Once again, US scheduled data produced good and bad data points which the trade seemed to embrace as a reason to liquidate shorts and reverse into longs. Certainly, the treasury charts were damaged with the bond spiking down to 8-day lows, with March bonds regaining the 130-00 level. Therefore, the 130-00 level has become a very significant layer of support for the bull camp. Looking into next week’s schedule data flow, the bull camp in bonds and notes will encounter 2 major central bank rate decisions and will also be presented with significant inflation readings from the euro zone.
The treasury trade might continue to post narrow daily ranges as a series of central bank rate decisions/forward guidance is likely to reduce trading activity. However, with a US Federal Reserve meeting early in the week followed by critical monthly jobs data late in the week volatility and trading volume for the week should in the end be high.
In retrospect, the dollar index over the last week has been unable to garner a lift from periodic flight to quality sentiment from positive US scheduled data. Going forward, we suspect the dollar will continue to slide particularly if Chinese infection concerns begin to moderate and/or there is talk that the worst is over. We continue to see the bull trend in the euro as the most likely reliable long side position in the currency markets. In fact, despite dollar weakness the Pound and Swiss franc disappointed their bull camps. The dollar along with many other markets has settled into a trading range ahead of significant economic news this week.
While the charts in the euro were slightly damaged by last Friday’s dip, the 4-month uptrend channel remains in place with traders expecting bearish dollar developments and or a lack of a significant bounce in the dollar, following dollar bullish developments. Spanish consumer prices contracted significantly (-0.3%) and Italian producer prices jumping by more than expected. Furthermore, a contraction in German GDP was offset by mostly favorable euro zone economic sentiment, industrial confidence, services sentiment, and business climate readings for January.
While the Yen might see some support from further weakness in the dollar index, some traders are avoiding the Yen because of uncertainty with respect to the Bank of Japan inflation target. Even though the Pound has lost momentum from the January 23rd new high for the move, chart structure remains bullish. However, for the Pound to resume the January uptrend pattern will certainly require a downside breakout in the dollar early this week.
Looking back last week, the equity markets stood up to an avalanche of negative corporate headlines and they managed to throw off extremely negative macroeconomic and market conditions with a low to high recovery in the S&P on Wednesday, January 25th of 77 points. However, investor sentiment might be set to improve thiis week following the US Federal Reserve rate decision, but the Fed will need to acknowledge some inflation battling progress to extend this week’s very impressive gains.
Relatively speaking the NASDAQ has held up better than other sectors of the market following the reversal from a significant spike high. NASDAQ related news/tech news favors the bear camp with headlines from Asia indicating confusion following the US Chip deal with the Netherlands and Japan. Furthermore, confusion towards twitter operations combined with noted weakness in Dow and S&P futures gives the bear camp an edge. The Commitments of Traders report for the week ending January 24th showed Nasdaq Mini Non-Commercial & Non-Reportable traders are net short 37,552 contracts after net selling 7,593 contracts.
GOLD, SILVER & PLATINUM:
Apparently, the sideways track in the US dollar has prompted some gold longs to exit possibly because of a lack of patience. Furthermore, with gold ETF holdings on Friday falling by a significant 112,515 ounces and silver ETF holdings increasing by a modest 17,481 ounces gold and silver are also seeing divergence in investment demand. Gold might be undermined from reports of heavy gold discounting in India with prices at times reaching $42 below the official gold price set for the government import duty. Therefore, Indian consumers are price resistant. Underpinning gold and silver in the early going this week is the return from holiday in China and indications that the Chinese economy showed modest improvement through the weeklong holiday.
Like the gold market, the silver market remains marginally overbought in net spec and fund positioning with last week’s reading near the highest level since April of last year. The Commitments of Traders report for the week ending January 24th showed Silver Managed Money traders are net long 20,923 contracts after net selling 7,119 contracts.
Over the weekend, the PGM markets were undermined following a Reuters story indicating the historical rally in palladium prices has likely run its course with recycling and substitution with platinum thought to be well underway. On the other hand, disappointing physical and industrial demand for platinum might be offset today with a massive 23,711-ounce ETF inflow last Friday!
While the March copper contract has generally maintained periodic higher highs for the move since the first two trading sessions of the year, the spike down failure later last week and a retest of the Friday low early today, shifts the bias slightly in favor of the bear camp. The bull camp should already be on edge waiting for the latest Chinese infection count readings and/or hospital utilization rates as intense exposure during the holidays could result in a temporary spike in infections. According to other trade sources the weakness in copper this morning is the result of a lack of “upbeat” Chinese economic stories in the Press. However, China posted a net increase in 2022 refined copper output of 4.5% which should provide modest fundamental demand support for prices.
In retrospect, the petroleum markets bought the rumor of a recovery in Chinese energy demand from “opening up” optimism last week. However, global macroeconomic psychology appears to have shifted bearish from last week, perhaps because of concern for central bank rate hikes this week. On the other hand, the Russians have aggressively escalated their attacks perhaps because of the promise of sophisticated Tanks from the US and UK. Fortunately for the bull camp, bearish macroeconomic pressure will be partially mitigated with a 16% decline in global crude oil in floating storage on a week over week basis. Another potential supportive element in today’s trade is evidence of a significant increase in bullish Brent and gasoline long speculation. Certainly, the petroleum markets could derive support from an attack on an Iranian military complex rumored to be carried out by Israel.
