Not surprisingly, the treasury bond market showed a muted reaction to the US Federal Reserve dialogue late last week as some participants saw Fed commentary as dovish and others saw it as a Fed that would like to remove asset purchases. Today’s US scheduled data typified the reason why the Fed remains noncommittal toward the beginning of tapering as some reports were positive and others were disappointing. In the end, the Fed chairman walked a tight rope between dovish and hawkish commentary and some bond traders saw that as a reason to buy given the market’s proximity to 3-week lows. With treasury prices near 3-day highs in the early going this week, the tailwinds from the Jackson Hole symposium last week remain in place. While it is possible that fear of slowing from the aftermath of hurricane Ida is contributing to buying interest, the tone from international equity markets was generally positive and therefore limiting of bond and note prices early on this week.
Clearly, the dovish stance by the US Federal Reserve chairman in the Jackson Hole Symposium extracted uncertainty from the marketplace and in turn prompted long liquidation in the dollar. Not surprisingly, the Fed dialogue also sparked bargain-hunting buying of recovery currencies like the Swiss franc and the euro. With a fresh downside failure on the charts early this week and residual bearishness flowing from last week’s Federal Reserve news, the bear camp maintains an edge in the dollar. The reaction in the dollar index to the Dallas Fed manufacturing reading is a potential sign of the currency markets focus for the week. In other words, will the dollar rally off flight to quality from soft data, or will the dollar falter because of macro-economic disappointment following soft data? The Commitments of Traders report for the week ending August 24th showed Dollar Non-Commercial & Non-Reportable traders were net long 25,759 contracts after increasing their already long position by 1,671 contracts.
While we give the edge to the bull camp in the Euro at the start of this week, we are suspicious of the bull’s case in the current environment. In our opinion, “recovery currencies” like the euro are facing serious threats against global recovery in the form of surging Delta variant infections and from struggling scheduled data. Overall Euro zone sentiment indicators were disappointing with consumer confidence contracting and the business climate deteriorating from the prior month. In conclusion, the bias is up but the risk to fresh longs is unappealing. The August 24th Commitments of Traders report showed Euro Non-Commercial & Non-Reportable traders reduced their net long position by 13,738 contracts to a net long 58,130 contracts.
Despite Johnson & Johnson, Walmart and UnitedHealth showing weakness, the broad market managed a very significant rally at the end of last week. In fact, the S&P and NASDAQ forged new all-time highs with the bullish focus centered on the potential for an extension of very low rates. However, the equity markets could experience significant volatility early this week if US daily infections climb over 150,000 or above. Global equity markets at the start of this week were mostly higher with the exceptions the Chinese CSI 300 and the Spanish Ibex 35. While the general tone from global equity market action was positive, we are growing concerned about the unrelenting rise in US daily infection counts, as that in turn could return serious economic headwinds and injure economic psychology. However, strength in global equities suggests the trade is not concerned with the surge of US infections yet, but that could change if more restrictions like the European ban of US travelers to certain countries surface in the headlines. On the other hand, with the markets generally thinking the Fed has yet to determine its tapering timing, we suspect the bull camp needs to see “Goldilocks” type results from the jobs front.
GOLD, SILVER & PLATINUM:
While the December gold contract forged a higher high early this week, it relinquished those gains and was chopping in negative territory very early in the US Monday trade. The initial strength was likely the result of a fresh lower low for the move in the dollar index and perhaps because of initial explosive strength in US gasoline prices from Hurricane Ida. Last week, gold ETF holdings were reduced by 323,151 ounces reducing the year-to-date change to a loss of 6.8%. In retrospect, the net takeaway from the Jackson Hole Fed Symposium sparked buying of gold and silver late last week, as the timing for tapering once again drifted into the future. Seeing the timing for tapering drift into the future is thought to increase the potential for inflation to become entrenched.
