The setback in bond prices last Friday started well in advance of the release of US economic readings. However, US housing starts and permits data were strong enough to embolden the bear camp with selling likely to be “fresh sellers” instead of long liquidators. In retrospect, this week the markets were presented with presented the largest monthly foreign liquidation of US treasury holdings in 12 months with a net sale of 65 billion in February. The Treasury markets continue to ignore a growing list of inflation signals in action that seems suspicious. In fact, with reports that Asian life insurance companies are steering away from US treasuries (due to very low returns), some market participants are getting nervous of a sharp turn higher in interest rates.
While other financial markets showed reversal/corrective action to end last week, the dollar index extended its downward track with a new low while the euro and Swiss franc continued to outperform other currencies. While our logic might prove faulty, we think traders are liquidating dollar positions and moving to higher risk/higher return potential currencies in anticipation of a wave of US re-openings later this month. In short, China is growing and the US is growing and that should provide significant help for Europe when their infections come under control.
While various segments of the market Friday made all-time highs, the magnitude of the gains were unimpressive. Apparently, the markets were short-term technically overdone, and the markets were disappointed by a disappointing loss in Morgan Stanley earnings. On the other hand, the majority of bank/financial entity earnings were positive and the trade was also supported by solid US housing starts and permits. Global equity markets at the start of this week were mixed with Chinese and European stocks higher and slightly weaker starting action seen in Europe and the US. While it-would-appear sentiment in the marketplace remains conclusively bullish, the rate of daily gain in prices for the month of April has been narrow but the pattern has been very uniform.
GOLD, SILVER & PLATINUM:
With soaring lumber prices catching daily international attention, extreme volatility overnight in crypto currencies, grain hitting prices hitting 8-year highs and the Fed still promising to hold rates down in the face of inflation, we have a-very-unique historical situation. In fact, the upside breakout action in gold to start the new trading week maybe a sign the markets have thrown off what has been sloppy and anemic action. In our opinion, we have not seen so many signs of inflation in our 36 years of analysis. Standard inflation measures world-wide are flaring (PPI and CPI indices) and industrial material prices surging fundamentals and technical momentum should fuel prices sharply higher.
With both China and the US posting positive scheduled data last week, China confident enough on its control of the virus to hold the Shanghai auto show, it is not surprising to see copper demand hopes improve. As indicated already, surging lumber prices (for some unbelievable) and a given list of industrial material prices rising sharply in China, copper should also see physical hedge buying. Some traders suggest that copper has already priced in significant Chinese copper demand, but we now think the market is just starting to embrace prospects for improving non-Chinese demand.
The energy markets were the only major commodity group trading lower at the start of this week, and that is partially the result of a short-term overbought condition from last week, but also because of serious ongoing global infection rates. It is also likely that a 3.4% weekly rise in global floating storage has undermined prices. However, talk in the media has also pointed to a continued reduction of the pandemic supply glut! Another pressure on crude prices is news that the US Department of Energy has requested bids for up to 9 million barrels of sour crude from the US strategic reserve. While the energy markets have been able to “find” fresh bullish information regularly over the past 6 months, that information might be seen from Chinese March crude oil imports rising by 20.8% on a year-over-year basis.
November soybeans managed to close 10 3/4 cents higher on the week last week, finding most of their support recently from strength in vegetable oil prices. Meal continues to struggle as traders remain nervous that AFS is reducing the size of the Chinese hog herd. However, the China pork supply has not been hit as hard as feared and pig prices in China are under pressure. China’s national average spot pig price today was down 2.1%. For the month, prices are down 7.2% and down 34.2% year to date. Reports suggest that the China hog herd is 416 million head as of March 31st vs 406 million on Dec 31st. The sow herd grew 28% on the year to 43 million head. There have been reports of ASF outbreaks across some parts of western and northern China since January, but these were apparently only isolated incidents, unlike the 2018 and 2019 outbreaks. According to China’s Ministry of Agriculture and Rural Affairs, six ASF outbreaks were reported in China in 2020, with the last having occurred in October. All the six outbreaks were dealt with quick quarantine measures and stricter inter-provincial transportation policies.
Concern over tightening domestic supplies in China continue to support, and dry conditions over Brazilian growing areas and dryness for the northwest corn belt have been additional sources of strength. In Center West Brazil which accounts for about 70% of winter corn plantings, it is expected to dry up starting early next month, and this could be an issue for the crop. Brazil’s second corn crop represents 76% of the nation’s total supply, and buyers are counting on the harvest to ease corn prices which have more than doubled in the past 12 months. High prices are squeezing margins at meat producer and other purchasers, spurring imports into Brazil, one of the biggest growers and the No. 2 exporter.
