The treasury markets exhibited significant volatility last Friday with the markets coming under early pressure and then bottoming after a slight extension from a hotter than expected US PPI result for March. However, treasury bond prices recovered significantly from the post PPI washout and ultimately forged a recovery rally of nearly 1 full point. According to some economists to begin to embrace inflation will likely require a “series” of hot PPI or CPI monthly readings. In the longer term, the Fed Chairman on “60 Minutes” Sunday night suggested that the US economy was at an inflection point and that he expected growth and hiring would “pick up speed” in the months ahead.
While we suspect that last Friday’s recovery in the dollar from the 92.00 level was partly the result of a week-ending technical short covering action, seeing US PPI register a 1% gain certainly entices some for money to move into the dollar. We would also note that the Swiss franc and euro became short-term technically overbought and were in-need-of some back and fill action. The Dollar has managed to bounce in the early action and that is justified by upbeat views from the US Federal Reserve Chairman on “60-Minutes” Sunday night, but perhaps because of very serious infection issues in emerging markets. In other words, the Dollar might see a sudden surge in flight-to-quality buying in the event the virus situations in India, Brazil, or Turkey threaten to spin out of control. Therefore, we suggest traders buy (for a short-term trade) the Dollar below 92.10 looking for a recovery “bounce” and not a full revival of the February and March rally. The Commitments of Traders report for the week ending April 6th showed Dollar Non-Commercial & Non-Reportable traders reduced their net long position by 1,269 contracts to a net long 8,231 contracts.
While several market measures forged new all-time highs last Friday, last week saw a loss of upside momentum and in the case of the Dow futures a sideways consolidation pattern. On the other hand, the market did stand up to news of a possible minimum global corporate tax rate, disappointing US claims readings and even more surprising to a noted jump in US daily infection counts. Global equity markets were down at the start of this week with declines ranging from mere fractions to as high as down 1.74% in the CSI 300 Index.
GOLD, SILVER & PLATINUM:
Taking a step back from the markets, it-is-clear that the June gold contract found strong value just above $1,650 with interim resistance coming in at last week’s highs. Last week, gold and silver established inverse correlation with the US dollar again with the dollar at times the all-encompassing influence on gold and silver prices. While gold should draft some support from news that Indian gold imports in March jumped to near a two-year high, with an import of 98.6 tonnes, sustained recovery in Indian gold demand could be derailed by surging infections. In fact, one out of every 6 new global Covid-19 cases are occurring inside India and mass gatherings off a religious event could add to the Indian infection rate in the weeks ahead.
In retrospect, the palladium market failed to sustain gains in the face of new all-time highs in US equities last week, and that suggests the market is not tightly tethered to the ebb and flow of the outlook for the global economy. While the net spec and fund long in palladium remains mere fractions of its all-time high spec long and remains near the lowest levels of the past year, trading volume last week picked up on the high to low liquidation of $115.00 and that should discourage some buyers early this week. Palladium positioning in the Commitments of Traders for the week ending April 6th showed Managed Money traders are net long 3,420 contracts after net buying 173 contracts. Non-Commercial & Non-Reportable traders were net long 3,374 contracts after increasing their already long position by 266 contracts.
While the copper market started last week with a significant rally in the wake of positive Chinese data and strength in equities, the market finished last week back on its heels and has opened poorly in the new trading week. In fact, given the fresh lower low for the move, risk-off from equities, more inflows to copper exchange warehouses and emerging market infection concerns, we think copper will see a lot of trade below $4.00 this week. Certainly, news of a 5% decline in February copper production from Chilean company Cochilco, is supportive, but the market has already embraced and factored in very tight supply.
In the wake of the current US infection jump, it is likely that portions of the US will see lockdown rules extended into the future again and that should delay or slow the recovery of US energy demand. While Indian fuel demand posted the highest consumption since December 2019 last month, Indian demand is also called into question following a massive jump in infections over the last week. On the other hand, the June crude oil contract early this week has forged a 4-day upside breakout and the market is partially supported as-a-result of news that global crude oil floating storage posted a decline of 1% in the last 7 days. Two other issues that are probably contributing to the initial strength this week are fresh reports of attacks on Saudi facilities from inside Yemen and news of an attack on Iranian nuclear facility which the Iranians have blamed on Israel.
The soybean market experienced a long liquidation selloff late Friday as the USDA report carried a bearish tilt for the old crop supply situation. The sharp drop in palm oil helped to pressure the market. Malaysian crude palm oil stocks continued to increase in March growing 12.37% to 742,742 tonnes from 660,987 tonnes the month before. Processed palm oil stocks also improved 9.02 per cent month-on-month to 703,228 tonnes from 645,035 tonnes. Overall, total palm oil stocks rose 10.72 per cent 1.45 million tonnes from 1.31 million tonnes previously. However, as the focus shifts to the new crop ending stocks outlook, the market looks set for a continued uptrend.
