To recap last week’s fundamental developments, it can be said that inflation remains a problem but might be moderating. However, markets disagree on the argument that inflation is peaking. The failure to extend the rally from earlier last week is partially the result of a relief rally in equities, a much weaker than expected Michigan sentiment reading and a softer than feared US import prices reading. On the other hand, Reuters reported the largest bond fund outflows in 4 weeks. Even though treasuries forged fresh new lows for the move early this week, there are plenty of residual supportive fundamental developments operating in the market. While not a direct impact on US treasury prices, China released very disappointing industrial production readings and appears to have extended the lockdown of Shanghai by indicating Shanghai could be back to normal by June 1st. Last week, China hinted at reducing some lockdown area later this week.
In a very minor supportive development, seeing Finland in Sweden potentially apply for membership in NATO ruffles the feathers of the Russian leader and therefore fosters minimal flight to quality interest in US bonds and notes.
As in many other markets late last week, the currency markets showed corrective action against pre-existing trends. However, while the euro and Swiss franc are massively oversold, their fundamentals offer little sign of bottoms. In fact, with Europe continuing to move toward less Russian oil use and targeted the end of May as a complete ban deadline, Europe is facing the potential of paying significantly higher premiums for energy than the rest of the world. Therefore, European consumers will see their spendable income contract significantly ahead. In conclusion, the outlook for the European economy is for increased potential for a recession and more downside action.
While the dollar index extended the lower track at the start of this week following a poor close on Friday, the bull case remains substantial. However, bullish fundamentals from the prospect of aggressive US interest rate hikes have tapered along with the expected pace of US inflation and growth.
While the euro showed a slight and anemic extension of last Friday’s bounce early this week, ECB comments suggesting Euro weakness threatens their inflation targeting keeps the bulls at bay.
With a fresh contract early this week forged in the wake of softness in the dollar, it is clear the downtrend in the Swiss franc has extended into another week. While we doubt Swiss consideration of joining NATO is causing the break, that argument cannot be ruled out.
After the severe beating in the first 4 days of this week, a noted short covering relief rally was justified at the end of last week. Granted, many large growth stocks like Tesla, Apple, Google, and Amazon led the market higher, but the major shift in psychology from Thursday’s action was more than likely the tempering of 75-basis point rate hike expectations for next month from the US Federal Reserve Chairman. Going forward, we are hard-pressed in the near term to come up with a key and sustainable theme. Global equity market action at the start of this week was split with a lack of consensus among markets.
With a low to high bounce of 1,100 Dow points from last week’s low, the extreme oversold technical condition is partially repaired. While a normal retracement of the April and May washout allows for a bounce to 32,777 without reversing the downtrend, we seriously doubt the markets capacity to rally to that level given current fundamental news flow patterns. Dow Jones $5 positioning in the Commitments of Traders for the week ending May 10th showed Non-Commercial & Non-Reportable traders are net short 23,466 contracts after net selling 4,482 contracts.
With Tesla delaying a return to pre-pandemic production levels in Shanghai and a fresh dispute between Twitter executives and Elon Musk the NASDAQ starts with a negative fundamental undertow.
GOLD, SILVER & PLATINUM:
In retrospect, last week was extremely disappointing to the bull camp as a series of inflation readings showed hot inflation relative to history, but some analysts saw the data as a slowing of inflation and perhaps even the beginning of a peak of inflation. However, the gold and silver markets have declined persistently since the March high, despite several extremely hot inflation reports in that timeframe. Certainly, the unrelenting rally in the dollar index and rising interest rates is a bearish environment for gold and silver, and therefore the classic flight to quality buying off the inflation theme was overwhelmed.
As opposed to gold and silver, the palladium market appears to have solid consolidation low support (which have preceded key lows of significance since September 2021) above $900. Unfortunately for the bull camp the net outflow from palladium ETF holdings last week was 25,266 ounces bringing the year-to-date contraction to 27%!
Like the rest of the precious metal markets, platinum is under pressure from several macro market forces like rising rates, strength in the dollar, fear of slowing economic activity (softer physical demand) and because the close Friday was still $75 above the perceived bottom off the late April/early May consolidation zone.
