Wkly Futures Market Summary Oct 23.23

BONDS:

Just as investors stepped aside from equities because of the potential uncertainty of events in the Middle East over the weekend, we suspect shorts in treasuries stepped aside as a significant escalation of the war could turn treasuries into a flight to quality instrument. However, the bear camp should be emboldened by broad headline coverage of the benchmark treasury yield reaching the psychological 5% level. In addition to the potential for flight to quality buying from the Middle East, last week’s US economic data adds to the bull case. With a fresh downside breakout in prices resulting in the highest treasury bond Yields since 2007 (the beginning of financial crisis) bearish charts have been enhanced with downside follow-through very likely.

CURRENCIES:

In retrospect, the dollar failed to rally last week following several typically bullish fundamental developments. In addition to the failure to rally from a decline in US initial claims, the dollar did not see flight to quality interest in the escalation of uncertainty in the Middle East. Perhaps the short-term dovish view from the Fed discouraged buying of the dollar for global investors are becoming skittish regarding the potential for a debt rating downgrade in the US. With the dollar unresponsive to escalating global economic, geopolitical, and unprecedented treasury market volatility, the currency index is obviously out-of-favor.

As in the dollar trade, the trade is hesitant to buy the euro and other nondollar currencies because of the potential from the historical flight to quality standing of the US dollar.

STOCKS:

The trend in equities looks to remain down with last Friday’s rupturing investor sentiment and fostering a measure of anxiety. Not surprisingly, the equity markets failed to benefit from favorable earnings results from American Express and the oil services giant SLB. However, fear of what turmoil could face the equity markets on Monday’s opening because of Middle East events likely resulted in some investors liquidating in moving to the sidelines. Global equity markets at the start of the week were lower as were many physical commodity markets. Given the explosion in US interest rates, earnings news is likely to be downplayed this week in favor of renewed recession concerns and because of rapidly expanding uncertainty. Historically, investors do not like uncertainty and are already eyeing rotating into interest rate investments.

While the S&P will likely see upcoming big tech earnings as important events, without wildly outside of expectation results, macroeconomic concerns from surging interest rates are likely to dominate. While December Dow futures have respected the 33,000 level on two previous occasions this month, broad bearish fundamental conditions should foster downside follow-through action with the potential for a quick return to the 2023 lows below 32,500.

GOLD, SILVER & PLATINUM:

While the gold market is certainly overbought from the low to high October rally of $180, flight to quality uncertainty looks to entrench in the marketplace with the prospects of a ground war keeping the region and the world anxious. However, the markets have partially embraced potential for diplomatic efforts (perhaps because of the release of some hostages) despite the failure of such efforts early last week. On the other hand, given increased airstrikes, widespread expectations of a ground offensive by Israel and violence around the world, the prospect of a broadening of the conflict is rising.

Palladium positioning in the Commitments of Traders for the week ending October 17th showed Palladium Managed Money traders hit a new extreme short of 10,995 contracts. Managed Money traders added 556 contracts to their already short position and are now net short 10,995.

COPPER:

The path of least resistance is down in the copper early this week with December copper posting a new low and the lowest trade since 2022. While aggressive purchases of aluminum by China on a year over year basis is helping to support copper prices, Chinese economic news is neutral at best. Unfortunately for the bull camp, the International Copper Study Group pegged the global refined copper deficit at 33,000 tonnes in August which is only 3,000 tonnes larger than the deficit in July. Furthermore, the International Copper Study Group forecasts a significant jump in copper supplies next year with their last estimate projecting a 2024 surplus of more than 470,000 metric tonnes.

ENERGY COMPLEX:

We are not surprised with a slight retrenchment in crude oil prices this morning as the trade is temporarily unmoved by the relentless Israeli bombardment of suspected Hamas targets in Gaza. It appears the Israelis are trying to soften up positions for a widely anticipated ground war. Several Arab groups, Arab countries and reported terrorist groups have warned there will be serious repercussions of an occupation force. Along those lines, the US Defense Secretary over the weekend suggested the US government is very concerned of an escalation or broadening of the war with the involvement of any other key oil producers in the fighting immediately throwing crude oil prices back to the late September highs around $92.50.

While the gasoline market showed leadership action last Friday, the trade fell away from the high in a fashion that could indicate an interim peak for prices. Furthermore, China appears to be drawing from reserves and increasing gasoline output with September production up 17.5% versus year ago levels and a 4.1% increase in Indian oil refinery activity in September. However, tensions in the Middle East remain high, the US refinery operating rate is very low on a seasonal basis and reports are that Chinese traffic congestion continues to improve.