Written Commentary
The Ghost in the Machine Q1 2024
March 19, 2024
Wkly Futures Market Summary Nov 21.22
- November 21, 2022
- ADMIS Research Team
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BONDS:
Japanese national CPI reached a 40-year high while UK retail sales came in better than expected. The ECB’s Lagarde said that they expect to raise Euro zone rates further. Following a stronger than forecast Canadian IPPI reading, US existing home sales came in above estimates as it fell to a 2 1/2 year low. The Fed’s Collins said that the Fed likely needs to hike interest rates more, and that inflation expectations are reasonably well anchored. Treasuries held within tight ranges as they went on to finish last Friday’s session with moderate losses. Apparently, the treasury markets were overbought following the last two weeks of significant gains as prices were lower at the start of this week despite global risk-off sentiment dominating early this week. Perhaps the treasury markets have factored in the prospects the Fed will moderate the pace of rate hikes in their December FOMC meeting.
CURRENCIES:
The Dollar bounced back from early pressure and went on to close with a modest gain for last Friday’s trading session. Hawkish comments from the Fed’s Collins pointed towards higher US rates in the near future, and has underpinned the Dollar late this week. In contrast, sluggish energy prices drove the Canadian dollar to a 1-week low. Apparently, the Covid situation in China has deteriorated with the government closing schools in Beijing and that in turn has ignited flight to quality buying interest in the dollar index.
STOCKS:
Global markets shook off mild early pressure, but lost strength at midsession as they finished Friday’s trading session with a mildly positive tone. Better than expected earnings from Applied Material provided an early boost to market sentiment. However, ongoing concern that China will not relax their Covid restrictions soon weighed on risk appetites. US equity markets fell from early highs but still went on to finish in positive territory with the Dow Jones outperforming the S&P and Nasdaq. Global equity markets at the start of this week were lower with the markets in Japan and Spain bucking the trend with modest gains.
GOLD, SILVER & PLATINUM:
In retrospect, both gold and silver were fortunate to avoid significant declines last week in the face of predictions that US Fed funds might need to rise above 7% to quell inflation. While the Chinese central bank left rates unchanged on Monday, the closure of schools in the capital city has sent a wave of fresh economic recession fear into world markets. Obviously, a significant range up breakout in the US dollar has added fresh currency related selling interest in gold and silver. Fortunately for the bull camp, it appears that treasury yields might be poised to slide lower and that might serve to cushion gold and silver against strength in the Dollar. However, this week it is possible the markets will be presented with a temporary wave of euphoria from the upcoming kickoff of the holiday shopping season, and that could firm the dollar further and pressure the Treasuries thereby setting the stage for a quick decline in December gold down to $1,725.
Chinese Covid concerns has shifted the path of least resistance down in the PGM markets. Unfortunately for the bull camp in platinum, the market is very vulnerable from a technical perspective with prices at Friday’s close sitting $184 above the September lows! It should also be noted that this week’s COT positioning report showed platinum to have the largest net spec and fund long positioning since early March and that could facilitate aggressive stop loss selling ahead. Even the outlook for the US economy is moderating with more and more economists projecting recession and that combined with rising loan rates should leave demand forces in the PGM markets in the bear camp. Last week, PGM ETFs reduced their platinum holdings by 31,610 ounces while palladium ETF holdings declined by a mere 102 ounces.
COPPER:
Conflicting news continues to flow for copper regarding China. While some solid import figures have helped moderate demand destruction fears from the flow of Chinese quarantine headlines, it seems as if the Covid flare has become very serious again! While overall copper supply inside China remains tight, last week’s 9,641-tonne inflow to Shanghai copper warehouse stocks dampens the prospect of support from tight supply headlines. On the other hand, analysts expect copper treatment charges for Chinese smelters will remain high but solid forward demand expectations are of little interest to the trade today in the face of what appears to be a big picture macroeconomic let down.
ENERGY COMPLEX:
Even though the crude oil market is holding up in the face of significant market wide risk off psychology, we see the path of least resistance pointing down. Obviously, the expansion of the Covid problem in China is at the root of broad-based negative price action in nearly all physical commodity markets early this week. Adding into the initial downward tilt in crude oil is news that Russian Black Sea oil exports have resumed (after a storm), a significant jump in the dollar and news that crude oil in floating storage increased by 12% over last week. However, the crude oil trade expects strong Chinese crude oil imports ahead as the government seeks to capitalize on the global fuel shortage brought on by the Russian embargo by ramping up domestic refinery activity.
It should be noted that Ukraine is reporting heavy damage to its energy infrastructure from Russian bombing with some officials worried that the capital could lose all power! Therefore, one should not rule out the prospect of a massive human tragedy in Kyiv, especially with temperatures beginning to settle below freezing! At least to start the week, the $80.00 level looks to be a key pivot point potentially holding up as support until the direction of global equities telegraphs overall economic sentiment.
BEANS:
Concerns for demand from China continues to provide support. The market is in a difficult set up as futures are still holding a risk premium for potential weather issues in Brazil and Argentina. Brazil seems off to a great start for a record crop, while Argentina dryness is a concern. If the Argentina situation does not get worse, and the Brazil crop conditions are good in another 2-3 weeks, the market may take away the weather premium. January soybeans closed moderately higher on the session last Friday but stayed inside of Thursday’s range. The market closed 21 3/4 cents lower on the week with bearish export news out of Ukraine for vegetable oils, a sharp break in palm oil futures and a decent start to the Brazil growing season helping to pressure. The market found some support from dryness issues on Argentina for getting the soybean crop planted.
