Apparently, last Thursday’s jump in initial and ongoing unemployment claims was quickly forgotten, perhaps because the latest Michigan consumer sentiment index posted the highest reading since January 2022 (13 months). It is also possible that longs have decided to bank profits and exit ahead of this week’s CPI release, as the combination of strong jobs and softer inflation could put the treasury markets in a position to begin to catch up to Fed rate hikes. In retrospect, disappointing treasury auction demand is not surprising given the low level of yields offered and strong evidence of growth in US jobs data.
While the dollar at times this week showed significant strength which prompted talk of a trend reversal, a significant loss of upside momentum disappointing US claims data, the US CPI report Tuesday could be a watershed moment for the greenback. Into next week’s avalanche of global CPI and PPI readings we expect Swiss franc volatility to expand again and the Yen to come under renewed selling pressure.
Although the dollar has posted a series of lower highs and lower lows on its charts, bearish technical signals could be easily overwhelmed by bullish fundamental developments early this week. Regardless of the fundamental condition of the Japanese economy (which is somewhat precarious), the Yen the charts have been damaged with a breakout below consolidation and support. Clearly, Swiss domestic data is relatively unimportant given the flow of data from the US in the coming sessions. Like the Swiss, the Pound has relatively credible support just under the market but could see a spike down trade in the coming 36 hours. While we expect the Canadian dollar to gyrate within the range of the last 2 weeks (74.21-75.40) the currency sits in the upper quarter of the last 30 days range.
Fortunately for the bull camp, the markets did not face anxiety as corporate headlines remained squarely in the bear camp last week and are likely to extend into this week. In addition to a pulse up in interest rate markets, the trade was undermined by disappointing news and stock price action in sharing company LYFT. Not surprisingly, the NASDAQ saw noted pressure as the outlook for the tech sector has been severely damaged by unrelenting layoff announcements from tech companies. Going forward, we see equity prices caught in a limiting conundrum with the need for good data to discourage investor fears in recession forecasts and soft data needed to moderate rising rate concerns.
While the March S&P has apparently produced a consolidation support shelf (thin in scope), that level is likely to become resistance over the coming 2 trading sessions. While the Dow might ultimately find support after CPI related selling, a retest of the Friday low is likely early this week. As indicated in other sectors, the NASDAQ continues to face a pattern of negative fundamental headlines from the beleaguered tech sector.
GOLD, SILVER & PLATINUM:
With the dollar showing significant two-sided volatility last week, volatility in gold was clearly justified and is likely to extend early this week. In fact, with the dollar charts shifting up and the April gold chart producing damaging action last Friday, the path of least resistance is down in gold. Looking ahead, we suspect the US CPI report on Tuesday will be a major event for gold, silver, platinum, and palladium. In a twist of historical trade action, gold and silver bulls probably need softer than expected inflation readings to shake off last week’s setback.
While the recent surge in platinum ETF holdings has not garnered headline status, ongoing inflows should soon spark speculation of a return of investment interest. At the end of last week, platinum ETF holdings were up 1.9% year-to-date with inflows last week resulting in holdings reaching 2.36 million ounces versus 2.33 million less than one month ago. With the palladium market smaller in scope than the platinum market, a year-to-date gain in palladium holdings of 4% is significant especially given total world palladium ETF holdings are only 465,301 ounces.
Fortunately for the bull camp in copper, last week’s trend extending increase in Shanghai copper warehouse stocks has been offset by several global production issues. In addition to Freeport Indonesia suspending work at its Grasberg mine after flooding from heavy rains damaged facilities, the trade is also watching production disruptions in Peru at 2 major mining facilities. However, hope for improving Chinese demand has shifted into concern of softer demand, as demand has not picked up strong after the holiday. Therefore, some analyst to predict Chinese copper demand might not recover until the 2nd quarter.
With the range up action at the end of last week, crude oil prices posted a rally of nearly $6.00 primarily because of the 500,000 barrel per day production cut by Russia. Furthermore, according to the Russian Deputy Prime Minister, the risk of additional declines in Russian oil output later this year should not be ruled out. While Russia has indicated the production cuts will be limited to oil, they also announced efforts to limit crude price discounts with their Urals price at times at a $34 to $20 discount to Brent crude oil. However, just as EU price caps are largely ineffective, Moscow’s attempt to limit discounts to those ignoring sanctions would be similarly difficult to enforce.
