In retrospect, we see last week’s high and the previous week’s similar high as a significant resistance if not a top price. While treasury prices fell and yields increased from the PPI release, the reactions were undersized given the historical nature of some of the inflation data. Furthermore, the market did not fall precipitously after Cleveland Fed President Mester indicated she would still “like the central bank to begin tapering this year”. In conclusion, the treasury markets continue to have the ability to discount bearish price developments and embrace bullish price developments.
Another negative facing Treasuries was the potential for a sizable rally in the Dow Jones. On the other hand, another very minor supportive development for treasuries is a strengthening US dollar over the prior 6 trading sessions as attracts capital and hope of currency windfalls from a favorable US interest rate differential. The subject of inflation remains a front burner issue following a long list of global PPI and CPI readings recently as Treasuries will be presented with US CPI on Tuesday. With the latest CDC US infection count 162,279 there has been several infection readings above 160,000, leaving the infection surge as a threat against global macroeconomic sentiment.
The dollar index rallied aggressively last Friday in the wake of a hotter than expected US producer price index reading for August. In fact, several of the components of the PPI report registered historic highs and the pressure on the Fed to begin tapering was notched higher today. However, the dollar was unable to make across-the-board gains against all currencies in a sign that the Dollar’s rally was potentially a temporary knee-jerk reaction. While the next FOMC decision is still over a week away, the dollar appeared to have forged a 1 1/2 week high off residual US tapering expectations.
Not surprisingly, the euro ranged down sharply early this week and temporarily failed at the 1.1800 level in a fashion that projects the currency to extend down in the days ahead. Apparently, the euro was unable to draft support from a very hot German wholesale price index reading. While the net spec and fund long in the euro has likely come down significantly with the post COT report slide of 164 points, the market doesn’t feel sold-out yet. The Commitments of Traders report for the week ending September 7th showed Euro Non-Commercial & Non-Reportable traders were net long 74,780 contracts after increasing their already long position by 21,300 contracts.
The equity markets waffled around both sides of unchanged late last week after a hotter than expected PPI report fostered some fresh concern over the subject of tapering. However, Apple avoided a major legal problem after a judgment partly exonerated their app payment restrictions. Perhaps more importantly to the tech sector is the judge’s suggestion their job was not to determine if Apple was a monopoly and that being successful is not illegal. Global equity markets at the start of this week were generally positive with the only losers located within China and Hong Kong.
Economic news of importance included a softer than expected month over month Japanese producer price index reading for August, a year-over-year 5.5% jump in Japanese producer prices, and a very significant jump in German wholesale prices on both a month over month and year-over-year basis. Therefore, this news adds minimally to global inflation concerns and notches the prospect of central bank tightening minimally. The latest US infection count was 162,179 cases as of September 10th.
GOLD, SILVER & PLATINUM:
The gold and silver markets started out the new trading week out under pressure, likely the result of a firmer US dollar. In fact, if gold were to close at the opening level that would be a 12-day high close. Surprisingly, last week gold ETF holdings increased by 49,422 ounces which is surprising given the trend of outflows. In retrospect, the gold and silver trade discounted a wave of global inflation news last week in a fashion that suggests the expectation of self-perpetuating inflation is not being embraced yet. Instead, the gold and silver trade focus is usually on a combination of the ebb and flow of physical demand views and the impact from the dollar.
While last week’s massive washout leaves a heavy weight hanging over palladium, the market aggressively rejected a sharp range down move to $2,050 and traded $87 above the early low! Obviously, last week’s debacle-type washout in palladium (a high to low break of more than $300) indicates that a moderate measure of longs have “thrown in the towel”. In fact, in the most recent positioning report the palladium spec and fund long was already net short and with the washout late last week the market is likely approaching a record net spec and fund short (especially if adjusted for the low this morning). Palladium ETF’s last week reduced holdings by 15,297 troy ounces bringing their year-to-date gain down to 6.4%.
While the platinum market avoided tracking down with the palladium market last week, and prices this morning remain near the Friday spike low that suggests the fundamental and technical outlook has shifted decisively negative. However, the market did show respect for recent consolidation lows by rejecting the breakout below $950 and all is not lost for the bull camp yet if the close today is back above $950. On the other hand, the net spec and fund long in platinum remains burdensome despite falling consistently this year.
While the copper market has fell back from a new high for the move early this week, prices have respected the $4.40 level during the early going as if that could be a plateau of support. However, LME copper warehouse stocks are negative to prices with a 6,400-tonne daily increase from Friday. In a sign of broad bullishness toward the entire copper related investment sector, shares of a Chinese based copper company reached 3-month highs following strength in other Western copper related shares last week. A 13-year high in aluminum prices follows a 7% gain in aluminum prices last week and that also favors the bull camp, as the Chinese government might have stoked commodity prices by their interventions.
With the crude oil contract early this week forging a higher high and reaching the highest price since August 3rd, the lingering US production losses are combining with favorable equity market sentiment to lift prices. Apparently, the bull camp is unfazed by ongoing demand concerns and from news that Asian refineries did not inquire about supply above their contractual levels for October. However, crude oil and floating storage in the past week declined by 8.9% and the markets remain upbeat on the potential for the Chinese to rebuild their reserves despite that fundamental argument being questioned.
On the other side of the world, Shanghai has apparently closed port operations because of a typhoon and that could restrict shipments into southern China. The rally last Friday was mostly the result of a surprisingly slow return of US Gulf of Mexico production, but the markets also saw support from a disruption of loadings in Libya, a downward revision in 2021 US crude output by the EIA and residual support from the extending pattern of weekly declines in EIA crude oil stocks. In a roundabout way, the trade might also be factoring the failure of the Chinese government to dampen crude oil prices designed to help small refiners in China.
