Wkly Futures Market Summary Mar 27.23
- March 27, 2023
- ADMIS Research Team
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Clearly, the treasury markets have seen a dramatic expansion of bullish forces serving to lift prices. In addition to the bullish inertia from early March declines in equity markets, the emergence of global bank sector fears and renewed fears of slowing from tightening credit conditions could result in new contract highs in bond and note prices in the weeks ahead. Given the potential for a major escalation of bank fears and given a slightly less likely potential for a moderation of bank sector fears, traders should expect the initial action on Monday morning to set this week’s trend.
With global equity markets showing modest gains, reports of two banks stepping forward to buy portions of the Silicon Valley Bank and a lack of additional rumors of other banks under pressure, treasury prices have retrenched from last week’s low to high rally of 4 points.
After the US dollar failed to show lift from flight to quality and risk-on earlier last week we expected it to remain out-of-favor. However, seeing the focus of the markets shift from the US bank sector threat to a European bank sector threat has clearly rekindled long interest in the dollar. In the near term, flight to quality markets is likely to be the Dollar, yen, US treasuries, and gold which in turn will likely result in consistent and perhaps significant pressure on the euro. The dollar has not managed to take out the Friday high and the 2-day bounce at the end of last week has probably set the stage for a slide in the dollar early this week.
While the euro appears to have found technical chart support and saw a sweep of favorable German IFO business climate, current assessment, and expectations surveys for March, the direction of the euro is likely to flow from big picture global influences. With the Yen receiving several weeks of significant flight to quality buying and global anxiety seemingly moderating, we see the Yen eroding toward uptrend channel support but would not rule out a further slide to a past double low down at 76.39. While we expect volatility in the Swiss franc to moderate this week the currency could without notice rally 100 points or break 150 points. From a technical perspective, the Pound is clearly overbought from the March rally of 550 points and the currency could see a measure of pressure from news that Scotland may seek independence if the pro-independence movement remains in place after a leadership transition. While the Canadian aggressively rejected the sharp spike down failure last week, the action certainly undermines bullish sentiment and leaves the bear camp with a psychological edge early this week.
Typically, the equity markets do not like high levels of financial sector anxiety and increasing economic uncertainty. Clearly, the current banking sector threat could be fully exposed, but traders should not have as much confidence in the ECB controlling a banking crisis as in the Fed controlling its banking crisis. Certainly, sharp declines in US treasury yields have reduced the prospect of yield hunting rotation out of equities, but increased headwinds from tightening credit conditions could have a negative impact like additional US Federal Reserve rate hikes.
All things considered, the upside action in the S&P early this week after the very strong finish on Friday should have some shorts running for the exits. Unfortunately for the bull camp the overall macroeconomic environment is not particularly upbeat with “relief” instead of optimism seemingly driving the bus this morning. While the Dow futures are hesitant early this week, the index is following other US measures and global market action higher. Not surprisingly, the NASDAQ has lagged the markets early this week with a conference in China including many US corporate executives potentially resulting in some form stern threat against the US government from the Chinese government.
GOLD, SILVER & PLATINUM:
With reports of buyers stepping forward for some assets of the Silicon Valley Bank and a regional Fed President suggesting the US economy is drawing closer to recession because of the bank sector turbulence, a measure of corrective action in gold and silver is justified. However, a demand underpin for prices was seen overnight following reports that Chinese February imports of gold via Hong Kong rose to 64.8 tons versus only 22.2 tons in January. In a suspect but supportive development at the end of last week, the Russian central bank also indicated it has added 1 million ounces of gold to its reserves since the beginning of the Ukraine war. While the Russian bank indicated their gold holdings were 74.9 million ounces (worth $135 billion), sanctions reportedly froze $300 billion worth of Russian reserves outside of Russia.
Going forward, we suspect the platinum market will continue to chop sideways with a slightly bearish tilt. The Commitments of Traders report for the week ending March 21st showed Platinum Managed Money traders reduced their net long position by 766 contracts to a net long 2,572 contracts. Like the platinum market, the palladium market posted negative chart action on Friday and has not shown positive traction from strength in gold or from the ebb and flow of flight to quality market action.