A soft payroll reading would likely undermine the dollar, pushback tapering and in turn lift gold and silver prices further. From a technical perspective, the definitive upside breakout in December gold at the end of last week projects the top of the new trading range at $1,835.90 with the bottom of the trading range possibly seen at $1,793.10. Fortunately for the bull camp, the latest COT positioning report in gold showed a relatively low spec and fund long reading versus the last 2 years range even if adjusted into the high on Friday. Gold positioning in the Commitments of Traders for the week ending August 24th showed Managed Money traders are net long 94,592 contracts after net buying 16,943 contracts. Non-Commercial & Non-Reportable traders were net long 245,168 contracts after increasing their already long position by 21,868 contracts.
While the copper market forged a 7-day rally and a 10-day upside breakout at the start of this week, overall fundamentals remain benign in the US and limiting from China. On the other hand, copper prices have merely returned to a 2 1/2-month-old sideways consolidation range and the $4.25 level appears to have become a noted value zone. However, the net spec and fund long in copper has come down considerably since the recent peak in December 2020 and is now nearing the lowest level since June 2020.
While damage estimates were not available as of this writing, daylight on Monday morning should bring significant information on the disruptions to US energy infrastructure. However, reports from the CEO of the Port of New Orleans and from reporters on the ground in New Orleans it appears as if the damage was significantly less than the damage seen from Katrina. However, Katrina was a very strong and very damaging storm and hurricane Ida at times exceeded wind speeds posted by Katrina, but the size of Ida was not as expansive as Katrina. On the other hand, with the storm approaching late last week oil firms moved to reduce US Gulf of Mexico output by 96% and that should have an impact on crude oil supply in the coming 2 weeks. As of Sunday, more than 90% of total Gulf production was still idled!
Countervailing the potential reduction in crude supply flow is temporary outages of US refiners which would lower demand for prompt crude oil. However, from a global standpoint, supply side influences from the news are positive with crude oil and floating storage reportedly 48% lower than year ago levels. The largest contraction in supply of floating crude oil storage over the last week was in Asia with a week to week decline of 1.4% In addition to the volatility from assessing the storm damage, the markets will also be facing the threat of energy demand destruction from the economic front and a meeting of Middle Eastern oil producers.
Like the gasoline market, the diesel market has also stalled and lagged the crude oil market over the prior 3 trading sessions. Unfortunately for the bull camp, US TSA airport checkpoint numbers have remained below 2 million per day over the past two weeks, some airlines are reportedly cutting flights for fall travel and the summer travel season is ending. With Delta variant infections continuing to “grow” it is likely that air travel will see both seasonal and medical related contractions. Unfortunately for the bull camp, the latest COT positioning report in ULSD was near the highest level since October 2018 suggesting the market lacks as much speculative buying fuel as crude or gasoline. The Commitments of Traders report for the week ending August 24th showed Heating Oil Managed Money traders net sold 3,342 contracts and are now net long 37,939 contracts. Non-Commercial & Non-Reportable traders added 1,724 contracts to their already long position and are now net long 52,835.
The soybean market managed to close higher on the week last week in spite of what appears to be better weather in the US for late developing crops. There is some concern for too much rain if tropical storm activity intensifies, but for now it appears hurricane rains will stay south of the Ohio River Valley. Vegetable oil markets are growing concerned with very short oilseed crops from Kazakhstan and from concerns over drought conditions ahead of planting in Argentina and Brazil. It may be too early to get too concerned with South America plantings. However, the market is also concerned with drier than normal conditions for some of the key growing areas in India. It will take a pickup in monsoon activity or yield expectations for oilseed crops in India could begin to decline.
December corn closed 3 cents higher on the session Friday and well up from the early steep losses. As a result, December corn closed 16 3/4 cents higher on the week. A lower close early this week after another move above resistance at 554 1/4 could be seen as a bearish technical development. The early weakness Friday stemmed from talk that Midwest rains would help fill the crop out. However, crops are maturing and the rain may have little impact on some fields. As of August 22nd, 41% of the crop had dented from 22% the previous week. The strong rally on the week after reaching the lowest level since July 13th is somewhat impressive.
