We suspect that weakness in treasury bond and note prices late last week in the wake of anxiety from weakness in US equities was the result of a jump in PCE for March and stronger than expected US personal income and spending data. In fact, later in the session, treasuries remained lower despite very disappointing Chicago purchasing managers and Michigan consumer sentiment readings! Even though overall anxiety flowing from US equity market action is initially low early this week, the fear of ongoing sharp losses in equity prices provides cushion for bond and note prices. Obviously, the US Federal Reserve rate decision on Wednesday is hanging over the markets and is likely providing the bear camp in Treasuries with confidence. The bear camp is also likely emboldened by a flurry of headlines touting the largest month over month rise in 10-year yields since 2009 last month.
While the currency markets showed countertrend action at the end of last week, we suspect the dollar will regain its footing and run to new contract highs in the coming sessions. Uncertainty from the stock market from intensifying war efforts, from the hot US inflation data and from the idea the US will go-ahead and hike rates they continue to believe the US economy will stand up better than other competitive economies. With a bounce in the dollar at the start of this week, the bear’s resolve is encountering early adversity.
The Yen sits in the same boat as many non-dollar currencies with economists, investors, and central bankers fearing further Japanese slowing from spillover slowing in China. With the markets discounting the potential for Bank of Japan intervention and the BOJ likely hand cuffed from raising rates, the bear camp has a free hand to push the Yen to fresh contract lows.
Not surprisingly, the US equity market continued to suffer selling from the disappointment flowing from the big tech sector. Obviously, investors are also unnerved by the looming US interest rate hike which many investors fear will be interest of the current economy. In fact, current buzz has the US consumer sector softening considerably and continue to embrace that view despite much stronger than expected personal income and personal spending results for March. Global equity markets at the start of this week were lower with the exceptions the markets in Shanghai and Hong Kong. While US markets showed modest positive action early this week, the overall environment leaves the preponderance of forces in the bear’s camp. In addition to rising US and Chinese infection numbers, Boeing lost orders to Airbus, evidence of ongoing weak Chinese data continues to flow, headwinds are expected to continue from sharp declines in global consumer spendable income (due to inflation) and the lack of positive takeaway from earnings leaves the bear camp very confident.
While the Dow futures did not fall below the Friday spike low, prices are butting up against a measure of overhead consolidation resistance, fear of rising rates is likely to dominate market sentiment over the coming 3 days, and favorable earnings are having little impact on the markets
GOLD, SILVER & PLATINUM:
Apparently, the significant setback in the dollar at the end of last week, combined with the full take-away of the World Gold Council first quarter outlook, spurred the significant recovery rally off last Thursday’s low on Friday. However, June gold surrendered $25 from the Friday high and has been pummeled early this week which has produced clearly negative charts. The gold and silver trade is also undermined because of expanding economic concerns toward China, as lockdowns in China and “other cities” and are hammering economic activity.
In a very surprising development, the platinum market came alive last Friday and seemingly tracked with palladium. Fortunately for the bull camp, the latest positioning report in platinum remains minimally net long after a significant liquidation of the long last week after the report. The Commitments of Traders report for the week ending April 26th showed Platinum Managed Money traders net sold 13,322 contracts which moved them from a net long to a net short position of 12,638 contracts. Non-Commercial & Non-Reportable traders are net long 3,883 contracts after net selling 10,508 contracts.
Clearly, the copper market has come unhinged because of the expansion (not contraction) in Chinese lockdown conditions. In fact, several analysts predict both copper and iron ore prices have further downside to factor in increased and ongoing Chinese economic headwinds. Apparently, the Chinese economy was already slowing from initial lockdown efforts with PMI readings dropping from 48.4 in March to 41.9 in April. Even smaller manufacturing companies were hit with the Caixin manufacturing PMI reading falling much more than expected.
With a significant downside extension early this week in crude oil taking place in the face of fresh chatter of the potential for an EU ban of Russian oil, the bear camp has clearly gained the upper hand. Unfortunately for the bull camp, current expectations have an EU ban “by the end of the year” and that timing is disappointing to the bull camp. Not surprisingly, a major argument for the bear camp is the prospect of further Chinese lockdowns as China continues to manage its Covid flare very aggressively. However, it should be noted that press reports suggest the number of daily infections measured in key cities only number in the low hundreds and not in thousands.
While the gasoline market fell back from its highs on Friday like crude oil, the reversal was less severe than in crude oil. However, the action from last Friday is resulting in catch up selling early this week. In our opinion, the fundamentals in gasoline are stronger than crude oil with the US refinery operating rate relatively low for a tight supply environment. However, northern hemisphere seasonal demand should post only incremental gains over the next two weeks. In a negative demand development, the allowance of high ethanol content use gasoline mixes has been officially sanctioned for the US this summer and that could temper tightness in gasoline stocks.
While the natural gas contract extended the downside trend last Friday, prices recovered/rejected that washout possibly in a short covering pre-weekend trade. Furthermore, tight inventory fears have surfaced again early this week, colder than usual weather for the US Northwest and Northeast next week has been noted and with the latest positioning report still showing a net spec and fund short, the bounce is justified by several factors. Unfortunately for the bull camp, supportive US weather is countervailed by mild and therefore negative European temperatures. As of the most recent and suspect reports, Russian gas continued to flow westward but has not been consistent for the last three weeks. With the total Baker Hughes weekly rig operating count (oil and gas) increasing by 3 rigs to 698 the rig count is the highest since March 2020.
