Last Friday’s European data included an uptick in French unemployment and a larger than expected Euro zone trade surplus. However, the turning point for global risk sentiment came with the release of a private monthly survey on US consumer sentiment which was much lower than trade forecasts and reached an 11-year low, which deflated the prospects for Fed tapering by the end of this year. Treasuries were able to break a 6-session losing streak by finishing last Friday with sizable gains.
The Dollar turned sharply to the downside late last week following US data and reached a 1-week low during last Friday’s trading session. A sharp drop in US consumer sentiment weakened the prospects for Fed tapering and was a major source of pressure the Dollar. A return to a “risk on” mood across many market sectors had the Eurocurrency and Swiss Franc as major beneficiaries. The dollar has not benefited from increased political and economic uncertainty at the start of this week, and has also failed to benefit off what is likely a pulling forward of US Fed tapering timing.
We are surprised that the euro has avoided pressure early this week given several negative global macroeconomic developments. However, the bear camp retains control with the prospects for renewed global economic headwinds increasing and that times pressuring recovery currencies. Euro positioning in the Commitments of Traders for the week ending August 10th showed Non-Commercial & Non-Reportable traders net sold 13,441 contracts and are now net long 66,524 contracts. While the amount of market anxiety to start this week was relatively low, the Yen appears to have regained its flight to quality status again.
The global markets have seen volatile action but were able to regain a positive tone by the close of Friday’s trading session. Rising new COVID case count in Japan cast a shadow over global risk sentiment early in the day, but the sharp drop to a multi-year low in a major consumer sentiment reading diminish chances that the Fed would taper this year. US equity market bounced back from early pressure and finished last Friday with mixed results. Global equity markets at the start of this week were mostly lower with the exceptions the Shanghai composite and Hong Kong Hang Seng, as the markets were disappointed by the amount of growth in China and the takeover of Afghanistan by the Taliban. Equity markets are also unnerved because of reports that Fed opinion has shifted toward the potential for tapering to start “next month”!
While the S&P clearly started off on a back foot this week, We also suspect that the markets are undermined because of what will likely be a protracted delay in passage of a US infrastructure bill. Our reasoning behind a significant delay in passage of an infrastructure bill is the speaker of the house announcement that she wants the two bills “combined” to coerce house members to agree to sweeping changes in the social fabric of America. Fortunately for the bull camp, the net spec and fund long positioning in the E-mini-S&P remains very modest below 90,000 contracts and that should indicate significant buying fuel remains in place on the sidelines. E-Mini S&P positioning in the Commitments of Traders for the week ending August 10th showed Non-Commercial & Non-Reportable traders were net long 89,998 contracts after decreasing their long position by 25,959 contracts.
GOLD, SILVER & PLATINUM:
In addition to last week’s short covering spillover, the gold market is drafting support from increased political uncertainty in Afghanistan and economic uncertainty from disappointing Chinese economic information. Apparently last week’s washout debacle has been largely forgotten by the trade as gold prices into the close on Friday had regained more than $100. With a significant downside reversal in the dollar at the end of last week, the bull camp should have further hope of gains, but the dramatic washout last week has probably left a lasting impact on weak-handed players. On the other hand, seeing US interest rates fall should add to the bull’s case.
The charts in the palladium market to start the week are negative with the market seemingly poised to forge a 4-day low. Strength in equity prices last week and ongoing recovery action in gold combined with a very poor finish last week in the dollar failed to result in gains in palladium. However, the net spec and fund long in palladium remains very small indicating a moderate amount of buying fuel sits on the sidelines. Palladium positioning in the Commitments of Traders for the week ending August 10th showed Managed Money traders were net long 2,944 contracts after increasing their already long position by 439 contracts. Non-Commercial & Non-Reportable traders net bought 410 contracts and are now net long 1,924 contracts. However, fears of slowing in China have certainly dampened demand prospects for palladium and until the global chip shortage is remedied, palladium could remain mired within a range defined as $2,590 and $2,676.
While the copper market appeared to be in an upward track following the early August washout, disappointing economic news from China has deflated optimism and emboldened the bear camp early this week. However, it should be noted that Chinese economic data did show forward motion in the economy with the trade centered on the rate of growth in that economy as a yardstick. On the other hand, copper prices should be supported because of a Russian export tax increase on copper and other metals but also because of a strike at a Codelco mine in Chile. On the other hand, with the world’s largest copper mine labor disputes were settled and demand is suspect due to poor US consumer sentiment and the Delta variant, and therefore it could be difficult to extend last week’s rally straightaway.
In retrospect, the $65.00 level appears to have become a key value zone in the September crude oil contract. However, determining the upside value zone is more difficult with our suspicions pointing to prices just above $70.00 at $70.81. While some in the marketplace feel OPEC+ will release more oil on the world market consistently over the coming months, OPEC sources indicate that they fear more shale oil supply hitting the market and there is concern within the cartel that the latest infection wave from the Delta variant will undermine demand and therefore they intend to be very cautious. Last week, US oil drilling activity jumped to the highest level in 5 months and has now doubled from the record low.
Like the crude oil market, the natural gas market has seen the first of 3 tropical storms fail to transition into hurricanes and so far, shipping has only seen modest disruptions. The August 10th Commitments of Traders report showed Natural Gas Managed Money traders are net long 87,869 contracts after net buying 9,455 contracts. Non-Commercial & Non-Reportable traders are net short 104,422 contracts after net selling 6,403 contracts. In the end the 8-to-14-day temperature forecast for the US is bearish with a single pocket of much above normal temperatures seen in a portion of the US desert area.