Even though the natural gas market is significantly oversold from both short-term and intermediate perspectives, periodic and limited duration cold weather systems are being more than offset by higher-than-average temperatures. In fact, at this point a significant deep freeze might not result in anything but a loss of downside momentum. On the other hand, from a technical perspective the net spec and fund short in natural gas adjusted for the slide of $0.39 (into last week’s low) should leave the gas contract with the largest net spec and fund short positioning since March of 2020.
There are scattered rains for parts of Argentina growing areas over the next week, but today’s models show no rain for the second week out and only widely scattered rains for this week. While there is plenty of uncertainty for the forecast this far out, if it verifies, significant stress could return to any fields which misses out on this week’s scattered rain events. There is still significant tightness in the short-term supply situation for meal as traders await new crop supply from South America. Soybean planting looks profitable for the coming year, and this could pull acreage from cotton. Planted area this coming year may increase to 88.5 million acres, up 1 million from last year.
While there is decent rain for the past week, Argentina corn growing areas should see just scattered rain amounts for this week, and no rain in the forecast for next week. If this forecast verifies, many corn areas could be back under stressful conditions. Crops in poor to very poor condition reached 32% before last week’s rains as compared with 28% the previous week and 20% last year. March corn closed slightly higher on the session Friday and moderately higher for the week. The market managed to trade up to the highest level since January 18 before pulling back into the close. Weakness in crude oil and weakness in soybeans were seen as negative factors. More talk of potential irreversible damage to the Argentina crop helped to support the market last week. With strong profitability for corn production this year, producers may shift to more acres in 2023. We are estimating that plantings could come in near 91.5 million acres, up from 88.6 million last year.
The wheat market may follow the other grains higher short-term. March wheat closed slightly lower on the session Friday with a quiet inside trading day. The market managed to close 8 cents higher on the week after first trading down to the lowest level since September 2021. The weekly reversal is a positive technical development and the market is still correcting the oversold condition. European milling wheat futures also closed lower but posted its first weekly gain in a month. News of a potential record high production and record high exports for the Australia crop this year helped to limit the buying. July Kansas City wheat closed higher and experienced the highest close since January 3. A Farm Futures survey showed US producers expecting wheat planted area to come in at 48.8 million acres for the 2023/24 season.
Technically, the market experienced a sweeping reversal on Thursday and also experienced an outside week higher close which are positive developments. However, the lack of tightening supply this quarter from the fourth quarter combined with the April premium to the cash suggests the market will need some type of supply catalysts in order to experience more than just a technical bounce. April hogs closed lower on the session Friday after an early rally to the highest level since January 17 failed to attract new buying interest. While still in an oversold condition, and still in a position to bounce, the upside looks limited due to ample short-term supply. In addition, April holds a large premium to the cash market. The premium is normal for this time of the year, but the shift to lower production into the first quarter is the reason for the premium, and this year production is not shifting lower. Packer profit margins are supportive and average weights are low so producers are current with marketings.
The cattle market seems to have the supply fundamentals in the months ahead to expect a resumption of the uptrend. However, beef prices are at the lowest level since December 22 and cash markets remain sloppy. January is a seasonally weak demand timeframe but any actions which might tighten supply further could be seen as supportive. For now, choppy trade is still possible. April cattle closed higher on the session Friday after the early break to the lowest level since January 23 failed to attract new selling interest. Sluggish action for beef prices and weakness in the cash market last week helped to pressure. The USDA boxed beef cutout was down 21 cents at mid-session Friday and closed 99 cents lower at $267.76. This was down from $271.72 the previous week and was the lowest it had been since December 22. The estimated average dressed cattle weight last week was 829 pounds, down from 830 the previous week and 845 a year ago. The 5-year average weight for that week is 833.6 pounds.
While cocoa’s recovery move ran out of steam at the end of last week, the market will start today’s action 120 points above its mid-January low (up 4.8%) and on-track for a fourth positive monthly result in a row. With the demand outlook showing signs of improvement, cocoa prices should remain well supported early this week. March cocoa held within a fairly tight range before finishing Friday’s inside-day session with a minimal loss. For the week, however, March cocoa finished with a gain of 58 points (up 2.3%) which was a third positive weekly result over the past 4 weeks.
Coffee prices are on-track for their first positive monthly result since August after regaining more than 19% in value over the past 2 1/2 weeks. While this leaves the market vulnerable to end-of-month profit-taking and long liquidation, coffee should continue to find support from an improving demand outlook. March coffee shook off early pressure and reached a new 3 1/2 week high before finishing Friday’s trading session with a sizable gain that was a sixth positive daily result in a row. For the week, March coffee finished with a gain of 15.10 cents (up 9.8%) and a second positive weekly result in a row.
March cotton closed moderately lower on the session last Friday and this left the market with a slight gain for the week. The US dollar was slightly higher which was seen as a negative, and US consumer spending fell for a second straight month in December. Spending on non-durables like clothing and footwear declined 1.4%. Weakness in the crude oil market was also seen as a negative factor. Some traders believe Brazil and India cotton are cheaper than US cotton for now, and this may cause export sales to soften over the near term. Sales have been positive for the last couple of weeks, but cumulative cotton sales still significantly lag a normal pace to reach the current USDA projections. There has been plenty of talk about the potential for a sharp drop in US cotton plantings this year given the high price of competing crops.
Sugar prices have risen more than 5% in value over the past 3 sessions and are back to within striking distance of a new 5 1/2 year high. Following recent bullish supply developments in India, sugar prices could finish January by reaching new high ground. March sugar found early strength before falling back into negative territory, but regained upside momentum and reached a 5-week high before finishing Friday’s trading session with a sizable gain. For the week, March sugar finished with a gain of 1.24 cents (up 6.3%) which was a second positive weekly result over the past 3 weeks.
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