In our opinion, the Treasury bond market overreacted to a series of softer than expected US data points, to the prospect of a puncturing of the inflation story following huge commodity price declines and most specifically in the wake of the statements from the US Federal Reserve. In fact, the Fed statement acknowledged the potential that inflation might be “more persistent” than previously expected and it also indicated the US economy continues to grow and more jobs will be added. Therefore, the gains in the bonds this week appear to be partly the result of technical short covering (from a large net spec and fund short), but also because the Fed might be turning prematurely hawkish.
In retrospect, the gains in the dollar last week were very surprising, especially with US scheduled data continuing to disappoint and the markets clearly overreacting to last week’s large washout in physical commodity prices. However, many nondollar currencies entrenched in a “recovery currency” condition and therefore some measure of decline was deserved in the Swiss franc and euro. In our opinion, the dollar is significantly short-term overvalued and lacks the basis for the massive run-up over the prior 2 weeks.
While some will suggest that the stock market was overbought and that this week’s slide was merely a temporary correction, the near perfect storm of economic conditions has deteriorated slightly. The primary change in the marketplace is the subtle hawkish shift by the US Federal Reserve, especially with that change coming on top of several weeks of disappointing US economic data. In retrospect, the taper tantrum seen last week was not as significant as might have been expected and that could limit the magnitude of the slide ahead.
Not surprisingly, the Dow futures knifed lower and temporarily breached the even number 33,000 level in early action this week, and that should leave the bear camp confident and undermine a portion of the bull camp. While the markets do not appear to be overly concerned about a resurgence of US infections from the Delta variant, some would be buyers could be discouraged by the 2-day jump in daily infections toward the 12,000 level. While the 33,000 level could prove to be a critical low, we suspect the market will see periodic trades below that level until macroeconomic sentiment is bolstered by a headline of substance. The NASDAQ remains the strongest component of the markets with the trade apparently expecting “stay-at-home”, Internet-based business and technological advances offering the index broader appeal and is seen as an all-weather index.
GOLD, SILVER & PLATINUM:
Apparently, gold and silver prices were cheered early this week by the latest upside extension in treasury prices (yields reached the lowest level since mid-February) and to a lesser degree by a slightly weaker US dollar in the early going. However, China continues to express its disdain for speculative activity in key industrial material prices with an investigation launched into the spot iron ore market and that leaves a dark cloud hanging over many markets where China is a significant demand source and a source of inflation.
While palladium ETF holdings have shown periodic gains, investment demand so far, has failed to impress enough to become a primary driving force for prices. In fact, without a pickup in open interest and trading volume on the approach of $2,400 (indicating exhaustion selling or bargain hunting) it is likely that bullish buzz will remain absent from the palladium market.
Like many other physical commodities, last week’s macroeconomic letdown and significant physical commodity market liquidation waves have injured sentiment in copper on several different occasions. In fact, with China announcing investigations into the spot iron ore trade, it is clear the Chinese government is serious about deflating material prices and without a noted change in key demand fundamental issues, July copper might be on a direct path to retest $4.00. In fact, the threat of Chinese dumping looms large and has likely discouraged would-be bargain-hunting buying despite the huge May and June slide of $0.79.
All things considered, the action in the crude oil market has been very impressive and indicative of residual bullish control, as demand could have easily been undermined as-a-result of events and data released over the past 3 weeks. However, the bull camp should be emboldened Monday morning by news that Indian May crude oil imports rose by 18.2% over year ago levels, but that supportive news was more than offset by a 5.5% month over month decline in Indian oil imports. Limiting the upside in crude oil prices is the revelation that new Chinese crude oil import quota levels were down 35% versus year ago levels as that could be a development that signals soft Chinese demand or more likely is another attempt by the Chinese government to knock back the price of a key physical input to their economy.
While August natural gas has built solid chart support, Friday’s close below the prior 5 closes and an early violation of the $3.20 level suggests the charts are vulnerable. The latest forecast has hot US West temperatures expanding east, but that is offset by a forecast for cooler temps in the East. In our opinion, tropical storm Claudette has popped up so close to shore that it is unlikely to strengthen quickly. This week’s Baker Hughes gas rig operating count increased by one, while Canadian gas rigs operating increased by 9 and reached an 11-week high. We are a skeptical bull with any close below $3.20 potentially a major corrective signal of even more declines, but gas prices at $3.20 are very cheap from a historical basis, but also from a cyclical basis. However, the market currently lacks a bullish catalyst to put natural gas in vogue among the funds. Aggressive traders might buy dips below $3.20, but not tolerate a close below that level.
