After significant gains in the first 4 trading sessions last week, treasuries fell back last Friday in the wake of a lack of a “definitive downtick” in the US PCE report. In fact, despite the reading coming in below expectations, the absolute level of the PCE remains in the inflationary category. When better than expected personal income, personal spending, and Michigan consumer sentiment index readings from October are considered the bear camp had several reasons to press prices early this week. In retrospect, last week’s 5-point bond market rally was largely constructed on reduced probability of a 75-basis point rate hike in December. However, the focus of the trade early this week has likely shifted back to the question of the November rate hike size which is widely expected to be a 75-basis point hike.
Last Friday’s slate of US scheduled economic data extended the view that the US economy continues to stand up to the very aggressive tightening regime of the US Federal Reserve. In fact, seeing positive personal income, personal spending and a strong University of Michigan consumer sentiment reading for October could tip the scales in favor of a jumbo rate hike in December. The bull camp can also suggest today’s US inflation data was slightly moderated but still at elevated absolute levels which rekindle buying interest in the dollar. Not surprisingly, the currency trade has revived its bullish tilt toward the dollar into what is widely expected to be another jumbo US rate hike decision from the US Federal Reserve. In a minor early supportive Dollar development this week, US scheduled data could add to the short covering/fresh buying condition in place.
In addition to a significant overbought condition following the mid-October low to high bounce 380 points, the euro was undermined by a jump in EU/Russian tensions from a Russian halt of Black Sea shipping which in turn could cause the EU to ratchet up Price Cap efforts and that could lead Putin to restrict energy flow to the West. Fortunately for the bull camp German retail sales and Italian GDP readings came in positive this morning thereby increasing the validity of support. On the other hand, euro zone inflation expectations have surged to new record highs which likely pressure the euro as the trade sees European rate hikes dramatically increasing recession prospects. With the Yen correcting a massive oversold condition from the October spike low, further downside retrenchment is expected with Japanese economic information overnight supportive, with large retailer sales and industrial production on a year-over-year basis providing a cushion against a direct slide to support. While Swiss retail sales readings for September were slightly disappointing to expectations, the readings did post a noted gain and the Swiss has not tracked domestic data for daily action.
The rally in the equity markets last Friday was very surprising considering that many financial markets seem to rekindle fear of a jumbo US interest rate hike in December after scheduled inflation related data was released. However, extremely impressive oil company profits and some views that last Friday’s inflation readings moderated attracted investors after significant corrective action on Wednesday and Thursday.
With the massive low to high rally/trading range of 1,116 points in the December Dow futures, the market is obviously short-term technically overbought into this week’s action. In retrospect, the NASDAQ has clearly underperformed relative to the rest of the market because of ongoing fear of slumping online ad revenues and additional fresh pressure is presented this morning from the potential for a 30% loss of iPhone production in China due to Covid.
GOLD, SILVER & PLATINUM:
With gold and silver tracking lower in the face of a significant flare-up of tensions involving Russia, flight to quality interest is absent again early this week. Outside market influences for the gold and silver markets continue to favor the bear camp with the dollar showing signs of a shift back into an uptrend, treasuries potentially topping out last Friday and the lack of definitive demand stories out of India into the festival demand window.
Even the silver market has rolled over and its short-term technical signals have also shifted into fresh sell modes. At present, silver looks to remain slightly disjointed with daily action in gold, with its industrial demand focus potentially discouraging sellers.
Even though December palladium is bucking the metals downtrend with small gains early this week, the PGM complex should be disappointed with surprisingly soft Chinese PMI data for October. In fact, trade chatter suggests the data was even worse than released thereby leaving China news a negative for most physical commodity markets. In retrospect, the January platinum contract has recoiled sharply from that trendline in 5 of the last 9 trading sessions!