Obviously, optimism toward growth in Chinese oil demand has been a key component of the bounce off the early February low, with Chinese imports, total Asian oil movement, increased Middle East prices into Asia and significant Chinese refineries throughput levels all contributing buying to the market. In a slightly bearish longer-term development, US oil rig drilling activity in the most recent Baker Hughes report showed the largest one week increase since last June. With 609 US oil drilling rigs operating compared to just 516 rigs a year ago, over time US production and supply will rise unless the dollar weakens and gives the US a significant price advantage in Asia.
Hot weather for Argentina over the weekend (100 degrees) added some stress to dry areas. A front brought showers to southern areas yesterday and will move north today. Another front will move through in a few days but forecasts models have trended down with precipitation coverage and intensity. Some models still have decent rain totals this week. Forecasts remain dry for the following week. The market priced-in a mostly dry forecast over the next 10 days, but the weather models continued to flip-flop over the weekend and some models show decent rains. Brazil harvest reached 17% complete as compared with 24% last year.
May corn closed sharply higher on the session last Friday, and this helped the market trade near three cents higher for the week. Drier than expected weather forecasts over the next 10 days for Argentina helped to spark the buying. In addition, traders see too much rain in Brazil as a reason to suspect late plantings of the second crop corn in Brazil. Plantings of the second crop as of February 4th, reached just 10% as compared with 22% in the same period last year. The forecast on Friday was quite threatening for Argentina, but forecasts “flipflopped” over the weekend and they shifted back to just scattered rains this coming week and dry conditions next week.
A little less tension in the Black Sea and ideas that the export corridor will remain open helped to pressure the wheat market early this week. Traders are nervous with the potential for a sharp drop in Ukraine wheat production for the coming season, and also a much smaller Russian crop. Increased concerns about the Black Sea region and the impact on exports and production from the region due to escalating tensions between Russia and Ukraine late last week helped to support the market. The market has become accustomed to aggressive exports from the Black Sea region, so if the situation changes in the future, exportable surplus could tighten. May wheat closed sharply higher on the session Friday and experienced the highest close for the year.
The hog market remains in a short-term downtrend and the hook reversal on February 7 might suggest the start of a technical correction. Supply is coming in above last year and above the fourth quarter which is a contra seasonal bearish force. Hong Kong reported an outbreak of African swine fever on a farm near the border with mainland China. Traders will monitor the situation closely, but it may provide some underlying support. April hogs closed slightly lower on the session Friday after choppy and two-sided trade with a small range. The market is still trying to hold a premium to the cash market as the cash market has remained in an uptrend over the past week or so, weights are low and pork product prices have bounced.
Cash live cattle traded in active volume last Friday, rounding out the week $1-$1.50 higher than the previous week. As of Friday afternoon, the five-day, five-area weighted average price was $159.19, up from $158.05 the previous week. April cattle closed slightly higher on the session Friday with a small range and an inside trading session. The market remains in an overbought condition, but supply is likely to tighten ahead and demand factors short-term still look okay. The estimated average dressed cattle weight last week was 827 pounds, unchanged from the previous week and down from 846 a year ago. The 5-year average weight for that week is 833 pounds.
Cocoa prices have seen choppy price action so far during the month of February, but the market continues to hold its ground above the mid-January lows. If global risk sentiment can improve this week, the cocoa market may be able to climb above its recent consolidation zone. May cocoa came under early pressure as it fell to a new 3-week low, and then turned back to the upside as it finished Friday’s trading session with a moderate loss. For the week, May cocoa finished with a loss of 15 points (down 0.6%) which was a third negative weekly result over the past 4 weeks.
Coffee prices have held within a fairly tight trading range and have been unable to sustain upside momentum since a negative daily reversal on February 1st. With a bearish shift in the Brazilian production outlook weighing on prices, coffee could see a downside breakout. May coffee rallied through midsession, but came under pressure late in the day as it finished Friday’s trading session with a mild gain. For the week, May coffee finished with a gain of 1.35 cents (up 0.8%) which was a fourth positive weekly result in a row.
The cotton market has been in a coiling pattern since putting in a low in November. The market closed slightly lower on Friday but well up from the lows on the day. The dollar was higher but so was crude oil, so two key outside market forces conflicted with each other. The export sales report on Thursday was supportive, but the USDA supply/demand report was bearish.
Sugar prices are on a 4-session winning streak, but appear to have lost upside momentum going into the weekend. Unless the market can receive fresh bullish supply news, sugar remains vulnerable to a near-term pullback. May sugar continued to see coiling action late last week as the market was able to match Thursday’s weekly high before finishing Friday’s trading session with a mild gain. For the week, May sugar finished with a gain of 5 ticks (up 0.3%) which was a third positive weekly result in a row.
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