Underpinning bond and note prices are residual fears of slowing brought on by persistently hawkish Fed dialogue and by US economic data showing less than stellar readings. On the other hand, fears of recession are elevated by bouts of significant economic and investor anxiety from out of nowhere/nearly instant major declines in equities. With the US economic report slate offering a single 3rd tier reading from the Chicago Fed, equities, energies, and infection reports from Beijing are likely to be primary drivers of treasury prices. In a slight bearish development, German IFO survey readings for May all bested expectations and that certainly provides some of the positive equity market/negative Treasuries tone early this week. The trade will be presented with auction supply this week with 2-year, 5-year, and 7-year notes auctions.
Relatively speaking, the currency markets went into the weekend with less volatility than was present early in the week. In our opinion, the dollar recovery was classic week ending profit-taking by the shorts. The dollar is likely to remain under pressure following hot German PPI readings, rising expectations of a July ECB rate hike and comments from the Bank of England suggesting they need higher rates. In our opinion the range down action in the dollar over the last 2 weeks is the result of the US economy facing with a difficult combination of broadening evidence of economic slowing and a Fed interested in getting rates closer to normal.
While the euro has exploded on the upside, near term conditions suggest the rally is a windfall of definitively bearish dollar views and technical stop loss buying from the oversold condition earlier in the month. However, very upbeat German IFO May survey readings provides the bull camp with fundamental justification. The Commitments of Traders report for the week ending May 17th showed Euro Non-Commercial & Non-Reportable traders net bought 9,801 contracts and are now net long 46,163 contracts. The next critical resistance point in the June euro is 1.0718.
With the Yen steadily rising off the spike low earlier in the month, the rally appears to have more substance than gains in other non-dollar currencies. Gains in the Yen are clearly related to foreign issues, as the Japanese economy and fundamentals are not attracting money. The gains in the Swiss franc continue to be massive with some traders beginning to assert the Swiss franc has become the “flight to quality” currency. Furthermore, given the massive 5-day rally, suggesting the rally is a simple relief/technical rally is highly questionable.
After a positive opening salvo, equities reversed course and before midsession the Dow was down nearly 300 points which in turn keeps investors nervous because of the quick shifts in sentiment. Stocks were undermined because of negative Caterpillar views toward their Chinese business and because Deere revenues disappointed. While banks and mega-cap growth stocks provided support early that cushion evaporated quickly.
Like the S&P, the Dow futures also forged a relief rally and managed a second day of higher high action. In our opinion, despite this week’s higher opening, deep investor anxiety remains in play and the current “bounce” is likely to be reversed soon. Fortunately for the bull camp, the latest positioning report showed the Dow net short a significant amount and from the COT report mark off into the low last week, the market fell 2,000 points! The May 17th Commitments of Traders report showed Dow Jones $5 Non-Commercial & Non-Reportable traders added 2,143 contracts to their already short position and are now net short 25,609.
GOLD, SILVER & PLATINUM:
At least to start this week, a precipitous downside extension in the dollar and general risk on psychology has given the bull camp the edge. While many media outlets suggested the Chinese mortgage rate reduction is providing lift to prices, that development was already in the market last week. Unfortunately, for the bull camp, gold ETF holdings last week declined by 145,856 ounces and silver ETF holdings declined by 9.01 million ounces. In retrospect, the gold market performed very impressively last week in the face of threats of global slowing and unending central bank promises to stop inflation by reducing demand (slowing the economy). Not surprisingly, the gold rally last week was most likely the result of the washout in the dollar, but it is also likely that some buying was flight to quality orientated.
Apparently the palladium market is finally being threatened with lost supply from Russia, following reports that some metals traders are starting to shun Russian palladium supply. Since the war started the trade has discounted severe tightening with prices into the low last week sitting more than $200 or 10% below start of war pricing. Apparently, the lack of a specific palladium embargo on Russia was allowing supply to flow under the radar of the EU.