Last week, we saw little justification for the $0.20 rally in December copper in the face of daily worsening of the Chinese Covid lockdown situation. In addition to an expanding Covid lockdown threat, Chinese manufacturing and nonmanufacturing PMI readings for October overnight came in much weaker than expected which obviously tempers Chinese copper demand prospects. Fortunately for the bull camp, LME copper warehouse stocks last week posted another week of noted declines (down more than 11,000 tonnes) and the weekly Shanghai copper warehouse stocks figure fell by 29% over a single week. On the other hand, overall physical copper within the Chinese supply chain remains extremely tight thereby increasing risk to those pressing the short side below the middle point of the last 30 days range.
Apparently, the Russian exit from the UN Food/Black Sea shipping agreement has not provided support to energy prices early this week, perhaps because rising Chinese energy demand fears are present following poor PMI readings and additional Covid lockdowns. Tempering the bearish Chinese demand threat is news of further declines in Chinese on shore crude inventories in the second half of 2022. Bearish influences to start the trading week are the beginning of the latest OPEC+ production cut back, a 2.7% week over week increase in crude oil in floating storage and expectations for a surging US dollar from a hawkish Fed meeting on Wednesday.
The rally in natural gas prices early this week is taking place in the face of bearish near-term European weather, German storage reportedly at 99% targeting and confirmation from Russia that gas flows through Ukraine continue to be steady. However, there has been a forecast of a cold winter in the UK and the Russian pulled out of a UN food shipping deal over the weekend which could result in aggressive efforts to invoke a price cap on Russia gas which the Russians have indicated will result in a halt of all shipments. The weather outlook for Europe is favors the bear camp with unseasonable hot temperatures in portions with temperatures in southern Europe running 10 Celsius above normal. However, there is a cold front moving into the Northwest US by the middle of the week with some storms potentially sparking talk of an early start to winter.
Russia suspended its participation in the export corridor deal over the weekend after drone strikes against its naval fleet, claiming without evidence that one of the drones might have come from a grain ship that’s part of the Black Sea initiative. Ukraine strongly denied the accusations. The UN announced late Sunday that it had agreed with Ukraine and Turkey to have vessels carrying food from Ukrainian ports sail early this week. This news helped to market sell off from early highs. January soybeans close moderately higher on the session Friday and up nearly 20 cents from the early lows. This is bullish technical action and the weekend news from the Black Sea should help support today.
Over the weekend, Russia suspended the UN brokered Black Sea grain deal indicating a major Ukrainian drone strike attack on its fleet and Crimea. This is likely to support increased buying over the short term. Ukraine’s infrastructure ministry indicated that a total of 218 vessels are effectively blocked due to Russia’s decision to suspend its participation in the grain deal. The ministry said 95 loaded vessels that had left Ukrainian ports were awaiting inspection for shipment to the final customer, and 101 empty ones awaited inspection at the entrance to Ukrainian ports. On Sunday, Ships loaded with grain were beginning to leave Ukraine, as the United Nations and Turkey work to salvage the agreement to keep seaborne exports flowing even after Russia’s weekend announcement that it was suspending its involvement in the deal. The uncertainty is supportive.
Ships were moving out of Ukraine early this week, but this is uncertain with increased fighting in Ukraine. On Saturday, Russia suspended the UN brokered Black Sea grain deal indicating a major Ukrainian drone strike attack on its fleet and Crimea. This is likely to support increased buying over the short term. Ukraine’s infrastructure ministry indicated that a total of 218 vessels are effectively blocked due to Russia’s decision to suspend its participation in the grain deal. The ministry said 95 loaded vessels that had left Ukrainian ports were awaiting inspection for shipment to the final customer, and 101 empty ones awaited inspection at the entrance to Ukrainian ports. Since the agreement started on July 22, more than 9 million tonnes of grains have been exported.
