As indicated in last Friday’s newsletter, the treasury markets appear to have settled into a long-term pattern of rising interest rates in what appears to be a recalibration and/or a return to normal historic rates. On the other hand, treasury notes adjusted into the low prices last week have likely resulted in new record short positioning among speculators and that could be a sign of a temporary bounce this week. With a fresh downside breakout in treasury prices Monday morning resulting in interest rates forging upside breakouts, predictions of a long-term historical rate adjustment cycle are flooding the headlines. Others will suggest the additional pressure this morning is the result of hawkish expectations for this week’s Jackson Hole symposium.
Obviously, the uptrend in the dollar has become very impressive and uniform suggesting more gains should be expected. However, the bull case from the charts is secondary to the reality that surging US interest rates will continue to pull in capital from around the globe. In short, higher US treasury rates facilitate foreign buying of US debt which requires the purchase of dollars. Other dollar bullish developments are escalating concerns toward the Chinese economy and the slide in the Chinese currency.
As indicated already, German July PPI contracted massively (-1.1%) further reducing the need and perhaps lowering the capacity of the ECB to raise rates. While the Yen has managed to arrest the slide from the last 5 weeks over the last the 2 trading sessions, fundamentals remain bearish with recent weakness in the Nikkei and a lack of aggressive Even though the Pound might hold up against the dollar strength better than other actively traded currencies, a massive contraction in a UK key house price index and recent evidence of softening of the UK jobs market gives the bear camp the edge.
While the US equity markets managed to recover from initial lower lows for the move last Friday, the markets continue to face several negative issues. Obviously rising rates are prompting some rotation from stocks to bonds but sellers last week were motivated by market sentiment embracing higher for longer US interest rate prospects. Sentiment toward equities is clearly subdued with the markets showing little if any benefit from favorable Deere & Company earnings.
Not surprisingly, the Dow futures are also in a short covering move early this week with the market breakout above last Friday’s high likely to spark further gains into and through the US cash market opening. On the other hand, Dow stocks should be heavily impacted by rising interest rates and a strengthening US dollar. As would be expected, the NASDAQ is less concerned with rising interest rates than other sectors, but the index is not immune to slowing fears because of China and rising interest rates.
GOLD, SILVER & PLATINUM:
While a Chinese interest rate cut is a supportive development for gold, it is not enough to offset an extension of bearish outside market influences flowing from a higher dollar and rising US interest rates. Despite short-term technical indicators like RSI and stochastics being oversold, the downtrend in gold looks entrenched. In retrospect, the Federal Reserve meeting minutes combined with a recent hot US retail sales reading has fostered fear of even higher rates for longer, which is beginning to replace hope of a September pause. In a surprising conflict, the hawkish views of the US treasury trade and many traders that are now expecting higher for longer rates, the CME’s Fed Watch Tool at the end of last week pegged an 89% chance the Fed would pause.
Last week, platinum ETF holdings declined by 7643 ounces resulting in a reduction in the year-to-date gain to 4.7%. On the other hand, the net spec and fund long in platinum has come down significantly versus the April high and the spec long is probably near 12-month lows. While the palladium market did not register another record spec short in the weekly COT report, the net short remains near record territory which should provide a warning for those venturing into the short side.
While the 4 day high early last Friday was justified by the latest Chinese attempt to support their economy, the Chinese central bank effort is judged to be inadequate leaving copper vulnerable to surrendering recent gains. Furthermore, LME copper warehouse stocks continued to rise with a 3,125-tonne inflow last Friday, and we suspect Chinese copper demand views are softening from significant declines in Chinese equity markets overnight. In our opinion, international copper demand signals are also deteriorating with surging global interest rates capable of discouraging home and vehicle purchases.
Certainly, positive sentiment flowing from global equities, an interest rate cut by the Chinese central bank and global chatter of supply tightness gives the bull camp fresh impetus to start the new trading week. In addition to recent sharp contractions in US API and EIA crude oil inventories, the trade was presented with news of a 7% week over week decline in global crude oil in floating storage. Perhaps most importantly, weekly Asian-Pacific inventories declined by 15% and have reached the lowest level since March. In fact, with very strong Chinese refinery throughput and very high US refinery operating rates, physical crude oil demand should remain strong. However, Chinese demand news is conflicted with Chinese oil imports in July up 17.1% versus last year while declining 16.1% versus last month.
In a clear change of leadership, the diesel market took over from gasoline with a strong finish last week in the face of a very poor finish in gasoline. In fact, headlines overnight tout several bullish diesel developments with the best bull argument in gasoline a slight lift from higher US equities.
With a sharp gap up spike early this week, the market has returned to “weather market” status which means expectations of adverse conditions stressing the crop take precedence over many bearish fundamentals. In fact, recent significant rainfall to the eastern portion of the Grain Belt should have reduced the threat to the crop from the upcoming bulge in temperatures. However, with a rally in November soybeans from last week’s low of nearly $0.80, the trade is clearly moving to factor in a sustained return of stressful conditions with large areas in key pod filling stage. It should also be noted that funds were estimated to have purchased 11,000 contracts in the last 2 days of trade last week. In other words, there is clearly fundamental justification for the market to insert additional weather premium into prices for now.