CORN:
While the export demand outlook for the corn market remains sluggish and sales are well behind the pace to reach the current USDA forecast, it will not take much in the way of positive export news or minor weather issues in South America to spark a strong recovery rally. Traders anticipate a large crop from South America this year, but ending stocks are still projected at a very tight level. The market spent three sessions inside of Tuesday’s range as cash markets remain positive and spread action is positive. The market closed 10 1/2 cents lower for the week. The corn export market has been sluggish. Cumulative US corn export sales for the 2022/23 marketing year have reached just 29% of the USDA forecast versus a five-year average of 43% for this time of year. China imported a total of 550,000 tonnes in October, down 58% from the same period last year. Their year-to-date imports have reached 19.01 million tonnes, down 27.5% from last year’s pace.
WHEAT:
December wheat closed lower on the session last Friday, and continued to push to the lowest level since late August early this week. For the week, the market was down 10 1/2 cents. December Kansas City wheat closed slightly lower on the session but well up from the November 10th lows. US weather is still a bit bullish but it is the time of the year when traders feel that crop conditions have very little correlation with final yield. In India, the Ministry of Agriculture indicated that wheat was planted on 10.1 million hectares as of November 18, up from last year’s 8.8 million hectares. A bigger crop may ease the tight stocks situation with stocks falling to multi-year low this year. India is the world second biggest producer. The market seems to have already priced in a resumption of exports out of Ukraine and the Black Sea. There is no rain in the five day forecast for the Central Plains, and both the 6-10 and 8-14 day forecast models call for below normal precipitation.
HOGS:
Estimated US pork production last week was 559.7 million pounds, up from 536.6 the previous week and down 1.8% from 570.0 a year ago. The USDA pork cutout, released after the close Friday, came in at $91.88, up $1.02 from Thursday but down from $97.03 the previous week. The CME Lean Hog Index as of November 16 was 88.14, down from 88.22 the previous session and 88.96 the previous week. December hogs closed moderately lower on the session Friday. While packer profit margins are in the black, pork prices continue to push lower and this kept the cash market trend down.
CATTLE:
The USDA boxed beef cutout was down $2.39 at mid-session Friday and closed $2.23 lower at $254.87. This was down from $258.94 the previous week and was the lowest the cutout had been since October 21. The USDA Cattle on Feed report Friday showed placements for the month of October at 93.9% versus trade expectations for 96.5% of last year, with a range of 94.6% to 100%. This is bullish against expectations. Marketings came in at 100.8% of last year as compared with the average estimate of 100.8% (range 100.5%-101.7%). The Cattle on Feed supply as of November 1st came in at 98% as compared with trade expectations for 98.3% (range 97.9%-99.1%). The news is bullish with placements coming in below the range of estimates. The news is supportive for February cattle. December cattle closed higher on the session and up for the third day in a row and this occurred even with weak beef price. Beef prices have been choppy and cash cattle traded lower last week as supply has come in a bit higher than trade expectations. This may limit the advance in the December contract.
COCOA:
After losing more than 5% in value in a week, cocoa prices were able to find their footing going into the weekend. If global risk sentiment continues to improve, cocoa prices should be able to extend a recovery move in front of the Thanksgiving holiday. March cocoa saw early downside follow-through, but rebounded from a new 1 1/2 week low to finish Friday’s trading session with a mild gain and a positive daily reversal. For the week, however, March cocoa finished with a loss of 62 points (down 2.5%) which broke a 2-week winning streak.
COFFEE:
Coffee’s fourth quarter downdraft has left prices closer to last year’s low of 132.60 than they are to last month’s high of 216.25. While its top 2 growing nations continue to have supply issues, coffee continues to be weighed down by the rapid build-up of European near-term supply. March coffee was unable to hold onto early strength as it finished Friday’s trading session with a moderate loss and a fifth negative daily result in a row. For the week, March coffee finished with a loss of 13.00 cents (down 7.7%) which was a seventh negative weekly result over the past 8 weeks.
COTTON:
December cotton closed lower last Friday after probing below the low end of its two-week trading range and the selling pushed the market down to the lowest level since November 4th. The dollar closed higher, which is negative to cotton, but it failed to break out on the top end of its recent consolidation zone. It looks like China is far from being clear of its Covid restrictions, and this has traders concerns about demand going forward. In addition, traders are concerned that while consumer retail sales have been a positive influence on the economy, apparel sales do not look good, and traders are believing that consumers will back away from nonessentials for the holiday season and for early 2023.
SUGAR:
Sugar prices rose more than 16% in the space of three weeks, as a bottleneck in India created a short-term supply problem for the global market. The global supply fundamentals remain bearish, and this should reemerge as a negative force on prices. March sugar bounced back from a gap-lower opening and finished Friday’s outside-day session with a sizable gain. For the week, March sugar finished with a gain of 41 points (up 2.1%) for a third positive weekly result in a row.
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