In fact, it is possible that the downtrend might be now reversed as the world begins turn away from Russian supply. The platinum market with the opening early this week has posted the fifth straight higher high for the move. The latest positioning report in platinum adjusted into the low last week (a decline of $18) reached near the smallest net spec and fund long position since September 2018.
In retrospect, the sharp reaction in copper last week was probably the result of a specific opening date for Shanghai, but the markets are also embracing last week’s Chinese mortgage rate cut and there is certainly a risk on vibe in place early this week. While it is too early to predict a trend, LME copper warehouse stocks have shown declines recently thereby revitalizing supply concern. An outside market positive for copper is a 2-week high in iron ore prices which are also thought to be tracking higher off the lifting of activity restrictions in Shanghai. In fact, copper premiums in China have firmed in a sign that smelting activities are expected to pick up pace. Another significant supply-side support is the prospect of ongoing production losses in Peru, due to local protests.
With a 3-day high early, risk on sentiment flowing from equities and many commodities and the IEA expressing concern of a deeper fossil fuel related energy crisis, the bull camp has a broad spectrum of issues in its favor. Furthermore, crude oil in global floating storage over the last week fell by 15%, Bank of America has projected crude prices to $120, and suggested that global oil demand will increase this year by 3.4 million barrels per day. Perhaps most importantly, the reduction in floating storage in the Asian-Pacific rim fell by 22% with US Gulf Coast supplies posting a startling decline of 49%. While prices might be benefiting from predictions of a more active hurricane season, we attach little credibility to that forecast this early in the season.
While the ULSD market has diverged negatively with gasoline and crude oil since the early May high, its fundamentals remain very supportive even though recent diesel and distillate stock annual deficits narrowed. Nonetheless, the world diesel market remains extremely tight and should tighten further as the lock down of Russian fuel exports slowly progresses.
With the gas market appearing to run out of buying fuel at last week’s high and posting a setback of $0.70 from that high, the market has recently found value or a pivot price of $8.00 in the July contract. While slowing threats obviously threaten gas demand, gas demand should be more inelastic compared to RBOB and less Russian gas is likely going forward. On the other hand, the market looks vulnerable early this week with European gas prices reaching 3-month lows, Dutch prices falling 5.2% for tomorrow’s spot gas and market chatter regarding increased supply from Norway. At least initially the market is discounting Poland’s halt of consumption of gas from the Yamal pipeline. The source of Poland’s decision to cut off Russian gas supply is news that European imports of LNG increased by nearly 70% in the first 4 months of 2022 which signals strategic supply building.
While the wheat and corn markets are struggling, the soybean market continues to show signs of strong demand, and traders are looking for tightening supply ahead. Spot basis bids for soybeans were higher at River terminals in the eastern half of the US on Friday. Solid export sales news continues to provide underlying support. July soybeans closed moderately higher on the session Friday and have now closed higher for 8 of the past 9 trading sessions. Strong demand has helped support the higher market and the buying pushed the market up to the highest level since April 22. Both meal and oil closed higher on the day.
US cash market remains firm as crush margins are strong. Soybean futures reached a three-week high as the US reported strong export data and Indonesia continues to alter policies on palm-oil supplies. The US reported export sales up noticeably from the prior week. Indonesia officials indicated it will re-impose a measure requiring producers to sell a portion of their output to the local market. That comes just a day after its president pledged to lift a ban on exports.
July corn closed moderately lower on the session last Friday but stayed inside of Thursday’s range. December corn also closed lower on the day as the five day forecast was wide open for the Dakotas and most of Nebraska. Minnesota and northwest Iowa should see less than 1/2 inch while much of Iowa and the rest of the Corn Belt look to receive at least one inch. December corn closed 16 3/4 cents lower for the week after posting a new all-time high and the weekly key reversal is seen as a potential sign that a major top in in place. Argentina raised its export quota to 35 million tonnes from 30 million currently. However, the USDA sees exports at 39 million tonnes for the 2021/22 season. Demand remains firm but traders see the weather as a bearish factor.
