Once again, treasury prices seem to defy fundamental logic as prices rallied in the face of another day of inflation headline mania. However, buyers should be aware as analysts are beginning to take note of the accelerating amount of US treasury supply and are also aware of the potential for Fed tapering and that could create a historical bearish condition! While the risk-on global vibe is not intense to start the holiday shortened US trading week, commodities are in vogue and inflationary dialogue is flowing freely. Therefore, treasury bond prices were justified in forging 5-day lows, especially in the wake of positive Chinese manufacturing PMI results and given a $2.00 rally in crude oil prices! In other words, inflationary psychology has surfaced in conjunction with positive global economic report news, but it should be noted that bond prices have not been overly sensitive to typically bearish developments/conditions.
We see the current action in currencies as a temporary corrective event. Rising inflation sentiment from surging commodities is thought to be increasing pressure On the Fed to begin tapering and money is seemingly moving toward the dollar to potentially. However, the euro and Swiss franc are positioning as recovery currencies as long as global infection counts are declining. The dollar appears to be vulnerable to start the new trading week with risk on sentiment throughout the markets resulting in rotation away from the safety of the dollar.
While global equity markets were higher at the start of this week, the gains were not overly impressive. However, a risk on mentality is in place following favorable Chinese PMI data and from signs of “reflation” in many commodity prices. In looking ahead to the nonfarm payroll report on Friday, the trade will be anxious as the next focus of equities is likely to settle on when US tapering will begin, and the payroll report is a major influence on that thinking and timing. As indicated already, the S&P has forged an upside breakout and has returned to the vicinity of all-time highs posted in early May.
GOLD, SILVER & PLATINUM:
While the August gold contract did not hold the upside breakout initially the market did forge the highest trade since January 7th and should be supported as a result of initial weakness in the dollar and surging crude oil prices. In fact, crude oil prices with the early-week rally reached up to the highest level since October of 2018, and that smacks-of-inflation especially when combined with surging grain prices. We suspect that gold and silver garnered some lift from favorable Chinese PMI readings which in turn prompted economists to suggest that exports from China will continue to propel their economy forward. Both gold and silver ETF holdings increased in the last trading session documented, but gold holdings on the year have declined 5.6%, while silver holdings on the year have gained 5.5%.
The palladium market forged a 6 day high in the early going this week and violated a downtrend channel resistance line which in turn could project a quick move back above $2,900. Once again, the platinum market diverged with the rest of the precious metal markets overnight with the market caught within an $1150 and $1250 trading range.
In general, news from China is positive with volatility seen again in base materials pricing and especially with expectations for accelerating growth in the Chinese economy seen from the Chinese manufacturing PMI reading for May overnight. However, Bloomberg carried a story indicating that China’s demand for metals may be at or near its peak, and that is important as Chinese copper demand is and will continue to be the dominating force in the copper market.
While there could be a-number-of reasons for the significant surge/upside breakout in crude oil prices early this week, we suspect the primary force lifting prices is favorable Chinese PMI readings. However, the market should be drafting support from news Monday that crude oil in floating storage declined by 17% last week, which in turn is the lowest tally since February. Adding into the bullish track is a supportive article from Bloomberg predicting a potential trade above $70.00 in WTI. In fact, Brent crude oil prices hit $71.00 in the highest trade since the first quarter and those gains reportedly took place because of signs of surging demand! It should also be noted that US daily infections on Saturday were the lowest since the initial virus lockdown in March of 2020. However, the gains in prices could be subjected to a large measure of volatility, with OPEC+ members scheduled to meet and the trade expecting the group to return additional production to the market.
The natural gas market has forged an upside breakout and the highest trade in 9 trading sessions and appears to be supported by ongoing solid demand in Europe and by a much above normal temp forecast for the Northeast and Plains states in the US. In fact, cooling degree days are expected to continue to be above normal with cooling demand last week 7 degree days above normal. Furthermore lower 48 natural gas production declined 1.7% and estimated gas flow to LNG export terminals yesterday was up 12% since the middle of last month. Natural Gas positioning in the Commitments of Traders for the week ending May 25th showed Managed Money traders reduced their net long position by 33,854 contracts to a net long 26,121 contracts. Non-Commercial & Non-Reportable traders are net short 52,091 contracts after net selling 11,813 contracts. The bias is up but increased volatility is likely with support in July natural gas not seen until $3.015.
Outside market forces were supportive early this week for the soybean complex which helped to support early gains. The 5-day forecast shows almost no rain for the Dakotas, Nebraska, Iowa, Minnesota and the northern half of Illinois. While rain in the past week has been active, there were parts of the Dakotas which did not receive ample rain amounts, and this could start a dry down of soils. The 6-10 day forecast shows hot weather for the Dakotas and northern Corn Belt with precipitation expected to be normal to below normal. The 8 to 14 day forecast models are similar. The weather carries a slightly positive tilt.