Wheat prices rallied to a new 7-week high last Friday, but came under pressure late in the day to finish with a minimal loss. For the week, July wheat closed 14 1/2 cents higher. December Minneapolis wheat jumped 7 cents for the week as dry conditions in the northern and central Plains provided the wheat market with early support. The potential risk from frost over European growing areas should ease this week, however, and that may have fueled additional long liquidation heading into the weekend. The 5-day forecast shows very little rain in the central Plains and just trace amounts in the Dakotas. The 6-10 day outlook calls for below normal precipitation and cool temperatures and the 8-14 day models show above normal temperatures for the central and southern Plains and below normal precipitation.
A report that 1st quarter Chinese pork production was up 31.9% from year ago levels underscores the sharp recovery in their hog sector and the likelihood that their pork import needs will drop off. The selloff in June lean hogs accelerated with the expanded limits on Friday, with the market trading to its lowest level since March 23. The market is still operating under the negative technical influence of a sweeping key reversal from April 12. In addition, the market experienced a weekly key reversal from a contract high which suggests that a major top is in place. This came on top of a disappointing US export sales report on Thursday that showed weekly pork sales falling to their lowest level since December. China bought only 102 tonnes for the week. For the month of March, China imported 460,000 tonnes of pork, up 16.1% from last year. For the first quarter, China imported 1.16 million tonnes or up 22% from last year’s pace. The USDA pork cutout, released after the close Friday, came in at $110.80, down from $112.38 on Thursday and down $111.74 the previous week.
After a key reversal, June cattle has close lower for 7 sessions in a row as the market probes for a short-term low. Strength in the beef market and strong consumer demand signals would suggest that the market should find support soon. However, traders are nervous that surging feed grain prices could spark an increase in non-fed cattle slaughter. With the selloff last week, the market is trading at a slight discount to the cash market. This is despite continued gains in beef prices.
Cocoa prices were only able to increase by a total of 5 points during Thursday and Friday with both sessions having daily ranges of over 40 points each, which indicates that the market may continue to see volatile price action early this week. Although near-term demand concerns continue to shadow the market, cocoa now has more evidence that global demand has been improving since the middle of last year and should keep an upward trajectory over the second and third quarters. July cocoa saw choppy trading action early in the day, but maintained upside momentum as it went on to post a minimal gain for Friday’s trading session.
After a more than 2-week rally, coffee ran out of upside momentum going into the weekend. The market has a bullish supply outlook and improving demand prospects, so it should stay fairly well supported on near-term pullbacks. July coffee fell back from a 4-week high posted early in the day as it finished Friday’s outside-day trading session with a heavy loss. For the week, however, July coffee finished with a gain of 2.05 cents (up 1.6%) and a second positive weekly result in a row.
The cotton market remains in a steady uptrend channel as the surge in the stock market and the strong and very liquid economy help to support. December cotton closed lower Friday but closed higher for the second week in a row. The June Dollar Index was lower again on Friday, and it closed below the 50-day moving average for the first time since February 25, which is technically bearish for the dollar and supportive to cotton. Cotton is drawing considerable support from concerns the drought in Texas will pull production down again this summer. The most recent drought monitor, released on April 15 (and as of April 13) showed most of the state under some sort of drought condition, ranging from moderate to exceptional (the most extreme rating). The 6-10 and 8-14 day forecasts call for below normal precipitation across most of the state, leaving little opportunity for improvement. There was some talk last week that cotton plantings have been delayed, and there was also talk of the likelihood of a large abandonment rate this year. Monday afternoon’s weekly USDA Crop Progress report could offer clues to the extent that plantings have being delayed.
Sugar prices have only had one negative daily result over the past 10 sessions and are back within striking distance of a new multi-year high. While a negative shift in key outside markets could put some brakes on this current upmove, sugar has bullish supply factors that should keep the market well supported on near-term pullbacks. July sugar maintained upside momentum and reached a new 7-week high before finishing Friday’s trading session with a sizable gain. For the week, July sugar finished with a gain of 115 ticks (up 7.5%) which was a second positive weekly result in a row and the largest weekly gain since April 2020. A rebound into positive territory for the Brazilian currency provided sugar with carryover support going into the weekend.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.