Without scheduled economic data from the US late last week, the treasury market had little in the way of forces to drive prices. However, the markets held up impressively in the face of a sharp recovery in equity prices and in the face of extremely hot German producer price index readings for July. Even more impressively is the fact that treasury prices held up in the face of another wave of dialogue discussing tapering. With a risk-on environment thrown off by positive global equity market action, it is not surprising to see treasury prices start out this week in a weaker track. In fact, the risk on environment has discounted a wave of disappointing services, manufacturing, and composite PMI readings from Australia, France, and the overall Euro zone.
The Dollar was able to reach up to a new high for the move late last week, but lost upside momentum as it dropped into negative territory late in last Friday’s trading session. Comments from the Fed’s Kaplan hinting that the spreading Delta COVID variant could lead to the Fed pulling back on their tapering trajectory may have triggered end-of-week profit-taking in the Dollar. A stronger than expected German PPI result helped the Eurocurrency rebound from a new 13-month low. Obviously, a reversal of risk on slowing sentiment from last week into a risk on environment has caught the dollar index overbought technically and overbought fundamentally.
With the euro significantly oversold into last Friday’s low and a risk on environment presenting to the markets early this week, we see a technical short covering rally accentuated by a small measure of fundamental buying. On the other hand, the euro should be held back as result of the generally bearish euro zone PMI readings. The Commitments of Traders report for the week ending August 17th showed Euro Non-Commercial & Non-Reportable traders added 5,344 contracts to their already long position and are now net long 71,868.
With the initial weakness in the Yen early this week, the recent flight to quality status of the currency is partially confirmed. In other words, risk on has prompted long liquidation from the mid-August bounce in the Yen and given soft Japanese bank manufacturing PMI readings for August, we see a likely downside targeting of 90.73. We see the action in the Swiss early this week as extremely disheartening to the bull camp, as initial gains were almost entirely extracted in the wake of noted dollar weakness. Apparently, the Swiss is not easily pulled into the risk on environment fostered by equities, but we would strongly advise against pressing the short side of the Swiss!
The Pound rejected the 1.36 level and is likely to benefit from risk on sentiment early this week. Unfortunately for the bull camp UK services PMI readings came in precipitously weak, but that reading was offset by a better-than-expected UK manufacturing PMI result for early August. While we are underwhelmed by the rally in the Pound (given the gains in equities), the path of least resistance is pointing up. With the Canadian dollar significantly oversold from the massive declines at the end of last week, a risk on environment lifting commodities and flight to quality interest in the dollar exiting, the Canadian could be poised to regain the 79.00 level.
Following a 4-day high to low slide of 136 S&P index points, last Friday’s a recovery bounce could be significant. Without US scheduled data released in the trade, the markets likely took significant direction from Deere & Company earnings especially since the company raised full year forecasts. It is also likely that a portion of the buying at the end of last week was profit-taking/end of week position squaring. Global equity markets at the start of this week were all higher with the gains ranging from mere fractions of a percent to as high as 1.83% in the TOPIX Index. Despite the ongoing surge of Delta variant infections, recent disappointment with US scheduled data and persistent talk of tapering by the US Fed, the equity markets extended last week’s late recovery bounce and might be capable of regaining “all-time highs”.
Like the S&P, the Dow futures showed initial strength with a 3-day high and a general risk on environment providing confidence to the bull camp. Favorable buzz toward Boeing and a temporary capacity to put tapering talk on a backburner gave the bull camp control. With the COT report for the Dow posting a very minimal net long early last week, and the Dow from that report mark off into the low falling 700 points, the net spec and fund long could have been net spec and fund short last Thursday. The Commitments of Traders report for the week ending August 17th showed Dow Jones $5 Non-Commercial & Non-Reportable traders net sold 6,228 contracts and are now net long 1,058 contracts.
GOLD, SILVER & PLATINUM:
While the gold market held up impressively last week, the charts currently sits in a lower high and lower low pattern from the last 5 days of trade, and therefore the bull camp is fighting the technical condition. However, a significant reversal in the dollar and broad-based risk on psychology has lifted gold and the rest of the metals complex off fundamental reasons to start the new trading week. Others are suggesting that the ongoing surge in Delta variant infections is still threatening the global economy and that in turn is providing flight to quality buying interest in gold. However, with global equities higher, treasuries and the dollar lower, we do not see the safe-haven force operating in gold to start out this week.