December corn closed 9 1/2 cents lower on the session last Friday and this left the market down one cent for the week. Continued talk of good weather for the Midwest helped to pressure the market and sellers turned active as the move to the highest level since May 14th failed to attract new buying interest. The technical action was positive last week with the surge up from Wednesday’s low. Brazil government agencies have warned that droughts across the country are hurting power generation and raises the risk of fires in the Amazon rain forest. This is the worst dry spell in 91 years. Traders see corn plantings near 95 to 98% for this afternoon’s update and it will also be the first crop condition update for the season.
July wheat closed sharply lower on the session Friday and gave back near half of Thursday’s strong gains. News of record-type temperatures moving into the Dakotas and the Canadian Prairies this week was likely enough to spark the aggressive buying with Minneapolis wheat up 42 cents this morning. Tender businesses also picked up significantly and EU wheat prices were higher on Monday with hopes for better export ahead. IKAR raised its forecast for Russia wheat production by 500,000 tons to 79.5 million tonnes. This is due to improving weather for southern regions. While there is some concern with dryness in the spring wheat region this week, the market lacks significant production issues for most of the key exporting countries as the US, Europe, Australia and India are expected to see bumper type crops. There was some concern with too much rain for the central Plains but it may be too far ahead of harvest to spark yield concerns.
The hog market remains in a steep uptrend and is probing for a short-term peak. Until US exports slow, likely led by China, the market should remain well supported. Pork values continued to surge higher and this should support a continued advance in the cash market this week. The USDA pork cutout, released after the close Friday, came in at $124.93, up from $124.51 on Thursday and $118.84 the previous week. This was the highest the cutout had been since August 7, 2014. July hogs closed sharply higher on the session Friday and traded up as much as the 3 cent limit before a minor setback into the close. The short-term cash fundamental news with strong exports and surging pork cutout values are factors which have helped support. Traders see a continued uptrend in the cash market over the near term.
JBS North America and Australia plants were impacted by a cyber-attack over the long weekend. JBS is the world’s biggest meat supplier and if certain slaughter plants see a slowdown in production due to the cyber-attack, the short-term impact is likely positive to the beef market. If it is more than a couple of days, cattle could back up in the country and this would boost weights and eventually production in the long run. The headline news could support today, however, especially after the weak close on Friday.
While cocoa is expected to have a pick-up in global demand as COVID vaccines receive more widespread use and travel restrictions are relaxed, the near-term demand remains subdued. While it may find carryover support from key outside markets, cocoa is likely to fall back on the defensive before it can find a near-term floor. July cocoa came under early pressure and could not regain upside momentum as they finished Friday’s trading session with a moderate loss that broke a 2-day winning streak. For the week, July cocoa finished with a loss of 44 points (down 1.8%) which was a second negative weekly result in a row.
Coffee prices have risen up into overbought levels after sharp updrafts last Wednesday and last Friday, which could leave the market vulnerable to additional long liquidation if global risk sentiment has a negative tone following the holiday weekend. Coffee continues to receive evidence of a bullish supply outlook, however, and that should help the market stay fairly well supported on near-term pullbacks. July coffee built on early support and reached a new 4 1/2 year high before finishing Friday’s trading session with a sizable daily gain. For the week, July coffee finished with a gain of 12.25 cents (up 8.2%) which was a seventh positive weekly result over the past 8 weeks.
December cotton closed slightly lower on Friday but inside Thursday’s range. The market has been consolidating for the past couple of weeks, torn between improving weather in West Texas and strong export demand. The market has followed the grain markets higher overnight. The market closed slightly higher on the week and spent last week inside the previous week’s range. The dollar closed slightly higher on Friday but well off the high of the day, as it seemed to reject those higher levels. Ample rainfall is reaching Texas after a long-term drought. The 1-5-day forecast calls for chances of more rain after weekend rains were good. The 6-10 and 8-14-day forecasts call for normal to above normal precipitation in those regions with cool weather. With traders expecting US corn and soybean planted are to come in higher than the March 31 forecast, some are wondering if cotton area will be revised down.
After several weeks of choppy action, sugar was able to break out above its recent consolidation zone. While the ebb and flow of key outside markets could extend volatile price action, sugar has received bullish supply news that can help the market head towards a retest of its mid-May highs. July sugar built on early strength and reached a 2-week high at midsession, and in spite of a late pullback finished Friday’s trading session with a moderate gain. For the week, July sugar finished with a gain of 69 ticks (up 4.1%) which broke a 2-week losing streak and was a positive weekly reversal from Monday’s 4-week low.
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