The treasury markets forged significant volatile trade early this week with the bull camp and bear camps dominating prices at one point. It is possible that US treasuries benefited from what is thought to be a premature hawkish stance by the ECB. In other words, in the event central banks move to quickly to tighten policies that could result in a tripping up of the global economy which in turn would dramatically increase the chances of stagflation.
The latest US CDC infection count was 86,786 (Friday, October 29th) and while that shows improvement over the numbers posted two weeks ago, the daily counts are still too high to suggest the Delta wave is going to be under definitive control anytime soon. The October 26th Commitments of Traders report showed Bonds Non-Commercial & Non-Reportable traders are net short 92,053 contracts after net buying 5,763 contracts. In the T-Notes market Non-Commercial & Non-Reportable traders net sold 118,702 contracts and are now net short 440,700 contracts.
With the dollar forging a significant range up action last Friday, the currency index looks to have come back into favor off the prospect that the ECB and other central banks might be acting premature with respect to rate hike timing. In other words, premature central bank tightening could trip up inflation and fan stagflation. Technically the December dollar index forged a fresh high for the move at the start of this week, but quickly fell back to unchanged levels as if the bull case was unsupported.
The euro managed to stand up to the initial strength in the US dollar this week and in the process avoided a fresh low for the move. Surprisingly, the euro was not definitively undermined because of very disappointing German retail sales for the month of September or indirectly pressured because of the soft Swiss purchasing Manager’s report. The Commitments of Traders report for the week ending October 26th showed Euro Non-Commercial & Non-Reportable traders net sold 2,076 contracts and are now net long 15,909 contracts. At this point there does not appear to be technical or fundamental reasoning to suggest the 2021 slide in the euro has run its course.
In our opinion, the equity markets have burned through a significant amount of positive corporate earnings and appear to be stalled at current levels. However, seeing key bellwether companies Amazon and Apple experience supply chain problems and project those supply chain problems into the end of the year certainly adds risk to those with long positions. Global equity markets early this week were mostly higher with the exceptions the markets in China which traded lower in the wake of disappointing October PMI readings. Either the markets are comfortable with the prospect of tapering from the US Federal Reserve, or a portion of the market thinks the Fed will hold off in this meeting.
Like the S&P, the Dow futures also posted all-time highs in the initial trade this week which means the markets are not fearful of anemic Chinese economic activity or unnerved by the prospect of a US tapering announcement on Wednesday. Dow Jones $5 positioning in the Commitments of Traders for the week ending October 26th showed Non-Commercial & Non-Reportable traders are net long 5,200 contracts after net selling 2,988 contracts last week. Not to be left out, the NASDAQ also forged fresh all-time highs in the early going this week in a sign that last week’s strength and leadership is extended into another trading week.
GOLD, SILVER & PLATINUM:
In looking ahead to this week’s action, the bear camp in gold and silver should be licking their chops as the markets widely expect the Fed to announce the beginning of tapering of asset purchases on Wednesday. With the added pressure of a surge in the dollar from last week’s lows and the recent rise in US short term interest rates, the bear camp has several themes operating in its favor. However, the action in the dollar index is the key driving force in gold as last week’s significant upward thrust in the US dollar correlated almost instantly with the biggest washout in December gold since September 16th.
From a fundamental perspective, palladium demand views were slightly undermined early this week by Chinese PMI data as the Chinese economy continues to limp along and that in turn keeps Chinese auto sector demand for palladium measured. On the other hand, adjusted for the declines in palladium since the last positioning report was measured, we suspect the palladium market is once again venturing toward a record spec and fund short. Palladium positioning in the Commitments of Traders for the week ending October 26th showed Palladium Managed Money traders hit a new extreme short of 2,569 contracts. Managed Money traders are net short 2,569 contracts after net selling 376 contracts.
With ongoing weakness in bellwether industrial materials like iron ore, weakness in copper early this week was not surprising. However, the bear camp should be somewhat ruffled by the large 8,875 tonne decline in daily LME copper warehouse stocks. However, the copper market should be undermined because of disappointing Chinese PMI readings for October which many see as a sign that the energy crisis is holding back the Chinese economy. In the end, the lack of definitively positive Chinese PMI readings leaves a previous bearish status quo in force.
Apparently, the corrective track from early last week has been reversed with a 3rd higher high for crude oil posted in the early going this week. While some traders will suggest seeing China tap their strategic reserves could reduce imports in the near term, the necessity to use strategic reserves highlights “tightness/demand” inside China. Granted the purchases have probably become speculative hedges against a lack of supply and/or high prices this winter. In our opinion, China has policies in place to maintain adequate strategic supplies and the Chinese President recently has indicated the need for greater stockpiling. Therefore, China will be forced to rebuild its strategic reserve and could enter the winter season with strategic reserves low. In a fresh supply-side development global floating storage of crude oil in the latest week declined by 26%, with Asian-Pacific storage down by 32%! Perhaps new highs in US equities have provided a demand lift early today but it also appears that a global diesel shortage is also developing which in turn provides the energy complex with an additional bullish theme.
