Wkly Futures Market Summary Dec 27.22

BONDS:

Treasuries have started this week within fairly tight trading ranges but Bonds and Notes both reached 4-week lows coming into Tuesday morning’s action. News that China has further reduced their Covid restrictions has helped to fuel a “risk on” rally in many market sectors and has put pressure on Treasuries early this week. While US economic and inflation data continue to show signs of softening activity and moderating inflation pressures, the markets generally expect the Fed to continue to raise rates next year which has left some fear that a recession will take place. Stronger than expected US third quarter GDP readings, strong personal income results for November, and US jobless claims remaining close to their lowest levels since September signal that the potential for a soft landing (or better) has improved.

CURRENCIES:

While the Dollar extended a coiling price pattern since the start of last week, the longer-term trend continues to head to the downside going into year-end. Relaxation of more Chinese Covid restrictions have given more fuel to a post-holiday “risk on” mood that has put early pressure on the Dollar. Recent US economic numbers have provided mixed results that have not been uniformly strong enough for the Dollar to regain upside momentum, and it is unlikely to put any brakes on its pullback unless there is a flare-up of risk anxiety early this week.

The Euro extended its recovery move through the weekend and is in striking distance of reaching a 1-week high. While there have few Euro zone data points for the market to digest, news that German 2-year yields have reached their highest levels since 2008 have helped to underpin the Euro early this week.

While the Yen remains within the upper portion of last Tuesday’s updraft, it was on-track for a fourth negative daily result in a row. The Swiss franc pivoted back to the upside with sizable gains early this week. The Pound has underperformed since mid-December as it has struggled to climb back above the 200-day moving average and remains below its November month-end close. The Canadian dollar was able to extend its recovery move back above the 50-day moving average Last week’s data included stronger than expected readings for Canadian GDP and Canadian CPI.

STOCKS:

Global markets have started the holiday-shortened week with a mildly positive tone. Chinese and Japanese equities saw a second day in a row with moderate gains, while major European stock indices and US stock index futures are showing moderate early gains. China has taken further steps to reduce their Covid restrictions including removing a quarantine requirement for overseas visitors. Japanese unemployment had a surprise downtick, while Japanese retail sales and Chinese industrial profits came in lower than trade forecasts. The market experienced an impressive rally Tuesday morning and also saw a recovery bounce on Friday, but the market is still inside of Thursday’s big range down day.

Strong economic data is considered bearish to equity markets as that could trigger fears of recession from overtightening. The lack of urgency from investors to own equity markets along with decent returns for Treasury Notes are factors which might limit the upside on this rally. Technically, the Dow remains oversold and vulnerable to year end short covering, but it appears that investors may be waiting for a better sign of a short-term low before new buying can begin.

GOLD, SILVER & PLATINUM:

China has further reduced its Covid protocols, and this gave the gold market a boost overnight on ideas it would support demand from the world’s largest consumer of gold. Starting in January, inbound travelers to China will no longer be subjected to quarantine. February gold was higher overnight, advancing Friday’s gains but still inside Thursday reversal lower. The market responded positively on Friday to the release of the November PCE. The PCE is often referred to as the Fed’s favorite inflation reading. It was up 0.1% in November (+5.5% year over year) after climbing 0.4% in October (6.1% annually). Core PCE was up 4.7% annually.

March palladium gapped higher at the start of this week and traded to its highest level since December 16. China’s further relaxation of Covid policies may have given a lift to the market on ideas it would boost the auto sector, which is a key source of palladium demand. This comes after the market rejected a downside breakout on Friday. The platinum managed money position is coming off its largest net long since March, but it is still well below its record of 53,000+ from January 2020.

COPPER:

Copper prices spent last week in a tight consolidation zone, but it has broken out to the upside with a gap-higher opening and a sharp rally on Tuesday. March copper finished last Friday with a strong gain and a third positive week in the past four. It has reached its highest level in six weeks and is on-track for its first close above the 200-day moving average since June. Chinese equity markets had a positive start to the week following news than more Covid restrictions are being relaxed, and that should provide copper with carryover support. Weekly Shanghai exchange copper stocks fell for the fourth time inf the past five weeks on Friday, reaching their lowest levels since late September which also bodes well for Chinese demand. LME copper stocks increased on Friday, but they remain close to last Thursday’s six-week low.

ENERGY COMPLEX:

The crude oil market found some fresh supply-side support and could be ready to extend its recovery move early this week. February crude oil finished Friday with a moderate gain and a second positive week in a row, and it has followed with further gains early this week as it reached its highest level in 2 1/2 weeks. News that China will further relax its Covid restrictions has been a major source of strength. This follows last week’s threat from Russia to cut its crude production by 5%-7% if the EU and G7 nations introduce a price cap on Russian oil purchases.

RBOB and ULSD both finished Friday with strong gains, and they reached new highs for the move at the start of this week. This is due in large part to US refinery shutdowns from the severe winter storms that moved across the US last week and into the weekend. This year was initially expected to be the third-busiest holiday driving season on record, but the winter weather interrupted travel.

Natural gas was able to find its footing late last week, but the market has fallen back from its overnight highs and is only modestly higher this morning. Last Friday’s positive daily reversal was due in large part to the severe cold that marched across much of the US. This brought record high US gas demand and a sharp drop in production. Demand should ease this week, as the 6-to-10-day forecast calls for above-normal temperatures east of the Mississippi River.