The wheat market experienced the lowest close since September 8th on Friday as beneficial rain in Texas and Oklahoma was thought to be a factor to improve the crop conditions before dormancy. The 5-day forecast for the plains is dry, but the 6-10 day shows above normal precipitation. In addition, some rain in Argentina may have also helped to pressure the market. With the severe drought in Argentina and the poor crop, Brazil will need to import more wheat from other places than Argentina. Traders believe exports to Brazil will jump from the US, Canada and Russia. Normally, Brazil gets near 6 million tonnes of wheat from Argentina. December wheat closed moderately lower on the session Friday but managed to bounce off of the lows, which is also a key support area.
The jump in pork values late last week was enough to ease concerns for a sharp break in the cash market and may at least temporarily support futures. December hogs closed moderately higher on the session Friday with an inside trading day. Ideas that the break Thursday was just too far, too fast helped to trigger a bounce. In addition, pork values bounced and slaughter is not picking up as fast as expected. The USDA pork cutout released after the close Friday came in at $99.35, up $2.52 from Thursday but down from $99.45 the previous week. The CME Lean Hog Index as of October 26 was 94.15 down from 94.47 the previous session but up from 93.76 the previous week. The USDA estimated hog slaughter came in at 487,000 head Friday and 122,000 head for Saturday. This brought the total for last week to 2.557 million head, down from 2.571 million the previous week but up from 2.552 million a year ago.
The cattle market remains very overbought and vulnerable to a correction. However, beef production was lower last week and the cash market is in a steady uptrend. In addition, the beef price has pushed up to the highest level since August 25th and this might support a continued uptrend in the cash market. December cattle closed moderately lower on the session last Friday after choppy and two-sided trade with a small range. The market remains in an overbought condition, and is also still under the negative technical influence of Tuesday’s key reversal. The USDA boxed beef cutout was up 73 cents at mid-session Friday and closed 77 cents higher at $263.26. This was up from $253.71 the previous week. This is the highest since August 25. The cash live cattle market moved higher for the fourth week in a row last week. As of Friday afternoon, the five-day, five-area weighted average price was 151.90, up from 150.09 the previous week and 144.78 on September 30.
Cocoa prices have seen coiling action over the past few weeks, but continue to hold their ground above their mid-October lows. If global risk sentiment continues to improve, cocoa should be able to sustain an upside move. December cocoa bounced back from a midsession pullback, but that was not enough to keep the market in positive territory as it finished Friday’s trading with a modest loss. For the week, December cocoa finished with a loss of 4 points (down 0.2%) which was a third negative weekly result in a row.
Coffee prices have maintained downside momentum and have lost 22% in value (down 48 cents) over the past 2 1/2 weeks. The market is technically oversold and well into bargain price territory, which should have coffee close to putting in a longer-term low. December coffee was able to bounce back from initial pressure before turning sharply to the downside and reaching a new 15-month low as they finished Friday’s trading session with a heavy loss and a thirteenth negative daily result in a row. For the week, December coffee finished with a loss of 21.10 cents (down 11.1%) which was a fourth negative weekly result in a row. Concern that inflation levels remain high enough to diminish out-of-home demand prospects is a major source of pressure on the coffee market.
December cotton sold off sharply again on Friday and traded to its lowest level since January 2021 and closed limit down. The market closed 9% lower on the week and was down for the seventh week in a row. Harvest pressure and lack of mill demand have been blamed for the selloff. Traders remain concerned about demand with the possibility of a global recession looming over the market.
Sugar prices have retraced most of their early October rally and are on-track for a negative monthly result. Unless the market has signs of improving ethanol demand, sugar may be heading for a retest of its mid-September lows. March sugar bounced back from early and midsession pressure, but could not climb out of negative territory as it finished Friday’s trading session with a moderate loss and a tenth negative daily result in a row. For the week, March sugar finished with a loss of 80 ticks (down 4.4%) which was a second negative weekly result in a row. Sharp selloffs in crude oil and RBOB gasoline were sources of carryover pressure on the sugar market as that should weaken ethanol demand in Brazil.
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