Despite tightening supply signals last week from Shanghai copper warehouse stock readings and evidence of supply drawdowns in Chinese private company industrial storage facilities, the copper trade is facing a bearish macroeconomic environment to start the new trading week. However, US and Chinese relations remain very tense with Chinese officials at a global conference in China today reiterating their objective of an “open China”. However, it was reported that 5 Chinese employees of a US law firm were reportedly detained in Beijing today prompting suspicion of the open China policy. However, reports last week indicated spot discounts in Shandong contracted sharply because of soft demand but reportedly recovered sharply on Friday. Furthermore, copper scrap prices also fell sharply early last week before rebounding in a possible sign of bargain hunting buying by Chinese interests.
While crude oil is showing initial strength earl this week, the overall global macroeconomic outlook is still suspicious with the meter tilting more toward recession than growth. However, the focus of the energy markets is locked onto Chinese factors which are supportive of prices to start the new trading week. Apparently, the Chinese National Petroleum Corp. over the weekend indicated it expects crude oil imports to the country to increase by 6.2% this year relative to last year’s 540-million-tonne import tally. Furthermore, the national oil company expects crude oil refinery throughput to “increase” by 7.8% to 733 million tonnes. Comparing the anticipated import tally to the refinery throughput tally indicates China expects fuel demand to grow significantly. In fact, CNPC projected Chinese oil consumption to rise by 4.5% and the refinery utilization rate to increase by nearly 4%! In a positive long-term development for crude oil (a negative for global fuel markets) the Saudi national oil company has indicated it will begin building a massive Chinese refinery in a project that was delayed by the Covid pandemic.
Like the crude oil, the gasoline market also has a moderately liquidated net spec and fund long position, but near-term demand expectations are likely to trump technical oversold signals. Fortunately for the bull camp, signs of very strong Indian fuel demand and signs of some economic recovery in China should provide cushion against fear of softening demand in the US and Europe. Unfortunately for the bull camp the upside track in RBOB looks to face ongoing headwinds from macroeconomic slowing fears and from key pivot point/consolidation resistance point at $2.60.
Old crop soybeans and meal appear to have put in at least a short-term low. The extreme oversold condition after the selloff of the last two weeks plus expectations of a sharp drop in meal production in the months just ahead may help support the market over the near term. A lack of farmer selling in Argentina with the poor crop and the currency very weak is seen as a factor which could drive global meal production down even more. In order to find the meal needed for crushing in Argentina, it may take another currency deal in order to pull depleted Argentina supplies away from producer hands. July soybeans managed to close higher on the session Friday after trading down to the lowest level since September 8. The hook reversal after trading through key support at 1399 1/2 is a positive technical development, and the turn up comes from an extremely oversold technical condition. Strength in the other grains helped to provide support.
The corn market is a bit overbought short-term, but still has some positive fundamentals working in its favor. May corn managed to close sharply higher on the session Friday after trading lower early in the day. The buying pushed the market up to the highest level since February 28. China was a noted buyer of 204,000 tonnes of US corn which was the eighth China purchase in the last nine trading days. This pushed total purchases of US corn over this timeframe to over 2.75 million tonnes. With strong weekly export sales last week and May corn still trading at a 20 cent premium to the July contract, the cash tone remains firm. For the USDA planted acreage report, traders see US corn plantings near 90.9 million acres, 87.7-92.1 range, as compared with 91 million acres from the USDA Outlook forum and from 88.6 million last year.
A combination of uncertainty from the Black Sea region plus a drier than normal outlook for the winter wheat areas of the US are factors which may support. A Russian business newspaper reported that the Russian government could recommend a temporary halt in wheat and sunflower exports, but many traders believe that Russia has no plans to halt exports. On Saturday, Russia president Putin held a phone call with his Turkish counterpart and it appears that a deal may be in place; but still uncertain. The Ukraine infrastructure minister underlined the agreement to extend Black Sea grain initiative for 120 days is needed but there is still concern that Russia has only agreed to a 60 day extension. May wheat experienced choppy to lower trade early in the session Friday, but managed to close sharply higher on the day. Reports about Russia considering plans to restrict exports from the Black Sea as a way to support wheat prices and this helped to trigger aggressive buying.