Going forward, we see the silver market to be “more vulnerable” than gold and expect silver to lag gold on upside moves. In fact, despite strength in equities, the potential for classic physical commodity selling of silver should not be discounted late this week. The most recent spec and fund positioning report for silver posted one of the lowest net spec and fund long position readings since June 2019, and therefore the market might avoid aggressive stop loss selling in the event prices dive into month-end. The August 17th Commitments of Traders report showed Silver Managed Money traders are net long 9,758 contracts after net selling 2,146 contracts. Non-Commercial & Non-Reportable traders are net long 33,838 contracts after net selling 4,564 contracts.
Like many other physical commodity markets, the palladium market is bailed out of a big picture macroeconomic washout wave from last week because of the shift to risk-on this morning. Certainly, seeing US equities extend their recovery from last week will likely dampen recent selling interest. However, the markets are anticipating disappointing Chinese economic data due to the ongoing Delta variant infection rise, and the bear camp will be difficult to fully unseat unless the equity markets continue to rally. In a fresh positive development, Commerzbank has projected 2021 average palladium prices at $2,575 which compares to current prices at $2,329.50.
Despite ongoing fears of Chinese strategic stockpile sales, the copper market has sharply extended last week’s late recovery rally and that sets the stage for a return to a trading range defined as $4.25 and $4.50. However, the flow of dialogue from the Chinese copper market is that prices continue to be an impediment to Chinese manufacturing exports and that the government should be expected to continue periodic Chinese strategic copper sales. Obviously, the copper market could face opposition from the Jackson Hole Fed Symposium late in the week but in the near term a combination of technical and fundamental buying should control price action.
Clearly, the crude oil market has been “saved” by a shift back into a global risk on environment. Adding into the positive track early this week is the extreme short-term oversold status of the energy complex from last week. On the other hand, the sudden shift to risk on is called into question by a likely extension of a pattern of weak US scheduled data and to a lesser degree by looming fears of US Fed tapering. Certainly, the strong recovery rally in equities is providing the bull camp in crude oil with fresh demand “hope”. Apparently, the Saudis are concerned about demand as they are suggesting they will consider pressing for a postponement of the next monthly supply increase.
In the most recent positioning report, natural gas showed the largest net spec and fund short since April 2020 and adjusted for the slide since the last report was measured, that short positioning is probably understated. The Commitments of Traders report for the week ending August 17th showed Natural Gas Managed Money traders are net long 46,519 contracts after net selling 41,350 contracts. Non-Commercial & Non-Reportable traders added 14,778 contracts to their already short position and are now net short 119,200. In a longer-term supportive development coal prices in China returning to record high levels, it is possible that China might come back into the market for US natural gas supply.
Ideas that timely rains have helped ease crop stress and talk that crop tour results would be a bit better than expected help to pressure the soybean market last Friday. For the next seven days, much of Iowa, Minnesota and Wisconsin will receive 1 1/2 to 5 inches of rain. The Dakotas look to receive near 1 inch of rain while Illinois, Indiana and Ohio stay relatively dry. The Pro Farmer crop tour pegged the soybean crop at 4.436 billion bushels based on an average yield of 51.2 bushels per acre. This is well up from the current USDA estimate of 50 bushels per acre with production at 4.339 billion bushels. If so, and we leave demand numbers unchanged, ending stocks would come in close to 250 million bushels as compared with 155 million as the current USDA estimate and 160 million for the old crop season. November soybeans closed sharply lower on the session Friday, and down for the fourth session in a row. The selling pushed the market down to the lowest level since June 28.
Outside market forces are supportive for the corn market early this week. The market closed lower for the fifth time in the last six trading sessions on Friday as the selling push the market down to the lowest level since July 26 and the lowest close since July 13th. The market was down 6.3% for the week. The EPA is expected to recommend to the White House lowering the nation’s biofuel blending mandates below 2020 levels and that would be a blow to the biofuels industry. This may have added to the bearish tone for corn and for soybean oil. For the next seven days, much of Iowa, Minnesota and Wisconsin will receive 1 1/2 to 5 inches of rain. The Dakotas look to receive near 1 inch of rain while Illinois, Indiana and Ohio stay relatively dry.