With a very poor reversal/finish last week and a downside extension this morning, the natural gas market is vulnerable to further corrective action. While it is normal to have mild temperatures in the shoulder season, and it is common for injections to build during the shoulder season, the natural gas market was apparently expecting to proceed directly to a cold winter and an inadequate supply environment. It should be noted that the injection season is rapidly coming to an end and that could remove the bearish psychology associated with the normal seasonal rebuilding of supply. In fact, European natural gas stockpiles peak in supply was significantly lower than normal, at 77.3% of capacity and 7% below the lowest previous seasonal peak. Therefore, the potential for a winter bull market in Europe is not removed with the market likely to bottom this week.
The soybean market seems to have corrected the oversold condition from mid-October, and the two-week recovery may be running out of steam as the market does not seem to have the supply fundamentals to continue to advance. Vegetable oil prices seem to be showing signs of peeking as the supply of oilseeds looks to grow rapidly in the next year, especially from soybeans. News of increased COVID infections in China which could lead to additional lockdown measures is a factor which might slow usage. The October USDA reports pegged world ending stocks for 2021/22 at 104.57 million tonnes, an increase of 5.41 million from the previous year and the second highest ever.
While a bit overbought technically, the corn market seems to have the demand fundamentals to see a continued short-term uptrend. After choppy and two-sided trade early in the session, December corn closed moderately higher on the session Friday and experienced the highest close since August 16th. For the week, the market closed 30 1/4 cents higher or up 5.6%. Ethanol production has come in well above trade expectations for the third week in a row and this provided solid support to the market this week. Ethanol profit margins last week reached $1.63 which is the highest since at least 2015.
Fertilizer in Europe is set to get even pricier, adding to concerns that bigger production costs for food could add to inflation. A gauge of western European prices for ammonia, used to make nitrogen fertilizer, surged to a 13-year high to $910 a metric tonne.
The wheat market remains in a solid uptrend and while overbought, there is still no technical sign of a short-term peak. A shift to a drier pattern for the next few weeks for the plains was seen as a positive force. The market managed to absorb a huge rally in the US dollar on Friday and still managed to hold support. Egypt is tendering for wheat and traders will monitor the results closely. So far this marketing year, Russia grain exports are down 24%.
The technical action is positive and the market acts like a significant low is in place. November is typically not a good month to consider buying hogs, but this year may be an exception. First quarter 2022 US pork production is expected to fall to a three-year low, down 4.3% from 2021. Production is expected to fall another 500 million pounds in the second quarter, which would be the third largest decline for that quarter on record. This should be a positive force for June Hogs. For 2022, US per capita pork consumption is forecast at 49.7 pounds, down from 50.6 in 2021 and 52.0 in 2020. Exports are expected to increase to 7.405 billion pounds, up 2.9% from 2021.
The cattle market is in a short-term corrective mode as the futures and cash markets move closer together. The continued uptrend in the cash market is a positive factor and supply is still tightening a bit. The USDA boxed beef cutout was up $1.12 at mid-session Friday and closed 83 cents higher at $285.72. This was up from $281.82 the previous week and was the highest the cutout had been since October 6. Cash live cattle trade was quiet on Friday. As of Friday afternoon, the 5-day, 5-area weighted average price was 126.29, up from 124.39 a week before.
Cocoa’s demand outlook should remain on a longer-term upswing, but near-term prospects have been hurt by shipping container shortages and production limitations. This may not improve until early next year, and that could keep the cocoa market on the defensive during the fourth quarter. December cocoa was unable to shake off early pressure as it reached a 1-week low before finishing Friday’s trading session with a moderate loss. For the week, December cocoa finished with a loss of 39 points (down 1.5%) which was a third negative weekly result in a row.
Coffee continues to see choppy price action, but has been able to rise nearly 30 cents in value (up 17%) from an early August low. With the market unable to get past several supply issues, coffee should extend its longer-term uptrend during early November. December coffee was able to regain upside momentum after a 2-day pullback as it finished Friday’s trading session with a sizable gain. For the week, December coffee finished with a gain of 4.10 cents (up 2.1%) which was a fourth positive weekly result over the past 6 weeks and a positive weekly reversal from last Monday’s 2 1/2 week low.
The cotton market remains in a strong bull trend. December cotton closed sharply higher for the second day in a row on Friday, trading to its highest level since it put in its contract high on October 8. The upside break-out today leaves 121.43 as next upside target. One of the reasons being cited for the market ending the week in such a strong posture is the strong US export sales reports for the past couple of weeks, especially with the strong interest on the part of China. The surge in prices so far has not slowed demand.
Sugar prices lost upside momentum late last week, but held within a fairly tight trading range well above their mid-October lows. With open interest starting to increase after reaching a 2021 low, sugar is showing more signs that it may be down correcting and can sustain upside momentum early in November. March sugar came under pressure at midsession as it finished Friday’s trading session with a moderate loss. For the week, however, March sugar finished with a gain of 19 ticks (up 1.0%) which broke a 2-week losing streak.
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