December wheat closed lower on the session Friday as the early rally to match the high for the week failed to attract new buying interest and sellers turned active. The jump in European wheat futures and news that Russia wheat prices are up for a 7th week in a row are seen as positive forces. Russian consultancy SovEcon cut its wheat export forecast by 3.2 million tonnes to 33.9 million tonnes due to lower production. This would be the lowest wheat exports since the 2016/17 marketing season. August wheat exports were estimated at 4.3 million tonnes, down 9% from last year.
While the lean hog market has seen an impressive rally this past week, the upside seems limited unless there is a sudden revival in China’s import demand and/or slaughter continues to come in below expectations. Pork production has a seasonal tendency to increase rapidly over the next three months. China is buying pork locally and restocking their strategic reserves. Part of the support for the recent rally has come from the extremely wide basis for October Hogs. The USDA pork cutout released after the close Friday came in at $115.45, up 12 cents from Thursday but down from $117.96 the previous week.
The cattle market seems to be in search of a near-term low as a shift to a slower production pace into September should help keep the cash market in an uptrend. October cattle closed lower on the session Friday and well up from the lows. The market is now down for the fourth session in a row off of a contract high while open interest has turned higher. The premium of futures to the cash market has been a limiting factor, but the cash trend remains up and if the slaughter pace continues to taper into September, cash markets could continue to trend higher. The USDA estimated cattle slaughter came in at 116,000 head Friday and 72,000 head for Saturday. This brought the total for last week to 651,000 head, down from 665,000 the previous week and 654,000 a year ago.
While cocoa prices remain on-track for a sizable monthly gain, they have been unable to hold their ground close to multi-year highs. With the market likely to remain well supplied through the end of the 2020/21 season and with ongoing concern with near-term demand, cocoa is likely to see downside price action to finish out the month of August. December cocoa shook off early pressure and climbed to a 1-week high, but then turned sharply to the downside and finished Friday’s outside-day trading session with a sizable loss. For the week, December cocoa finished with a gain of 15 points (up 0.6%) which was a fourth positive weekly result over the past 5 weeks.
Coffee had a volatile start to the third quarter as it rallied 67 cents (up 44%) from an 8-week low to a new 6 ½-year high before giving back half those gains by the end of July. The market been much calmer in August as it has held within an 18-cent range, but continued to find support from a bullish supply outlook. December coffee continued to build on early support as it reached a new 4-week high before finishing Friday’s trading session with a sizable gain and a sixth positive daily result in a row. For the week, December coffee finished with a gain of 10.70 cents (up 5.9%) which was a second positive weekly result over the past 3 weeks. A COVID lockdown in Vietnam’s major port of Ho Chi Minh City that will restrict that nation’s coffee exports gave a boost to coffee prices going into the weekend.
The highest close since August 17 on Friday, also the day of contract highs, keeps the market in a solid uptrend with December cotton closing 1.9% higher for the week. Demand remains on a very impressive track and there is talk that once Vietnam opens back up from Covid issues, there could be pent-up demand from their clothing industry. Southeastern Louisiana and all of Alabama look to take the brunt of the rainfall from the hurricane. 7-15 inches of rain are expected in coastal regions with 5 inch plus rainfall totals expected for much of Alabama. This could cause damage, especially to crops with bolls open. There is some concern with not enough sunshine and cool weather for West Texas, but the 6-10 day forecast calls for above normal temperatures and below normal precipitation.
After seeing coiling price action for the first four sessions of the week, sugar prices regained upside momentum and went into the weekend on an upbeat note. October sugar built on early support and shook off a midsession pullback as it reached a 1 1/2 week high before finishing Friday’s trading session with a sizable gain. For the week, October sugar finished with a gain of 46 ticks (up 2.3%) and a third positive weekly result over the past 4 weeks. The Brazilian currency regained nearly 1% in value and reached a 2-week high, and that benefited the sugar market as that eases pressure on Brazil’s Center-South mills to produce sugar for the global export marketplace.
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