Unfortunately for the bull camp, Shanghai remains in lockdown but a story in the press early this week suggested a return to more normal conditions might not be seen until June 1st after press reports last week suggested some lockdowns would be ended later this week. Therefore, fear of slowing in the Chinese economy remains front and center in the copper market. Adding into the negative view toward copper is disappointing Chinese industrial output combined with satellite data confirming the slowest Chinese port activity levels since the 2020 lockdown! Unfortunately for the bull camp, the Peoples Bank of China left interest rates unchanged but hinted at a reduction of LPR rates. Furthermore, copper warehouse stocks continue to rise despite fresh signs of lost mine output.
While July crude oil tracked lower at the start of this week, prices did manage a fresh high for the move initially and remains near the highest levels since March 24th. On the other hand, the market is facing bearish fundamental news flow in the form of an 11% weekly rise in floating global crude oil supply, fresh demand fears from soft Chinese data, and projections that Iraq will post output targets this month and next. In an indirect negative, reports verified Chinese coal and gas power prices fell sharply last month because of factory lockdowns. Furthermore, reports that Chinese refinery rates are declining, points to softening demand for fuel in China.
With fresh record futures price early this week and more retail pump price gains expected, the gasoline market has extended its leadership role. In fact, worldwide refineries have been unable to match demand and seasonal demand is scheduled to rise for the coming 3 months. As of the last EIA weekly report, gasoline stocks were at levels usually seen after the end of the high demand driving period. Fortunately for the bull camp, the most recent positioning report showed a relatively low net spec and fund long compared to the last 8 months. However, Chinese oil refining activity was reduced due recently because of softer demand from ongoing lockdowns.
Certainly, large portion of natural gas gains over the last couple of months were expectations of a progressive reduction of consumption of Russian gas. While the reduction in Russian gas exports has declined it has not declined at the pace expected by the market thereby causing the early May high to low washout of $2.53. While the natural gas market on the big failure day of May 10th aggressively rejected the spike down, adjusted into that low the net spec and fund short likely approached the largest short since April 2020.
With the extreme tightness for vegetable oils, it seems like the market will need to see more drastic measures in order to assume soybean oil is high enough priced to reduce demand. The main issue is a huge percentage of US soybean oil being used for biodiesel and that there could be temporary measures to reduce this usage. In addition, the Malaysia government is considering reduction on export taxes and also considering reducing the biodiesel mandate for the remainder of the year. November soybeans closed higher for the fourth session in a row on Friday and the buying has pushed the market up to the highest level since May 5. The market closed 27 1/2 cents higher for the week. The USDA report failed to provide much in the way of any surprises and this kept the trade choppy, but a general idea that November soybeans may want to build a weather premium due to the slow start to the crop helped to provide some support. In addition, energy prices pushed sharply higher and this helps support soybean oil.
December corn closed lower on the session Friday after trading to a new contract high. The lower close represents a key reversal which might be seen as a short-term bearish technical development. However, new contract highs on Monday negate the reversal. The market closed 28 cents higher (3.9%) for the week. Talk of good weather to get the corn crop planted over the near term helped to pressure the market. With the overbought condition, some back and fill action might be needed. The first USDA Supply/Demand report for the 2022/23 season, which was released on Thursday, was not a major surprise for the corn market. While the supply side news was bullish, the demand news carried a bearish tilt. Corn used for feed and corn exports were both revised lower, and total usage for 2022/23 crop season is down 370 million bushels from 2021/22. China is expected to import 18 million tonnes in 2022/23, down from 23 million in 2021/22 season. But with a tighter overall outlook and a recently improving demand tone, the short-term trend remains up.
In a surprise announcement on Friday, the India Commerce Ministry put a ban on wheat exports. This comes at a time when traders were hopeful that India could export 10 million tonnes or more onto the world market to relieve the tightness caused by the Ukraine/Russia war. India thought they had a record crop, but a record heat wave in March that extended into April may have done more damage than believed, and the surge higher in wheat prices left India taking action for its own food security concerns. Egypt had agreed to buy 500,000 tonnes of wheat from India, but new sales on the books are uncertain.
