Not surprisingly, treasury prices rebounded significantly off last Friday’s new low for the move. In addition to buying from disappointing US jobs data, we suspect the soft data brought on a significant wave of stop loss buying and a smaller wave of speculative buying. The soft US nonfarm payroll data gave the bull camp additive bullish sentiment following the jumps in US initial and ongoing claims readings yesterday. There are reports that the cost to hedge against higher interest rates is ballooning in what could be a sign of a major fundamental value zone on the charts.
Not surprisingly, the dollar corrected last Friday following a very disappointing US nonfarm payroll result. While the July nonfarm payroll number was just under the number of jobs gained in June, current nonfarm payrolls are near the lowest levels since the end of December 2020. Unfortunately for the bear camp in the dollar, European data ahead of US nonfarm payrolls was not distinctly upbeat, thereby leaving the dollar less vulnerable to foreign economic report results. In retrospect, the action in US financial markets from last week was telling as US interest rates climbed despite signs of slower growth in the US jobs market.
In retrospect, the stock market survived a massive jump in US treasury yields last Friday, perhaps because of dissipating recession fear and very supportive Amazon earnings. However, the markets were disappointed with Apple sales and given the fear of rising real rates, the bull camp needs Goldilocks data and signs of softer inflation on Wednesday to avoid returning to the early corrective track this week to keep the recent upward track intact.
Global equity markets at the start of this week were lower except for the RTS index, the Topix and early US stock market action which traded moderately higher. The path of least resistance is pointing down in US equities with the threat of rotation from stocks to fixed income/higher yielding investments looming. In fact, the equity market is likely to be undermined following what could be a wave of hawkish US central bank commentary.
GOLD, SILVER & PLATINUM:
The initial trade in gold early this week was lower in a knee-jerk reaction to slightly higher US dollar action and from a slight blip up in US interest rates. The Peoples Bank of China posted another incremental increase in gold reserves in July of roughly 2 million ounces in a continuation of their gradual and difficult to monitor buildup of gold reserves. Unfortunately for the bull camp, gold ETF holdings saw a 10th straight daily outflow last Friday bringing net sales from holdings this year up to 2.86 million ounces. Furthermore, silver ETF holdings on Friday declined by 2.3 million ounces bringing this year’s net sales tally to 21.7 million ounces. The outflow from silver holdings was the fifth straight day of outflows. While the silver market aggressively rejected its range down move last Friday fundamental reasons to pick a low are lacking and the charts suggest buying closer to $23.00 is preferred. While the platinum market has managed a 3 day high in the early trade this week, we remain bearish toward the market with ongoing signs of outflows from ETF instruments, the threat of rising rates and a strengthening dollar all combining for a conclusive bearish environment. The palladium market continues to coil in a trading range bound by $1,324.50 and $1,215.50 and we expect that action to continue.
While the charts remain bearish in copper, there are countervailing issues flowing from the world’s largest copper consumer China. On the one hand, supply/inventories inside China are growing extremely tight despite the buildup of inventory in London exchange warehouses. Therefore, it is not surprising Goldman has predicted copper to hold up despite slack economic conditions in the country. According to a report, the Chinese government has instructed its economic analysts to avoid the use of deflation and recession in their official descriptions of the economy!
With a minimal higher high for the move, the bull bias in crude oil has been moderated by a $2.57 setback from the initial high. Nonetheless, the bull camp should garner confidence from a 4.6% weekly decline in global floating storage of crude oil with the biggest declines registered in Asia, the Middle East, and Europe. Not surprisingly, US Gulf Coast floating storage saw the echo impact from the decline in global floating storage, with a week over week increase of 123%. In other words, the US supply remains the marginal supply source with those supplies potentially backing up inside the US because of higher dollar adjusted pricing.
With respect to the weather, we could have saved time over the last several weeks by simply copying rainfall totals and forecasts from one day to the next. However, one could suggest that recent rain events have been definitively more bearish given increased rainfall amounts and coverages. While areas of southern Illinois continue to miss heavy rains, larger high yield producing areas throughout the belt have received significant precipitation over the prior 72 hours which should be facilitating pod setting/pod filling. The soybean market should also feel the pressure from weakness in crude palm oil futures given the breakdown off fears of increased production and rising inventories.
