Treasury bond prices forged a double bottom trade last Friday following early pressure from two out of three favorable PMI readings for October. However, a downside reversal in equities and a significant setback from the highs in the gold market gave bargain-hunting buyers incentive. On the other hand, the Fed’s Chairman indicated the bank is on track to begin reducing purchases of assets while he thinks inflation will abate early next year.
The threat of inflation is stoked further by comments from the European Central Bank last week, indicating price pressures have become too significant to ignore. Directly ahead, surging crude oil and gold price action is likely discouraging bargain-hunting buying of Bonds and Notes and in turn has also thickened resistance in December Bonds and in December Notes. With the spec and fund short positioning in Bonds moderating last week that could provide fresh selling interest on rallies above 159-00.
Just because the dollar index has built a formidable consolidation low zone around the 93.50 level does not mean the currency index has bottomed! In fact, very definitive uniform uptrend action in the Swiss Pound and Canadian suggest the dollar could be vulnerable this week. Certainly, tapering dialogue from the US Federal Reserve chairman and higher interest rate forecast for the latter part of 2022 by another Fed member provides the dollar with a measure of fundamental support.
We think the Yen has become technically oversold and fundamentally overdone in the near term. However, the bull camp lacks fundamental arguments for anything but a temporary short covering bounce. With a failure to hold a higher high early this week and a significant range down failure, the Swiss appears to be poised to test 1.0860. We would note that the dollar is not showing definitive strength and therefore we suspect the Swiss will be able to remain within proximity to 1.09.
With the December Pound retesting Friday’s mini failure lows at 1.3735 at the start of this week and a series of lower highs unfolding on the charts, we see a retest of 1.3725. We see the Canadian dollar consolidation as evidence of an ongoing bullish posture. However, the trade has pulled forward its expectations for a Canadian rate hike and that combined with 35 days of uptrend action leaves the bull camp with an edge. However, a key pivot point/failure price is 80.70.
While the S&P and Dow futures forged new all-time highs early in last Friday’s trading session, the markets fell back and chopped around both sides of unchanged through midsession. We suspect the markets were undermined because of tapering talk from the US Federal Reserve chairman and from higher treasury yields in the morning trade. However, the treasury market rebounded aggressively from its lows and should have resulted in equities returning to all-time high ground quickly.
While the S&P has not forged a new high early today, prices remain near last Friday’s all-time high and a close at current levels would be a new all-time high close. The S&P does look to miss out on buyout news lift as PayPal this morning has confirmed it is not interested in buying Pinterest. The net spec and fund long in the E-mini-S&P remains small relative to history with the index not heavily bought out until the net spec and fund long reaches 250,000 contracts! E-Mini S&P positioning in the Commitments of Traders for the week ending October 19th showed Non-Commercial & Non-Reportable traders reduced their net long position by 53,011 contracts to a net long 81,504 contracts.
As in the S&P, the Dow Jones futures sit at levels that would post all-time highs if sustained into the close. However, key earnings from GM and Ford are not scheduled until midweek but investors and analysts think that Ford will fare better than GM. The October 19th Commitments of Traders report showed Dow Jones $5 Non-Commercial & Non-Reportable traders were net long 8,188 contracts after increasing their already long position by 5,028 contracts. The NASDAQ charts remain the most bearish of the actively traded futures contracts, with a series of lower highs and lower lows forged in the face of new highs in the S&P and Dow futures!
Seeing Tesla halt the manufacturer of its latest car, news that PayPal is not looking to purchase Pinterest and seeing fresh hacking news in the headlines the NASDAQ looks to remain out-of-favor. Fortunately for the bull camp the most recent positioning report showed the NASDAQ to be “net spec and fund short”. The October 19th Commitments of Traders report showed Nasdaq Mini Non-Commercial & Non-Reportable traders added 7,607 contracts to their already short position and are now net short 11,123.
GOLD, SILVER & PLATINUM:
While the gold market has not made a higher high compared to Friday’s action, prices are holding in positive territory early this week and are printing trades above the psychologically important $1,800. Obviously, a setback in US Treasury yields combined with a temporary swoon in the Dollar provided gold and silver with outside market support to end last week. In fact, the Dollar forged a lower low and that could underpin gold and silver prices.