While the natural gas market is significantly short-term overbought from more than $1.25 in gains over the past 3 weeks and should be restricted by the bearish larger than expected storage injection last week, the most recent positioning report showed the market maintaining a rather large “net spec and fund short”. Natural Gas positioning in the Commitments of Traders for the week ending September 7th showed Managed Money traders were net long 87,174 contracts after increasing their already long position by 15,206 contracts. Non-Commercial & Non-Reportable traders added 1,044 contracts to their already short position and are now net short 110,236.
The USDA report carried a bearish tilt, but was not bearish enough to entice new selling interest. November soybeans fell to the lowest level since June 25, but close sharply higher on the day with an outside day higher close on Friday. India cut import taxes on edible oils which could boost demand. Yield came in at 50.6 bushels/acre versus 50.3 expected. Production came in at 4.374 billion bushels versus an average expectation of 4.365 billion. Ending stocks came in at 185 million bushels versus expectation for 182 million. World 2021/22 soybean ending stocks came in at 98.89 million tonnes versus an average expectation of 96.70 million and a range of 91.20 to 98.70 million tonnes. The previous month’s estimate was 96.15 million tonnes.
While the USDA data carry a bearish tilt, the 16.3% break from the August report to the September report may have more than priced in the fact that world beginning stocks came in much higher than expected. While the 9.5% stocks/usage ratio is well up from 8.5% last month and 7.9% last year, this remains much tighter than the 12.6% to 15.7% ratios seen during the previous six years. In fact, the 7.9% stocks/usage for the 2020/21 season resulted in July corn going off the board at $6.83. The USDA indicates an average farm price of $5.45 from $5.75 last month. With the oversold condition of the market and the improving demand outlook, it appears that a short term low may be in place. The 50% mark of the contract range for December Corn is 497 1/2, and that was the low of the day on Friday.
The 13.9% break off of the August 13 peak seems to have priced in an increase in world production and stocks from last month’s report. US ending stocks were reduced by 12 million bushels to 615 million and now 27% below last year, and the lowest in 8 years. Traders expected 613 million (range of 555 to 652). World supply jumped 7.1 million tonnes led by larger beginning stocks from Canada and higher production from Australia, India and China. Australia production jumped 1.5 million tonnes which would be the third largest on record, and India production also increased 1.5 million tonnes for the fifth consecutive record crop in a row. World consumption increased 3 million tonnes led by China increased feed demand.
The downside breakout for October hogs with a four day collapse leaves 80.25 as the next downside target. The COT report shows an overbought condition and the as of date is September 7. The market hit a high of 89.97 on September 7 and closed at 82.80 last Friday. The sharp drop in open interest during that timeframe would suggest long liquidation selling from speculators. The USDA supply/demand report carried a bearish tilt. While 2021 production was revised significantly lower, this was more than offset by a sharp drop in exports and an increase in imports. As a result, per capita supply for 2021 increased to 50.3 from 50.2 in August. For 2022, per capita supply increases to 50.9.
The cattle market is probing for a short-term low as technical indicators are extremely oversold, and open interest has come down significantly from the August peak. The USDA monthly supply/demand update carried a bullish tilt for the cattle market with lower production expected for 2021 and also for 2022. Exports for 2021 were revised higher as well so the 2021 per capita supply dropped to 58.3 from 58.6 in the August update. The continued drop in production for 2022 is expected to pull per capita supply all the way down to 56.5, the lowest since 2016. October cattle closed lower on the session Friday with a range similar to Wednesday and Thursday.
Following a new contract high last Wednesday, December cocoa has fallen 114 points (down 4.2%) and posted 3 negative daily results in a row. Unless there is a significant rebound in global risk sentiment, cocoa is likely to remain on the defensive early this week. December cocoa found early support, and then turned sharply to the downside and reached a 1-week low before finishing Friday’s trading session with a heavy loss. For the week, December cocoa finished with a loss of 51 points (down 1.9%) which broke a 2-week winning streak and was also a negative weekly key reversal.
Coffee has been unable to sustain upside momentum since having a more than 43 cent pullback during late July and early August as it lost nearly 20% in value. The market continues to find its footing at increasingly higher price levels, however, and that can help coffee to regain upside momentum again during this week’s action. December coffee kept within a fairly tight trading range, but managed to shake off midsession pressure as it finished Friday’s inside-day session with a modest gain. For the week, however, December coffee finished with a loss of 4.95 cents (down 2.6%) which broke a 2-week winning streak.
Choppy trade continues for the cotton market with a higher on Friday after trading to its lowest level since August 24. The USDA report was mixed. US production and stocks increased from last month and were much higher than expected, but world ending stocks decreased and came in lower than expected. The report showed US 2021/22 cotton production at 18.51 million bales versus and average trade expectation of 17.69 million and a range of 17.00-18.45. This was up from 17.26 million in the August report. US exports came in at 15.50 million versus 15.06 expected and up from 15.00 million in August. Ending stocks came in at 3.70 million bales versus 3.43 expected (range 2.82-4.40). This was up from 3.00 million in August. This puts the stocks/use ratio at 20.6%, up from 17.1% last month, 16.8% last year and 41.1% in 2019/20.
Sugar has been pressured by sluggish outside markets and bearish near-term supply factors as prices have fallen well below their August highs. This pullback should help to improve global demand prospects, so sugar may be closing in on a longer-term low. March sugar remained on the defensive as they reached a new 4 1/2 week low before finishing Friday’s trading session with a heavy loss and a fifth negative daily result in a row. For the week, March sugar finished with a loss of 81 ticks (down 4.0%) and a third negative weekly result over the past 4 weeks.
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