July soybeans closed unchanged on the session Friday after choppy and 2-sided trade. The early buying pushed the market up to the highest level since April 22. The 1-5 day forecast models show no rain for the Dakotas or Minnesota but still have good amounts for the heart of the Midwest. However with some dryness, and a warmer 6-10 day forecast and a sharp rally in the dollar and weakness in crude oil, the market looks set for some increase selling early this week. July soybean oil hit an all-time record high of 87.65 and the market closed sharply lower on the day. This represents a key reversal from an extreme overbought condition. RSI is at 89.5 and stochastic readings are near 91.5.
With the extremely high price due to Indonesia’s band on vegetable oil exports, the market may already have seen some demand destruction. However, it may take a temporary shift away from using vegetable oil for biodiesel to ease the tightness. The food for fuel debate is likely to come to a head soon.
July corn closed unchanged on the session last Friday after an early rally to new contract highs for a third session in a row failed to find follow-through support. The market has already traded as high as 824 1/2 as compared with the all-time record high for July corn at 826. While a bit overbought technically, traders are nervous with poor weather conditions for the end of the Brazil second crop corn growing season, and also worried with the hefty rain totals seen in recent days. However, the 5-day forecast shows a lack of rain for the Dakotas and Minnesota. December corn also posted a new contract high and closed slightly lower and the key reversal is a warning of a short-term peak.
July wheat closed sharply lower on the session last Friday as the major shift in the weather pattern helped to spark aggressive long liquidation selling. The forecast for much needed rain in the days ahead for the central and southern Plains is seen as a very bearish short-term force. Talk of the overbought condition of the market helped to spark some selling as well. July Kansas City wheat also closed sharply lower on the session after closing lower for the previous two sessions. The selling pushed the market down to the lowest level since April 8. July Minneapolis wheat also traded sharply lower on the day and experienced follow-through selling from Thursday’s key reversal.
June hogs closed sharply lower on the session last Friday, and the selling drove the market down to the lowest level since February 1st with the move under Thursday’s low attracted additional selling pressure. Traders continue to see plenty of short-term supply with weights remaining stubbornly high even with the high price for corn. While technically oversold, June hogs have pulled back to near a normal cash basis level. The USDA pork cutout released after the close Friday came in at $103.21, up 80 cents from Thursday but down from $109.44 the previous week. The CME Lean Hog Index as of April 27th was 101.81, down from 102.34 from the previous session but up from 101.25 the previous week.
June cattle pushed sharply lower on the session and experienced the lowest close since March 10th last Friday. Weakness in the stock market, fears of declining spendable income from consumers and ideas that short-term production will remain high helped to pressure. In addition, traders see continued liquidation of cows which will keep non-Fed cattle slaughter high as well. The estimated average dressed cattle weight last week was 833 pounds, unchanged from the previous week and up from 824 a year ago. The 5-year average weight for that week is 804 pounds. Weights normally push lower at this time of the year but have stayed persistently high for much of the second half of March into May. Given the extremely high price of corn, traders would expect weights to come in below normal not 29 pounds above the five-year average. This is a bearish factor and suggest producers are not current with marketing’s. Estimated beef production last week was 545.0 million pounds, up from 536.5 million a year ago.
Cocoa prices had a lukewarm finish to last week’s trading, but will start this week’s action nearly 90 points above last Tuesday’s 3 1/2 month low. While near-term demand will continue to be a source of concern, cocoa can extend its recovery move back above all 3 of its major moving averages early this week. July cocoa rallied up to a 1-week high, but lost strength late in the day to finish Friday’s trading session near unchanged levels. For the week, however, July cocoa finished with a gain of 13 points (up 0.5%) which broke a 2-week losing streak and was a positive weekly reversal.
Coffee prices have been unable to sustain a recovery move since early February as they continue to be pressured by near-term demand concerns. With South American production issues likely to continue through much of this year, however, coffee may be able to extend a recovery move early this week. July coffee was able to follow-through on Thursday’s positive daily reversal as it maintained upside momentum to finish Friday’s trading session with a sizable gain. For the week, however, July coffee finished with a loss of 5.05 cents (down 2.2%) which was a second negative weekly result over the past 3 weeks.
July cotton closed lower on Friday after trading to a new contract high for the second straight day and the key reversal is seen as sign of a possible short-term top. The market had gotten short term overbought after the sharp rally last week, so it was not surprising to see a pullback. Prior to the selloff on Friday, the nearby contract reached its highest level since July 2011. The bulls had been encouraged by a strong export sales report on Thursday and ongoing concerns over the US crop. The US Drought Monitor on Thursday reiterated the dire conditions in west Texas and showed them worsening from the previous week.
While sugar missed out on a positive weekly reversal, the market lifted clear of last Wednesday’s 6-week low. If key outside markets can remain strong, sugar can extend its recovery move early this week. July sugar found early strength, but turned to the downside late as it finished Friday’s trading with a moderate loss. For the week, July sugar finished with a loss of 6 ticks (down 0.3%) and a third negative weekly result in a row.
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