We were surprised with the washout in treasury prices last Friday, especially following much weaker than expected US retail sales readings and declines in both import and export prices. However, subsequent US scheduled data from capacity utilization, industrial production, and Michigan consumer sentiment came in much better than expected and in turn seem to prompt a wave of stop loss selling in bonds and notes. Some traders suggest that talk of a one and done decision in May added to the selling pressure. While treasury bonds and notes have held above last Friday’s spike low, the technical bias favors the bear camp to start this week. We suspect a modest risk on vibe from equities and positive Chinese housing sector news provides negative carryover for Treasuries from the global markets into the US trade early this week. While the market should see support from another negative New York Empire State Manufacturing Index reading, the magnitude of the contraction in the index is expected to have moderated from last month.
In our opinion, the dollar was significantly oversold while the Swiss franc and euro were significantly overbought into last Friday’s pivot in price action. However, bearish fundamentals for the dollar are likely entrenched with US scheduled data last week clearly showing signs of a decelerating economy. However, with the Swiss franc extremely overbought, traders should expect a significant corrective setback early next week.
With the Japanese Central Bank Governor making it clear to G7 Finance ministers that Japan will maintain its dovish policy stance and the dollar posting initial gains we see a failure of 75.00 and further erosion in the Japanese currency in the days ahead. While we are not prepared to call for an end to the uptrend in the Swiss franc, the currency is significantly short-term overbought from last week’s low to high rally of 318 points. Like other nondollar currencies, the Pound is deserving of a technical correction and to a lesser degree deserving of a slight fundamental adjustment lower. With reports the Bank of Canada considered hiking rates in its recent meeting, combined with periodic strength in commodities, the upward bias in the Canadian dollar has a fundamental foundation.
With equity markets failing to distinctly benefit from evidence that US inflation is moderating, and failing to benefit from strong major bank earnings, market sentiment remains bearish. In fact, a combination of lower inflation, an uptick in initial claims and a large decline in US retail sales has discouraged investors. Adding further pressure are fresh concerns regarding manufacturing procedures at Boeing, and residual chatter that the US central bank may go ahead with one final rate hike next month. Global equity markets were higher early this week except for the Spanish market which traded fractionally lower. With another positive weekly trade last week, the markets have a slightly bullish track to start the new trading week.
With the S&P Mini contract holding an extreme net spec and fund short positioning (posting the most extreme short since the 2012 debacle) the market clearly has significant speculative and stop loss buying capacity As in the S&P, we expect large cap stocks in the Dow to benefit from evidence of moderating inflation and from the medical technology sector buyout offer this morning. Tech sector news is mixed for the NASDAQ with strong Apple sales in India offsetting negative news from Tesla and a Netflix outage.
GOLD, SILVER & PLATINUM:
We see gold and silver in corrective postures to start the new trading week. In fact, several bullish fundamentals have reversed course and we expect a downtrend to unfold. Obviously, a dampening of inflationary expectations removed a primary pillar of the bull case, but seeing a reversal of a downside breakout in the dollar combined with talk that the Fed will “go ahead” with a rate hike in May provides a lot of bearish ammunition. Furthermore, the recent surge in gold and silver prices apparently resulted in a significant pullback in Asian demand because of price sensitivity. Even the technical picture is negative for gold and silver with both markets holding burdensome net spec and fund long positions as of early last week.
While the reversal in platinum was not as destructive as in gold and silver in last Friday’s trade, last Thursday’s massive range up move on strong volume might foster significant stop loss selling to start the new trading week. With the most recent COT positioning in palladium registering a record net spec and fund short the market might hold up in the face of a likely liquidation wave in gold, silver, and platinum early this week.
With a deterioration in global macroeconomic sentiment (from signs of softening in the US and ongoing rate hike fears) combined with a lack of definitive signs of recovery flowing from China, the reversal in copper prices at the end of last week leaves the market vulnerable to some back and fill action. However, both LME and Shanghai copper exchange warehouse stocks continue to be supportive with both exchanges holding little cushion for physical users. In fact, last week LME copper warehouse stocks reached the lowest levels in nearly 18 years and Shanghai copper stocks have returned to a pattern of weekly declines.
In retrospect, the oil bulls showed impressive action over the last 2 weeks as prices forged two stairstep higher moves on the charts and managed those rallies in the face of economic conditions ordinarily seen as undermining to energy demand expectations. However, as indicated over the last several months, the net spec and fund long positioning in crude oil was very low (lowest in 7 years) prior to the April gap higher opening. Obviously, the net spec and fund long is growing with the most recent tally understated because of the post report rally of $2.00. The April 11th Commitments of Traders report showed Crude Oil Managed Money traders were net long 198,493 contracts after increasing their already long position by 22,079 contracts.