Trade focus this week will shift to the Pro Farmer crop tour as traders expect to hear of record yield in the East, and below average yields for the West. The 5-day forecast shows only scattered rains of 1/2 inch or less for much of Iowa, southern Minnesota, and very little rain for Illinois. The Dakotas and Nebraska look to receive mostly 1 inch of rain or more. The 6-10 day models show above normal precipitation for the Midwest. For the NOPA July crush report, traders see crush near 159.1 million bushels, with a range of 156.2-164, up from 152.4 million bushels in June, but down 7.9% from a year ago.
Traders will monitor the Pro Farmer crop tour this week to get a better feel for yield. Last week’s USDA monthly supply/demand report, US corn yield and world ending stocks for 2021/22 both came in below the low end of trade expectations, which was a bullish development. World ending stocks for 2021/22 came in at 284.6 million tonnes, below the 288.2 million average forecast and below the low end of the range from 286-292 million. This was down from 291.18 million in the July update. The world corn stocks/usage ratio is now at an eight-year low. If August weather is poor and the average corn yield dips 2% to 171.1 bushels per acre, ending stocks would project to 950 million bushels with a 6.5% stocks/usage. This would be the lowest ending stocks figure since the 2012/13 season and the lowest stocks/usage since the 1995/96 season.
A bullish USDA report last week, expectations for further reductions in production estimates in the September report, and an inflationary tilt to commodity markets overall help bring the wheat market to new contract highs. Russian wheat exports are down 20% so far this season. Wheat shipments for the 2021-22 season totaled 3.8 million tonnes as of August 12th. In the monthly supply/demand report on Thursday, the USDA lowered its US all wheat production forecast for 2021/22 to 1.697 billion bushels (46.18 million tonnes), down from 47.52 million tonnes in the July report and a 19-year low. Russia’s production estimate was lowered to 72.5 million tonnes from 85 million in July report.
The surge higher in pork product prices late last week comes at a time when October futures were pricing in a massive break, supply is on the rise and export demand is weaker. The CME lean index closed at 110.19 and this leaves October hogs trading at a $23.79 discount to the cash market as compared with a normal discount at this time of the year of $7.03. February hogs closed at a $27.37 discount to the cash market as compared with the five-year average of $4.02. Weekly slaughter levels have been following the five-year average recently, and the trend is up for the next 2 1/2 months. With export demand tapering off, it is surprising that pork values are able to hold at historically high levels.
The cattle market continues to trade in a choppy consolidation pattern as traders wait for a rally in the cash market which comes anywhere close to the surge higher we have seen in beef prices. Beef prices jumped 9.6% last week as the cash market drifted slightly lower. With the premium of October cattle to the cash market, the market is not finding support for new buying during a period of sluggish cash market activity. The USDA boxed beef cutout closed $6.90 higher at $324.83. This was up from $296.26 the previous week and was the highest the cutout had been since June 17. Cash live cattle trade was softer last week. As of Friday afternoon, the 5-day, 5-area weighted average prices was 122.78, down from 124.13 the previous week. Early reported volume was light in the principle areas on Friday.
Over the space of 3 1/2 weeks, cocoa prices have gone from a 9-month low to a 5-month high as bullish supply-side developments have added to a positive longer-term demand outlook. The market may have gotten ahead of itself during the more than 330 point recovery move, however, and may be vulnerable to a near-term pullback. The foundation of the recent strength seems to be coming from short-covering as the open interest fell sharply on the rally. This is not a good foundation to expect minor support levels to hold, or for expecting a series of new highs. For the week, December cocoa finished with a gain of 146 points (up 5.9%) which was a third positive weekly result in a row.
While coffee prices have lost upside momentum, they will start this week’s trading above their early August consolidation zone. With clear signs that Brazil’s upcoming production has been impacted by frost damage, coffee should be able to extend this current recovery move. For the week, December coffee finished with a gain of 6.70 cents (up 3.7%) which broke a 2-week losing streak. There has been increasing concern that the spread of the Delta COVID variant could lead to increased restrictions on restaurant and retail shop operations. While the pandemic resulted in a notable uptick in home consumption, fresh COVID restriction would negatively impact overall coffee demand.
December cotton has posted new contract highs for the fourth session in a row. The dollar sold of sharply on Friday, and that added support to US export commodities like cotton. A key factor in the rally late last week was Thursday’s USDA supply/demand update, which lowered US harvested acreage for 2021/22 to 10.36 million acres from 10.50 million in the July report and average yield to 800 pounds/acre from 814. This took production down to 17.26 million bales from 17.80 estimated in July. This is still considerably higher than the 14.61 million in 2020/21, but overall situation is tighter due this year due to increased usage.
Sugar’s August updraft has taken prices above the 20.00 cent level for the first time in 4 1/2 years. While Brazil’s Center-South cane crop has been impacted by last month’s frost, the market has risen into near-term overbought levels and may be vulnerable to a near-term setback. For the week, October sugar finished with a gain of 1.27 cents (up 6.8%) which was a fourth positive weekly result over the past 5 weeks. Following the latest Unica supply report released last week, many analysts continue to dial back prospects for Brazil’s sugar output.
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