July wheat closed slightly lower on the session Friday after the rally pushed the market up to the highest level since March 8. Talk of the short-term overbought condition of the market helped to pressure. July Kansas City wheat closed moderately higher on the day and pushed up to a new contract high of 12.92. The market gained $1.13 3/4 for the week. July Minneapolis wheat closed higher on the session and posted contract highs for six of the last seven trading sessions. European milling wheat futures posted a new contract high as traders remain concerned with crop conditions in France and the US. There is very little rain for Kansas and Oklahoma for the next five days except for some decent storms in the northern and eastern parts of Kansas and South East Nebraska.
With the extreme oversold technical set up, the market may be in position to bounce. However, higher than normal weights and very slow export news are factors which could pressure the market as slow exports leave more meat for US consumers to absorb. June hogs closed sharply higher on the session Friday but stayed inside of Thursday’s session. The market is extremely oversold technically, and the short term fundamentals remain bearish but the discount to the cash might provide some support. China imported 592,000 million tonnes of meat in April, down nearly 36% from last year. China’s preliminary trade data doesn’t break down meat imports by category, but the sharp reduction was due to significantly lower pork arrivals. Through the first four months of this year, imports at nearly 2.3 MMT also fell 36% from the same period last year.
June cattle traded all the way down below Thursday’s low before finding support and the market bounced to close higher. Talk of the oversold condition of the market and ideas that the cash market could stabilize and even move higher if packers need extra cattle helped to support. The strong recovery in the stock market is seen as a positive development, and packer profit margins remain well into the black which could support cash markets if there was a feeling of tighter short-term supply. However, non-Fed cattle slaughter continues and there is a lack of tightness concerns.
Cocoa prices remain near the bottom end of their May downdraft, due in large part to near-term demand concerns that have been a source of pressure on the market for over 2 years. With bullish supply-side developments providing support, cocoa has a good chance of extending a recovery move. July cocoa came under early pressure and fell to a new 5 1/2 month low but regained strength by midsession as it finished Friday’s outside-day trading session with a sizable gain. For the week, however, July cocoa finished with a loss of 23 points (down 0.9%) which was a fourth negative weekly result over the past 5 weeks.
The coffee market gave back a good portion of those gains on Thursday and Friday, due in part to weakness in the Brazilian currency which has lost more than 10% in value since mid-April. Coffee prices are now closer to their recent lows rather than the multi-year highs from early February, and that could set the stage for a sizable upside move over the next few weeks. July coffee came under pressure early in the day, and in spite of a late rebound finished Friday’s trading session with a moderate loss. For the week, however, July coffee finished with a gain of 3.45 cents (up 1.7%) which broke a 2-week losing streak and was a positive weekly reversal from Tuesday’s 6 1/2 month low.
July cotton closed near unchanged on Friday after spending the day inside Thursday’s range. December cotton continued its gains in the wake of the USDA report, which showed a drop in US production for 2022/23 and the lowest ending stocks since 2016/17. December cotton pushed into new contract highs today. The US crop is barely in the ground, and traders are very concerned about this year’s prospects, particularly because of the ongoing drought situation in west Texas. Last week’s drought monitor showed a worsening of conditions there, and the 1-5 day forecast calls for little or no rain in the region. The 6-10 and 8-14 day forecasts show normal chances of rainfall in west Texas, with above normal as you move east and below normal as you move west.
Sugar’s abrupt turnaround at the end of last week recovered a sizable portion of the market’s losses during its April/May pullback. Although strength in key outside markets continues to be a major factor, sugar has seen bullish supply development that can fuel an extended recovery move. July sugar followed through on Thursday’s positive daily reversal as it shook off early pressure and rallied late in the day to finish Friday’s trading session with a sizable gain. For the week, July sugar finished with a minimal gain of 1 tick which was a second positive weekly result in a row, and also resulted in a positive weekly reversal from late Thursday’s 2 1/2 month low.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.