The short-term forecast shows 1 to 2 inches of rain for the eastern half of Iowa and into the northern half of Illinois. This is a negative development, but the 6-10 day forecast is dry for the Western Corn Belt and for northern Illinois. The 8-14 day forecast models show dry Iowa but wet Illinois. The Dakotas, Nebraska and Minnesota do not appear to have enough rain over the next two weeks and crop conditions could continue to deteriorate. It is still early in the season, and there is plenty of opportunity for the weather to turn bad, so a slightly drier forecast Friday had traders on edge going into the weekend. At the low Thursday, November soybeans had fallen $2.36 or 16% from their close last Friday.
The short-term weather forecasts may be enough to pressure the corn market with Iowa and northern Illinois expected to get decent amounts of rainfall over the next five days with plenty of areas over 1 inch. The 6-10 day and 8-14 day forecast models show plenty of dryness for the Dakotas, Nebraska and Minnesota for the next two weeks and this might provide support on any further short-term pullback. Friday’s price action was impressive and if outside market forces ease, the market is in position to bounce.
The short-term weather forecast carries a bullish tilt for spring wheat areas. The 1-5 day forecast shows very little rain for the Dakotas or Minnesota. The 6-10 day and 8-14 day models show above normal temperatures and below normal precipitation for this time frame. This is a supportive force as Minnesota and parts of the Dakotas have seen very little rain in the past seven days.
The hog market remains in a steep downtrend off of the June 8 high as a collapse in pork values in the US, and a collapse in pig prices in China has traders nervous that US pork exports are on the decline. Pork values are down 8.9% in just one week and traders see the seasonal advance in production in July and August as a potential bearish force. The market is extremely oversold from a short-term technical perspective but there is still no sign of a short-term low. China’s government-backed livestock industry body urged pig farmers not to panic as hog prices fell further and investors continue to sell shares in major livestock producers.
The USDA boxed beef cutout was down 78 cents at mid-session Friday and closed $2.97 lower at $323.28. This was down from $337.56 the previous week and was the lowest the cutout had been since May 17. Cash live cattle prices continued with their firm tone on Friday but at light volume. In Kansas 65 head traded at 122 versus an average of 119.70 last week. In Nebraska 376 head traded at 123-124 with an average price of 123.47 versus an average of 120.13 last week. In Texas/Oklahoma 318 head traded at 120-122 with an average price of 120.74 versus an average of 119.53 last week. As of Friday afternoon, the 5-day, 5-area weighted average was 122.70 versus 120.00 the previous week.
Cocoa prices are down for the month and quarter and are approaching a retest of their 2021 low from early May. With the likelihood of a global demand rebound over the second half of this year, however, cocoa prices are now well into “bargain” territory and may be closing in on a longer-term low. September cocoa gave back early gains and reached a new 6-week low before finishing Friday’s trading session with a moderate loss and a fourth negative daily result in a row.
After reaching a multi-year high at the start of June, coffee prices have been on the defensive as the “risk off” mood throughout commodity market fueled a retest of the late May lows. With a bullish supply outlook providing support, a positive turnaround at the end of last week could indicate that coffee has found a near-term low. September coffee reached a new 1-month low before rebounding late in the day to finish Friday’s trading session with a modest gain and a positive daily reversal. For the week, September coffee finished with a loss of 7.65 cents (down 4.8%) and a third negative weekly result in a row.
The cotton market has seen coiling price action over the past 4 sessions as December cotton closed higher on Friday as it stayed within Thursday’s big range down. The cotton market apparently disregarded a third straight sizable gain and a new 2 1/2 month high in the dollar, and focused instead on potential weather problems, strength in the grain markets, and the possibility that US cotton acreage could come in lower than current estimates. The 1-5 day weather forecast calls for moderate to heavy rainfall from east Texas to the Atlantic Coast, with light to none over west Texas growing areas.
With a sizable net spec long position, sugar had plenty of fuel for additional long liquidation during the post-FOMC “risk off” mood seen in many commodities. Key outside markets remain close to their recent highs while Brazilian production should see a sizable decline from last season, both of which can help sugar prices find their footing this week. October sugar was unable to hold onto early strength as it fell into negative territory and reached a 7-week low before finishing Friday’s trading session with a modest loss. For the week, however, October sugar finished with a loss of 101 ticks (down 5.7%) and a second negative weekly result in a row.
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