Extreme temperatures and no moisture will lend support this week along with the Pro Farmer crop tour which begins on Monday. Early week weather is void of precipitation across all the Midwest and models continue to suggest the hottest temperatures will be in the central corn belt from Tuesday to Friday with virtually no rain expected until next weekend. In addition, the heat does briefly reach the Eastern corn belt with upper 90’s midweek. 8-14-day models show moderating temperatures in the eastern corn belt but rain chances look limited. Ukraine says they are in talks with global shippers about insurance coverage for ships transiting Ukraine’s grain corridor. With one ship moving through the corridor last week, Ukraine says they are ready for others to do the same.
A massive heat dome will engulf the Midwest this week, which will help the wheat harvest move forward. Black Sea news over the weekend, Romania said 60% of Ukraine exports could go through Romanian ports, although for the last four weeks total Ukraine grain exports were 3.2 million tons versus 4.8 million in June before the corridor expired. Denmark and the Netherlands agreed to send F-16 fighters to Ukraine and the new grain corridor Ukraine established two weeks ago is ready for use, according to Ukrainian authorities.
October hogs saw a sharp two-day rally last week that took them back inside the relatively narrow July 5-August 10 trading range and helped alleviate a short-term oversold condition. It will be important for the market to take out the August 1 high at 86.75 to resume its uptrend. Hogs could see some support today from a bullish tone in global equity markets. Cash pork prices are weak, and hog weights are increasing, but October hogs’ larger than normal discount to the cash market lends support. The USDA estimated hog slaughter came in at 469,000 head Friday and 61,000 head for Saturday. This brought the total for last week to 2.414 million head, up from 2.354 million the previous week and 2.407 million a year ago. Estimated US pork production last week was 501.9 million pounds, up from 491.3 million the previous week and down from 506.1 a year ago.
The Cattle on Feed report Friday afternoon came in at the bullish end of expectations and could support a higher opening on Monday, especially in the wake of Friday’s selloff. The market could also see support from a better risk tone in global equity markets early this week in the wake of China’s decision to cut near term interest rates. The On-Feed report showed placements for the month of July at 91.7% of last year versus an average trade expectation of 94.5% and a range from 90.4% to 96.5%. Marketings came in at 94.7% versus 94.8% expected (range 94.5%-95.1%). August 1 on feed supply was 97.7% of last year versus 98.4% expected (range 98% to 99.1%). Both placements and on-feed came in lower than the average expectations. This could spark a move higher this week, as the report confirms once again the tight supply situation.
Sluggish global risk sentiment and significant weakness in key outside markets caught up with cocoa prices going into the weekend as it broke a 4-day winning streak on Friday. With a bullish global supply outlook, however, cocoa should regain upside momentum early this week. December cocoa was unable to shake off early pressure as it went on to post a sizable loss for Friday’s trading session. For the week, however, December cocoa finished with a gain of 92 points (up 2.7%) which broke a 2-week losing streak. Sizable weekly losses in European and US equity markets were a notable source of carryover pressure on the cocoa market as that may diminish near-term chocolate demand in both regions.
After a failed recovery move in late July and early August, coffee prices reached a seven-month low last week. The last time coffee prices were last these levels was in mid-January, which was followed by a 34.65-cent rally (23.9%) through the start of February. December coffee rebounded from a 7-month low as it went on to post a moderate gain and a reversal for Friday’s trading session. For the week, December coffee finished with a loss of 7.70 cents (down 4.9%) and a second negative weekly result in a row. Sluggish global risk sentiment over the past few weeks weakened coffee’s demand outlook on ideas it would have a negative impact on restaurant and retail shop consumption. However, out-of-home demand prospects should improve with the continued decline of inflation levels, and that has given coffee prices underlying support.
The cotton market is torn between threats to the US crop and concerns about Chinese demand. An improved risk tone early this week after China lowered its short-term rates over the weekend is lending support to December cotton. Last week’s US Crop Progress report showed the percentage of the crops rated poor/very poor were at record highs for Texas and the US, and they could be even worse this week, as high temperatures limited the benefit of any rain that did fall. There are chances for rain this week in Texas but again, temperatures continue to be well above normal, which will speed evaporation. The 6-10 and 8-14-day forecasts are also showing above normal temperatures and below normal chances of rain.
Sugar prices were unable to benefit from bullish supply news late last week as larger Brazilian production remains a front and center issue for the market. Unless a “risk on” mood develops in global markets, sugar may be heading for a retest of its July lows early this week. October sugar followed through on last Thursday’s negative reversal as it stayed under pressure and finished Friday’s trading session with a moderate loss. For the week, October sugar finished with a loss of 57 ticks (down 2.3%) which was a third negative weekly result over the past 4 weeks as well as a negative weekly reversal from last Thursday’s 3-week high. There were reports that India’s August rainfall through last Thursday was 40% below their long-period average and on-track for their lowest August rainfall in more than a century. India’s monsoon rainfall through Sunday is 7% below the long-period average which would put 2023 in the “below normal” category.
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