On the other hand, gasoline technical signals are not overbought yet with the most recent positioning report showing a very modest net long despite the market’s explosion over the last 30 days. As opposed to the gasoline market the diesel market has the least bullish supply and demand fundamentals within the petroleum complex. While distillate and diesel stocks surplus are versus year ago levels are minimal, weekly implied distillate demand has been very soft and several major players have been exporting copious amounts of diesel.
July soybeans closed moderately lower on the session but managed to hold above the April lows on Friday. Talk of the record crop from Brazil helped to spark some long liquidation selling. July soybean oil closed near the highs of the day after in early break to the lowest level since March 24. Outside market forces carried a bearish tilt. July Soybean Meal experienced an impressive rally last week, but it gave back part of its gains on Friday. There are expectations that US old crop supply could tighten further if Argentina is unable to increase its output over the near term.
Friday’s technical action was bullish for the July corn contract as a combination of strong demand from China and a cold and wet forecast for the upper Midwest helped to support. There is plenty of rain in the five day forecast models for the upper Midwest. The 6–10 day forecast models show below to much below normal temperatures but drier. The 8–14 day models are similar. July corn closed sharply higher on the session Friday with an outside day up. It was the highest close since April 3. Renewed aggressive buying from China helped support the market. Exporters announced the sale of 246,000 tonnes of US corn to China for the 22/23 season.
July wheat closed sharply higher on the session last Friday with an outside day up. This is impressive technical action and leaves the appearance of a head and shoulders bottom formation. Keep in mind that managed money traders hold a net short position of 104,247 contracts. The extreme dry conditions in Kansas are helping to support the market and there is a significant threat to short covering ahead. In the last seven days, only the Eastern and northern quadrant of Kansas received 1/2 inch or more of rain, and much of the rest of the state was 1/10 of an inch or less. For the next five days, the Western two thirds of Kansas receive little or no rain, and the far eastern areas might get 1/4 to 1/2 inch of rain.
June hogs closed lower for last Friday’s session and the selling pushed the market down into a new contract low. The downside breakout leaves 85.17 as the next downside target. While June is trading at a normal premium to the cash market, traders await a turn up in the cash market trend, and higher trade for the pork market. The USDA pork cutout released after the close Thursday came in at $75.96, up $1.46 from Wednesday but down from $76.69 the previous week. The USDA estimated hog slaughter came in at 484,000 head yesterday. This brings the total for the week so far to 1.790 million head, down from 1.924 million last week and 1.901 million a year ago.
June cattle gapped higher on the opening and pushed into new contract highs for the fifth session in a row early in last Friday’s trading before closing lower on the day. The key reversal is a bearish technical development. However, June cattle closed at 164.50 while cash live cattle prices are much stronger this week, with averages running $5-$7 higher than last week. As of last Thursday afternoon, the five-area weighted average price was $182.94 versus an average of $175.28 last week. The continued strength in the beef market and a strong uptrend in the cash market with June trading at a stiff discount to the cash may continue to support. April cattle traded as high as 177.70 which is yet another new all-time high for the nearby contract.
After starting the second quarter with choppy price action, July Cocoa rallied to its highest level since November 2020. With the market already overbought and having a significant spec long position, the cocoa market was vulnerable to a pullback. July cocoa found early support and reached a new 28-month high, but then turned back to the downside and fell into negative territory as it finished Friday’s trading session with a sizable loss and a negative daily key reversal. For the week, however, July cocoa finished with a gain of 27 points which was a fourth positive weekly result over the past 5 weeks.
While coffee ran out of upside momentum going into the weekend, it will start this week with prices more than 15% above their late March low. If global risk sentiment can regain a positive tone, coffee should extend its upside breakout this week. July coffee was unable to hold onto early strength as it came under late pressure to finish Friday’s trading session with a moderate loss. For the week, however, July coffee finished with a gain of 9.80 cents which was a second sizable weekly gain in a row.
July cotton closed lower on Friday but spent the week inside a relatively narrow 1.61-cent range. The recent US drought monitor showed some improvement in west Texas last week. Much of the region remains under moderate to severe drought, but conditions are much improved over a year ago. The 6-10 and 8-14-day forecasts call for mostly normal to some below normal chances of rainfall over west Texas.
While sugar prices were able to extend their rally last week, they went into the weekend well below last Wednesday’s 11-year high. With Brazil’s Center-South harvesting and crushing underway, sugar may need more carryover support from key outside market to avoid a correction. July sugar continued last week’s coiling pattern as it shook off early pressure to finish Friday’s trading with a mild gain. For the week, July sugar finished with a gain of 28 ticks and a fourth positive weekly result in a row.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.