While US pork production was higher than a year ago during the first quarter, it is expected to fall below last year’s levels in the second quarter. Production is also expected to decline by 455 million pounds from the first quarter. This would be the third largest decline for this period on record. US production typically drops anywhere from 150 million to 300 million pounds during this time, and a larger than normal decline would be a supportive force. June hogs closed sharply higher on the session Friday after choppy and two-sided trade early in the day. The monthly cold storage report was supportive, and the market is trading at a smaller than normal premium to the cash market. In addition, the market is oversold and experienced a hook reversal after reaching a key downside target on Thursday. The USDA pork cutout, released after the close Friday, came in at $78.90, up $1.04 from Thursday and up from $78.59 the previous week.
The cattle market is showing much more positive technical action, but the continued weakness in the beef market down to a six week low is a short-term negative force. It will be important to see beef prices stabilize and begin to move higher over the near term. Cash markets are trading well above June cattle and given the oversold condition and the wide basis, it will not take much in the way of positive news to spark renewed buying in cattle. The USDA boxed beef cutout was down $1.94 at mid-session Friday and closed $2.90 lower at $279.88. This was down from $283.35 the previous week and was the lowest it had been since February 16. Cash live cattle prices did not change much last week. As of Friday afternoon, the five-day, five-area weighted average price was $164.18 versus $164.14 the previous week.
Cocoa prices have maintained their strength through turbulent action in global markets as they continue to find support from bullish West African supply developments. With the market on-track for a sixth monthly gain in a row and a second sizable quarterly gain in a row, cocoa may be increasingly vulnerable to profit-taking and additional long liquidation this week. May cocoa was able to shake off early pressure and reach a new contract high before finishing Friday’s trading session with a moderate gain and a fifth positive daily result over the past 6 sessions. For the week, May cocoa finished with a gain of 146 points (up 5.3%) and a second positive weekly result in a row. After the steep rally this month, a negative shift in global risk sentiment weighed on cocoa prices as that may weaken near-term demand prospects for discretionary items such as chocolate.
After recovering from a 20-month low in early January, coffee prices fell back into a consolidation zone during March as the market could not sustain momentum in either direction. With the market receiving bullish supply news, coffee could see an upside breakout of its consolidation and extends its 2023 recovery move. May coffee had an abrupt change in fortune as it was able to rally from a 1 1/2 week low to finish Friday’s trading session with a sizable gain. For the week, May coffee finished with a gain of 2.65 cents (up 1.5%) which broke a 3-week losing streak. A sizable daily decline in ICE exchange coffee stocks Thursday was followed by a decline of 2,355 bags on Friday, while no grading took place and only 1,135 bags are waiting to be graded. With ICE exchange coffee stocks nearly 40,000 bags below their February month-end total with one week to go, this makes more likely that they will have a monthly decline for March.
May cotton closed lower on Friday after trading to its lowest level since November 2. The dollar was higher and crude oil was lower, and both of these moves were negative to cotton. A strong dollar makes US export commodities like cotton less competitive on the world market, and cheaper crude oil makes man-made fibers less expensive. Traders remain concerned that there is too much unsold cotton from last year. For the USDA prospective plantings report, the average trade expectation for US cotton planted area is 11.0 million acres, with a range of expectations from 10.5 to 12.7 million. This compares to 10.9 million in the USDA Outlook Forum and 13.8 million last year.
While the sugar market avoided a negative key weekly reversal, it is starting to show signs of being top heavy at current price levels. With a bearish shift in the Brazilian supply outlook, sugar prices may remain on the defensive early this week. May sugar was unable to hold onto early strength and extended its pullback by finishing Friday’s trading session with a mild loss. For the week, however, May sugar finished with a gain of 15 ticks (up 0.7%) which was a third positive weekly result over the past 4 weeks. The Brazilian trade group Unica released their latest supply report which showed Brazil’s Center-South cane crush during the first half of March at 608,000 tonnes, which was over 3 times the size of last year’s total. While most of that crushing was allocated to ethanol, there was an additional 16,000 tonnes of sugar produced during that timeframe. Unica also said that 24 mills had already begun their operations with another 36 planning to start during the second half of March.
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