical US crude oil. The market might see some support from news that global floating storage declined by a noted 7.9% last week and the bulls should also be cheered from news that East Coast fuel demand is strengthening, with bridges and tunnels in the New York Metro area appearing to have returned to year ago levels.
Weather maps were a little wetter for Argentina for the next two weeks as compared with weekend forecast, which is bearish. The market traded higher early this week as there was a little less rain in the two week forecast for Argentina Sunday as compared with Friday. This, along with strong demand signals helped to support the early bounce. With a large spec long position and the market seeing a drop of more than 4% on Friday, we cannot rule out additional long liquidation selling pressures. In a Reuter’s poll, Brazilian production is expected to come in near a record harvest of 132.2 million tonnes as compared with 131.79 million as the December estimate and near 125 million tonnes produced last year. March soybeans closed 58 1/2 cents lower on the session Friday, and the selling pushed the market down to the lowest level since January 4.
The extent of the long liquidation selling break is questionable. The two-week weather outlook had a little less rain for Argentina on Sunday than was expected on Friday. However, the updated forecast shows better coverage over the next two weeks which could ease crop concerns. March corn fell 5.8% for the week and this opens the door for additional long liquidation selling pressure. Demand factors remain very strong and this may provide some support as well. Corn positioning in the Commitments of Traders for the week ending January 19th showed Managed Money traders were net long 349,495 contracts after decreasing their long position by 25,219 contracts. This is a long liquidation selling trend. Non-Commercial & Non-Reportable traders were net long 520,764 contracts after decreasing their long position by 10,334 contracts. Ukraine’s economy ministry has revised higher there 2020 corn harvest to 30.3 million tons from 29.3 million and increased the export outlook for the 20/21 season to 23.5 million tons from 22.3 million previous.
March wheat closed sharply lower last Friday as the selling pushed the market down to the lowest level since January 11. For the week, March wheat fell 41 cents or 6%. Russia wheat export prices were down last week. The weekly export sales report showed that for the week ending January 14, net wheat sales came in at 329,647 tonnes as compared with trade expectations for 250,000 to 650,000 tonnes. Cumulative sales have reached 79.8% of the USDA forecast for the 2020/2021 marketing year versus a 5 year average of 76.1%. Traders see sluggish demand and news of a little higher Russian production forecast then expected as short-term bearish forces. In addition, there is above normal precipitation in the forecast for the US Plains for much of the next two weeks. Wheat prices are on the rise in China as livestock producers in China are using more wheat due to sky high corn prices.
The hog market remains in a steep uptrend as pork values continue to advance and the market has built up a strong premium to the cash. Perhaps demand is improving as the economy opens up and it is possible that consumers are stocking up on meat due to expanding cases. The USDA pork cutout, released after the close Friday, came in at $81.34, up $2.58 from $78.76 on Thursday and $78.78 the previous week. This was the highest the cutout had been since January 11. April hogs closed sharply higher on the session and the buying pushed the market up to the highest level since November, 2019. Ideas that short-term demand continues to come in better than expected and that consumer demand might be showing some consumer hording has helped to support. The market saw better pork exports and this helped to support as well. US pork export sales for the week ending January 14 totaled 45,172 tonnes, up from 23,782 the previous week and the largest since December 24.
The Cattle on Feed Report was considered bearish. Placements for the month of December came in at 100.8% from trade expectations for 97.1% of last year (93-100 range). Marketing’s during December came in at 101% of last year as compared with expectations near 100.6% of last year (99.2-101.8 range). As a result, the January 1st On-Feed supply came in at 100.1% of last year from expectations near 99.5% of last year (98.8-99.9 range). With the strong rally on Friday which left futures at a huge premium to the cash market, the report should spark more active selling. With steer weights at a record high for this time of the year, producer selling could also turn more active. Beef prices were up 4.6% for the week last week while beef production was up 3.6% from last year. The USDA boxed beef cutout was up $1.85 at mid-session Friday and closed $1.62 higher at $222.82. This was up from $212.92 the previous week and was the highest the cutout had been since December 8.
Cocoa’s whipsaw price action last week led to 3 negative daily results in a row as near-term demand concerns remain a major source of pressure. Cocoa did manage a positive weekly result, however, and that may provide some evidence that the late December and early January lows may hold for a while. May cocoa came under sharp early pressure and reached a 1-week low, and then put together a sizable rebound before finishing Friday’s trading session with a moderate loss. For the week, however, May cocoa finished with a gain of 4 points which was a second positive weekly result in a row.
Last week’s choppy price action in the coffee market has left prices more than 7.50 cents below their 4-month high from mid-January as near-term demand concerns remain a source of pressure. Coffee continues to hold above all 3 major moving averages, however, as it has a bullish longer-term supply outlook that can underpin prices early this week. May coffee was unable to shake early pressure as it reached a 1 1/2 week low before finishing Friday’s trading session with a sizable loss. For the week, May coffee finished with a loss of 4.05 cents (down 3.1%).
March cotton closed sharply lower on Friday, but it stayed within Thursday’s range-up day throughout the session. Cotton was relatively strong when compared with the collapse in grain markets. The dollar closed higher and the S&P 500 lower. Both moves were negative to cotton. US cotton export sales for the week ending January 14 came in at 292,355 bales for the 2020/21 (current) marketing year and 39,511 for 2021/22 for a total of 331,866. This was down from 376,338 the previous week and was slightly above the four-week average at 327,959. Cumulative sales for 2020/21 have reached 12.157 million bales, up from 11.859 million last year at this time and the highest since 2010/11. Sales have reached 86% of the USDA’s forecast for the marketing year versus a five-year average of 73%.
While sugar has seen a positive shift in global demand prospects during the past few months, prices may have gotten ahead of themselves with their mid-January updraft. Unless the market can find fresh carryover support, sugar prices are likely to remain on the defensive early this week. May sugar came under early pressure and was unable to sustain a midsession rebound as they finished Friday’s trading session with a moderate loss. For the week, May sugar finished with a loss of 50 ticks (down 3.2%) that broke a 5-week winning streak and was also a negative weekly key reversal from last Tuesday’s multi-year high.
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