December wheat close moderately lower on the session Friday and the selling push the market down to the lowest price level since August 10. The market experience choppy and two-sided trade early but managed to take out Thursday’s lows. Weakness in the other grains added to the bearish tone as the market reacted to news of potential lower biofuel mandates which helped to pressure corn and soybean oil. Rains in the Dakotas could slow harvest activity. December Minneapolis wheat managed to close slightly lower on the session Friday and near 13 cents up from the lows. While the market has a different set of fundamentals on its own, it may be difficult for wheat to divorce itself from a potential long liquidation selloff for the other grains. The move to a new contract high for the US dollar index is also a bearish factor as it will make it more difficult for US exporters to move wheat onto the world market. Russia plans to send two vessels or 60,000 tonnes of wheat to Algeria in September. Algeria is usually dominated by French wheat.
The hog market bounced Friday led by the big discount to the cash market. Talk of very weak export sales data led by a drop-off in China purchases helped to pressure the market Thursday but this also drove the October discount to the cash market to near $22 as compared with a normal discount for this time of the year near $7. The CME Lean Hog Index as of August 18th was 108.18 down from 109.17 the previous session and down from 110.19 the previous week. However, October remains at a big discount to the cash.
The Cattle on Feed Report was considered slightly supportive with lower than expected placements for the month of July. July placements were down 8.1% from last year from trade expectations for down 7.1% from last year. The range of expectations was -9.3% to -4.5%. This suggests less market-ready cattle available to the market later this year. Marketing’s for the month of July were down 4.5% which is slightly bearish against trade expectations with a range of -4.8% to -2.5%. As a result, August 1st cattle on feed supply was down 1.9% from last year from expectations for down 1.8%. October cattle experienced choppy and two-sided trade early in the session Friday but closed moderately higher on the day. The market is trading at a premium to the cash market, but it looks like the cash trend can remain higher over the near term.
December Cocoa experienced a key weekly reversal this week after posting a contract high on Wednesday. With the possibility of a Covid-related setback in demand and continued strong production news, the market appears poised for a further decline. December cocoa maintained downside follow-through for a second day in a row as it finished Friday’s trading session with a heavy loss. For the week, December cocoa finished with a loss of 53 points (down 2.0%) which broke a 3-week winning streak. The current 2020/21 season is expected to result in record high from Ivory Coast and Ecuador, and a sharp increase in Ghana’s output back above the 1 million tonne level for the first time in 10 season. This continues to pressure cocoa prices as many expect the market to remain well supplied going into the start of the 2021/22 season in October.
Coffee’s 16.00 cent trading range during August so far is a fraction of its whipsaw action seen during the second half of July. Although it has had trouble sustaining upside momentum over the past few weeks, coffee continues to find decent support above its August lows as a bullish supply outlook continues to underpin the market. December coffee came under early pressure and sold off further at midsession to a new 1 1/2 week low, but then rallied late in the day to finish Friday’s trading session with a modest gain. For the week, however, December coffee finished with a loss of 4.25 cents (down 2.3%) and a third negative weekly result over the past 4 weeks.
December cotton fell to its lowest level since August 12 on Friday but recovered to closed higher on the day and the market bounced early this week. Still, it was the first weekly decline in a month. The dollar turned lower on the session Friday after trading to a new high for the move, and this lent support to cotton. The stock market ended the week on a strong note, and this also lent support. Concerns over Covid cases have raised concerns about demand, but export sales have come in strong the past couple of weeks with the beginning of the new marketing year. The weather forecast does not seem to offer much of a threat to the crop.
While the sugar market is extremely overbought technically, the supply fundamentals continue to show a bullish tilt. The worst drought in 50 years and recent frost damage in Brazil’s Central-South region could keep sugar’s supply outlook on a bullish track going forward. October sugar continued to drop further below their near-term consolidation zone as its finished Friday’s trading session with a moderate loss. For the week, October sugar finished with a loss of 37 ticks (down 1.9%) which broke a 2-week winning streak and was a negative weekly key reversal. Sluggish energy prices remained a major source of carryover pressure on the sugar market as that will ease pressure on Brazil’s Center-South mills to produce ethanol at the expense of sugar.
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