The corn market now has a better understanding of where beginning stocks will be for the new crop season. If we plug in the previous record high yield for corn, and assume the USDA Outlook Forum demand numbers are correct, ending stocks for the 2021/22 season come in at just 935 million bushels with a stocks to usage ratio of 6.2%. In other words, the market will need to see a significant new record high yield in order to avoid extreme tightness. At 6.2%, this would be the second tightest year on record, and our records go back to 1960.
A combination of some rain/snow early this week in the Dakotas and negative news from China and the Black Sea region are factors which sparked the selling overnight. China’s State wheat sales hit a 2021 low and China sold only about 500,000 tonnes of wheat from state stockpiles on April 7, or a mere 13% of the amount offered. The rain in the 5-day forecast for the Dakotas (1/4 inch to 1 inch) plus weak prices in the Black Sea region might be enough to spark a corrective break which might be considered a buying opportunity. Wheat production in Morocco may rise to 6.3 million tonnes in the 2021-22 season, more than doubling from the 2.56 million from the 2020 harvest, USDA’s Foreign Agricultural Service reported.
June hogs closed slightly higher Friday and the buying pushed the market up to a new contract high for the third session in a row. This leaves the market in an overbought condition. Traders believe that demand will stay strong and that China will remain an active buyer of US pork. Slaughter and production have come in below expectations recently, but the premium of futures to the cash may be discouraging producers from moving hogs on time. The USDA pork cutout, released after the close Friday, came in at $111.74, up $2.58 from $109.16 on Thursday and $108.44 the previous week. This is the highest the cutout had been since May 14, 2020. The CME Lean Hog Index as of April 7 was 100.94 up from 100.47 the previous session and up from 98.97 the previous week.
June cattle closed sharply lower on the session Friday as technical sellers were active. The market experienced a key reversal on Thursday and long liquidation could be active as traders see the need for a technical correction. Cash markets traded moderately higher last week, and the strength in beef prices over the past week are likely to encourage higher trade again this week. The USDA boxed beef cutout was up $1.33 at mid-session Friday and closed $1.67 higher at $272.17. This was up from $252.85 the previous week and was the highest the cutout had been since June 4.
Cocoa prices continue to be pressured by near-term demand concerns and will start this week at the bottom end of its March/April downmove. With the market still relatively well-supplied at the early stages of the West African mid-crop harvest, cocoa may need to see clearer signs that demand will improve before it can sustain a recovery move. May cocoa could not hold onto early strength and dropped down to a new 5-month low, and despite a late rebound finished Friday’s trading session with a minimal loss. For the week, May cocoa finished with a loss of 38 points (down 1.6%) which was a fifth negative weekly result over the past 6 weeks.
Coffee prices continue to deal with near-term demand issues, particularly from Europe, but are looking at a 2021/22 season expected to have a sizable global production deficit. As the global demand outlook improves, coffee should be able to extend its recovery move. May coffee was able to build on early support and reach a new 2-week high, but fell sharply at midsession before finishing Friday’s trading session with a moderate loss. For the week, however, May coffee finished with a gain of 6.65 cents (up 5.5%) which broke a 3-week losing streak.
Friday’s USDA Supply/Demand report was viewed as bullish, as both US and world 2020/21 cotton ending stocks came in at or below the low end of expectations. US cotton production was left unchanged at 14.70 million bales versus an average trade estimate of 14.67 million and a range of 14.55-14.80 million, but exports were increased to 15.75 million bales from 15.50 million in March. This was above the average expectation of 15.58 million and towards the upper end of the range of 15.50-15.80 million. Ending stocks were lowered to 3.90 million bales from 4.20 million in March versus an average guess of 4.11 million and a range of 3.90-4.30 million. This brings the stocks/use ratio down to 21.6%, the lowest since 2017/18, when it fell to 21.5%. World ending stocks were lowered to 93.46 million bales from 94.59 million in March versus an average expectation of 94.43 million and a range of 93.70-95.23 million.
After reaching a multi-year high in late February, sugar prices dropped 16% over the following five weeks due in large part to heavy pressure from outside markets. However, the prospect that Brazil’s 2021/22 Center-South sugar production will have a sizable decline from this season continues to fuel sugar’s recovery move. May sugar built on early support and reached a new 2 1/2 week high, and despite a late pullback finished Friday’s trading session with a sizable gain. A more than 1.5% pullback in the Brazilian currency led to profit-taking and additional long liquidation. For the week, May sugar finished with a gain of 75 ticks (up 5.1%) which broke a 3-week losing streak.
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