We leave the edge with the bear camp in the palladium market as last week’s initial washout failed to spark bargain-hunting buying. However, a pattern of inflows to both palladium and platinum ETFs recently should be noted as that factor has not been a focal point of the trade lately. As of the end of last week, palladium ETF holdings were 6.8% higher on the year with overall holdings of 535,419 ounces. On the other hand, macroeconomic conditions are disappointing for the bull camp with scheduled data typically offsetting and the US daily infection count still problematic around 77,000.
However, it is possible that palladium and platinum derived support from the US initial claims reading last week as that measure posted the lowest unemployment claims week of the pandemic! As indicated in palladium commentary, platinum ETFs have continued to build in a market with little in the way of classic fundamental news flow. Unfortunately for the bull camp, the year-to-date change in platinum ETF holdings is a decline of 1.6% leaving palladium with greater investment demand.
With a major failure at the end of last week and little in the way of chart support until $4.40, December copper looks to be controlled by the bear camp. However, both Shanghai and LME copper warehouse stocks continue to decline (Shanghai stocks at the lowest since 2009) and the threat of a short squeeze on the London exchange should not be discounted. However, the LME has launched an investigation into on-warrant positions and perhaps the short squeeze scenario will be avoided. In the meantime, volatility in the copper market is likely to expand significantly.
With a firm contract high close at the end of last week and a fresh higher high for the more early this week, the bull camp extends its control. While we are not sure that La Nina talk is providing significant lift to energies, those headlines have fostered renewed “cold winter” weather expectations. Bullish sentiment remains high to start the trading week with forecasts of $90 Brent crude oil pricing this week in the headlines. However, a more salient bullish argument came from news that Saudi Arabia and OPEC plus would be very cautious with raising production beyond the already agreed to amounts despite surging prices. In retrospect, the energy markets last week saw signs of ongoing tightening of US inventories and generally positive jobs related data from the US which in turn helps rekindle demand optimism.
While the gasoline market remains stalled below last week’s high, it has also entrenched support above $2.40 for five trading sessions, and therefore it is possible that the market has reached an interim inflection point. Underpinning the gasoline market going forward is last week’s surprise decline in gas stocks and the significant jump in the year-over-year US gasoline stocks deficit. Into the new trading week, the US EIA gasoline deficit to year ago levels is back above 9 million barrels which in turn suggest the bull camp is traversing the slack seasonal demand period in solid fashion.
While near-term US weather is bearish, the fear of cold in the northern hemisphere winter and Asia has been given fresh credence by a prediction by China that La Nina might put cold weather into China and Japan and other mid-Eastern Pacific Ocean areas. It is also possible that natural gas will draft support from surging Brent and WTI pricing, as that raises the breakeven point for the substitution of natural gas in power production. From a technical perspective, the most recent COT report showed the specs maintaining their short stance in the market and that should help the market respect the $5.55 level going forward and given the La Nina talk, a run to $6.00 may occur. The Commitments of Traders report for the week ending October 19th showed Natural Gas Managed Money traders were net long 4,336 contracts after decreasing their long position by 22,990 contracts. Non-Commercial & Non-Reportable traders were net short 85,390 contracts after decreasing their short position by 4,442 contracts. This week’s Baker Hughes US gas rig drilling count increased by one, but that count remains below the 100 level.
While the longer-term fundamentals for soybeans are still in question, the short-term supply and demand factors are still in the bear camp. Managed money fund traders remain in a long liquidation selling mode, there appears to be plenty of soybean supply and there is plenty of incentive to expect a sharp increase in crushing which will boost soybean oil and meal supply. While soybean export demand has been strong in the last few weeks, cumulative sales are still behind the pace to reach the current USDA projection.
The Brazil crop is off to a fast start thanks to good weather recently, and more moisture in the short term forecast. The market managed to close slightly higher on the week, but the sluggish export outlook plus talk that we could see increased acreage for next year has helped to pressure. More weakness in December oil was seen as a bearish force as the higher energy market failed to support. Vegetable oil prices are likely near a short-term peak as supply tightness issues should ease as production rises.