With ending stocks for key world exporters already extremely tight this year, news that India, not normally a major exporter, banned exports was enough to drive wheat prices to all-time highs last week. There is some short-term improvement in US weather, but the market still lacks confidence that US weather will improve and that the European crop will come in better or even normal. July wheat closed sharply lower on the session Friday and closed near the lows of the day. The selling has pushed the market down to the lowest level since May 13 and also closed lower for the week after posting a new all-time high. The weekly key reversal is sometimes seen as a technical sign of a significant top.
June hogs closed sharply higher on the session Friday after mostly lower trade early. The buying has pushed the market up to the highest level since April 29. The recent jump in pork cutout values opens the door for steady to higher trade in the cash market over the near term. The USDA pork cutout, released after the close Friday, came in at $105.16, up from $101.67 on Thursday and $99.77 the previous week. This was the highest the cutout had been since April 22. The CME Lean Hog Index as of May 18 was 100.37, up from 100.08 the previous session but down from 101.04 the previous week. With plenty of supply and sluggish exports, the upside potential looks limited to a technical recovery bounce.
Traders have a bearish demand tilt as consumers are stuck with very high energy and food prices, and this leaves less disposable income for luxury items such as high-priced steak. While the short-term demand factors remain negative, and the market looks well supplied over the short term, June is trading at a stiff discount to the cash market. The USDA boxed beef cutout was up $1.08 at mid-session Friday and closed 47 cents higher at $262.17. This was up from $258.95 the previous week, and the highest the cutout had been since May 2. The USDA Cattle on Feed report showed placements for April at 99.1% of last year versus trade expectations for 95.4% of last year (guesses ranging from 89.1% to 97.8%). This is bearish and outside the range. Marketings came in at 97.8% versus expectations of 98%. Cattle-on-feed supply as of May 1 came in at 102% of last year versus expectations for 101.3% of last year (range 100.5% to 101.8%). The report news is bearish against expectations with both placements and on feed supply above the range of estimates.
The cocoa market finished the trading week in a definitively negative chart set up, and analysts are anticipating a downside breakout to the lowest price level since mid-December. Although last Friday’s late turnaround in global risk sentiment may provide some carryover support, cocoa will continue to have concern with near-term demand prospects that will weigh on prices early this week. July cocoa was unable to hold onto initial support and remained on the defensive for most of the day as it fell to a new 6 1/2 month low before finishing Friday’s trading session with a sizable loss. For the week, July cocoa finished with a loss of 40 points (down 1.6%) which was a fifth negative weekly result over the past 6 weeks as well as an outside-week lower close.
With the coffee market unable to sustain an early higher high for the move late last week, the market looks to remain in a slow downwardly sloped consolidation pattern. While reports of improving demand have not been broadly accepted or strong enough to be a market changing factor, coffee continues to find support from bullish supply-side development. July coffee found initial support before turning to the downside as it finished Friday’s trading session with a sizable loss. For the week, however, July coffee finished with a gain of 1.95 cents (up 0.9%) which was a second positive weekly result in a row.
July cotton closed lower last Friday after trading in a wide range that was inside last Thursday’s wide range but the market slipped down to the lowest level since April 28th this morning before a bounce. December cotton closed sharply lower and down for the 4th session in a row and the selling pushed the market down to the lowest level since May 12th. The S&P 500 ended up closing moderately higher on Friday but that was after trading to new lows for the move earlier in the session. It was down sharply at the time the cotton market closed, which was negative for cotton. Wheat was down sharply on reports that India could loosen its export ban and on negotiations taking place that would allow exports out of Ukraine to resume. The 1-5-day forecast calls for heavy rainfall in eastern Texas, and eastern Oklahoma, and across the Delta, with diminishing amounts as you move west.
While sugar became significantly short-term overbought into last Tuesday high, the 60-point setback should have balanced the market. While global slowing fears have fostered concern over slower sugar demand, fears of losses in Brazilian production should underpin prices going forward. July sugar was able to build on early strength as it finished Friday’s trading session with a moderate gain. For the week, July sugar finished with a gain of 78 ticks (up 4.1%) which was a third positive weekly result in a row.
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