Corn prices shrugged off weekend news of a Ukrainian strike on a commercial oil tanker carrying Russian crude. This was the first attack targeting commercial shipping and could cause shipping insurers to rethink their coverage. It is very clear Ukraine is trying to put maximum pressure on Russia to reinstate the grain corridor by disrupting their exports. Offsetting the Black Sea news, good rains fell across portions of the Midwest over the weekend, including the 3 “I” states. More is expected this week in those same areas. Moderate temperatures will shrink crop stress to just 10 to 15% of the corn belt and that limits the threat of yield loss the next two weeks, especially after private yield estimates last week came out near the USDA or slightly above.
Prices received a boost by the Ukrainian weekend strike of a commercial oil tanker carrying Russian crude and comments by Ukraine that ships moving toward six Russian ports would be considered possible military targets. Ukraine is likely hoping that this new risk to commercial shipping will disrupt Russian exports and bring them back to the table on the grain corridor deal. In addition, J.P. Morgan severing SWIFT access to the Russian Ag Bank on Friday was intended to exert additional pressure on Russian exports.
The gap lower last week in October hogs leaves the market vulnerable to more pressure this week. The market has been maintaining a mild uptrend over the past month but may be losing its seasonal support soon. The CME Lean Hog Index as of August 2 was 105.86, up from 105.80 the previous session and 105.84 a week prior. The USDA estimated hog slaughter came in at 418,000 head Friday and 30,000 head for Saturday. This brought the total for last week to 2.338 million head, down from 2.392 million the previous week but up from 2.335 million a year ago.
October live cattle are back testing contract highs with their rally on Friday. The market benefited from an improved risk-on attitude in the wake of the US jobs report and a sharply lower dollar. Cash live cattle trade was quiet during most of last week, with Iowa/Minnesota the only region showing any significant volume and average prices $2 higher than they were the previous week. The USDA estimated cattle slaughter came in at 113,000 head Friday and 6,000 head for Saturday. This brought the total for last week to 613,000 head, down from 619,000 the previous week and 648,000 a year ago.
Since a negative daily key reversal on July 27th, cocoa’s coiling price action has signaled a loss of upside momentum. While it continues to have a bullish supply outlook, the cocoa market is vulnerable to a sizable downside move this week. September cocoa found early support before losing strength late in the day as it finished Friday’s trading session with a moderate gain. For the week, September cocoa finished with a loss of 15 points (down 0.4%) which broke a 3-week winning streak.
For the second week in a row, coffee prices saw a more than 7.00 cent pullback from Thursday’s high to Friday’s low. While the coffee market has been lifting clear of its mid-July lows, it may have trouble regaining upside momentum early this week. September coffee remained under significant pressure as they followed through on last Thursday’s negative daily reversal and went on to post a sizable loss for Friday’s trading session. For the week, however, September coffee finished with a gain of 3.45 cents (up 2.2%). Forecasts for dry weather over Brazil’s major Arabica growing regions should help to minimize delays for this year’s harvest, and that weighed on coffee prices going into the weekend as it should lead to more of Brazil’s coffee supply reaching the global export marketplace.
Based on the action in December cotton last week, it doesn’t appear that the trade is too concerned about the US cotton crop, perhaps because weather worries are offset by weak demand. The weekly crop conditions reports, and the near-term weather outlook, suggest this year’s crop will be smaller than USDA’s latest projections. The market closed lower on Friday despite a turn lower in the dollar that should be good for US exports. After another week of hot and dry weather in West Texas last week, Texas crop conditions could see further declines in this afternoon’s Crop Progress report.
After a sharp selloff in late June, sugar prices were able to regain a good portion of those losses during the first three weeks of July. Following that rally, sugar prices ran out of upside momentum and could be heading for a retest of their late June lows. October sugar was unable to hold onto mild early gains and fell to a 3-week low before finishing Friday’s trading session with a sizable loss. For the week, October sugar finished with a loss of 23 ticks (sown 1.0%) and a second negative weekly result in a row. Energy prices extended their recovery move which provided sugar with early carryover support. However, sugar’s main source of pressure continues to come from Brazil’s Center-South sugar production, which over the first 3 1/2 months of the 2023/24 season was 21.9% ahead of last season’s pace.
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