December corn closed moderately higher on the session last Friday and this left the market with a gain of 12 1/4 cents for the week. Weakness in the US dollar plus solid gains for the crude oil helped to provide support on the early break. Agricultural markets are carrying a bullish tilt, as inflationary expectations are on the rise. Global demand remains very strong and the emergence of China as a major world importer is a bullish longer-term force. Major adjustments higher in energy prices helped cause fertilizer prices to triple, and this is likely to cause US producers to make a major shift away from corn acres to soybeans. With the current set up, it would not be surprising to see 3 to 5 million acres shift away from corn.
The wheat market remains in a short-term uptrend as tightening supply from key exporters, plus a more urgent tone from end-users to own a little more wheat than normal due to inflation, has the market well supported. Talk that Australia’s near record crop is quickly filling up shipping slots added to the positive tone. Spring wheat hit $10 a bushel for the first time since 2012 Friday after extreme drought cut this year’s production by 44% from 2020. The market has posted contract highs for 10 of the past 14 trading sessions.
The higher close for December hogs after trading down to the lowest level since September 22 on Friday is a positive technical development. A surge higher in cash and futures in China plus some stability in the US pork market plus a positive tilt to the monthly cold storage report are all seen as positive forces coming into this morning. Slaughter for the week last week down 2.6% from a year ago with production down 4.7% from a year ago. Frozen pork stocks at the end of September reached 466.41 million pounds, up slightly from the year ago and up 2.7% from the previous month. Pork stocks normally increase 4.1% for the month so the 2.7% gain may be seen as a slight positive. Talk of the oversold condition of the market plus talk that the futures are trading at a larger than normal discount to the cash market helped support the bounce.
The Cattle on Feed Report was considered bullish as September placements came in at just 97.1%, which is very bullish against trade expectations and was even outside the range of estimates. Traders expected see placements near 101.4% of last year, 97.5-104 range. This means smaller than expected supply 90-120 days out and is bullish for February cattle. Marketings were 96.9% which was also below trade expectations which is a slight negative. This brought the on-feed number as of October 1st to 98.6% which is well below expectations for 99.4%, and at the low end of expectations. Overall, the report was positive.
December cattle closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since October 7th. The USDA boxed beef cutout was up 98 cents at mid-session Friday and closed $1.16 higher at $281.82. This was up from $280.24 the previous week. Cash live cattle were mostly quiet on Friday, with 160 head reported in Kansas at 124. As of Friday afternoon, the five-day, five-area weighted average price of 124.31, up from 123.83 the previous week.
While cocoa prices remain well below their early October highs, their 2-day winning streak to finish last week has lifted the market well clear of last Wednesday’s 2-month low. It may be difficult to shake off the pattern of volatile price action that started at mid-year, but cocoa is showing early signs that a near-term low may be in. December cocoa came under early pressure, but turned sharply to the upside at midsession as it finished Friday’s trading session with a sizable gain. For the week, December cocoa finished with a loss of 24 points (down 0.9%) which was a second negative weekly result in a row.
Downside follow-through from last Thursday’s outside-day session has taken coffee well below the mid-October highs, but the market remains firmly within a longer-term uptrend. With a bullish supply outlook and improving global demand, coffee should remain fairly well supported on a near-term pullback. December coffee bounced back from an early pullback, but fell back on the defensive late in the day as they reached a 1 1/2 week low before finishing Friday’s trading session with a moderate loss. For the week, December coffee finished with a loss of 3.55 cents (down 1.7%) which was a second negative weekly result over the past 3 weeks.
December cotton closed higher on Friday after spending the day inside Thursday’s outside range down. There were reports of increased buying from China after the selloff on Thursday. Friday’s Commitments of Traders report showed managed money traders were net sellers of 6,018 contracts of cotton for the week ending October 19, reducing their net long to 81,427. This is a long liquidation selling trend and a potential bearish force ahead if support levels are violated. Non-commercial, no CIT traders were net sellers of 9,561, reducing their net long to 83,803.
Sugar prices remain well below their 2021 highs, but they appear to have found their footing following a mid-October downside breakout. With energy prices and a bullish supply outlook providing underlying support, sugar may be able to regain and sustain upside momentum early this week. March sugar continued to hold within a fairly tight consolidation zone as it built on midsession strength to finish Friday’s trading session with a moderate gain. For the week, however, March sugar finished with a loss of 72 ticks (down 3.6%) and a second negative weekly result in a row.
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