With treasury bonds recently forging an aggressive six points rally, the hard setback today in the wake of much better-than-expected nonfarm payrolls was fully justified. In our opinion, a nonfarm payroll result outside of the range of estimates can impact prices significantly for 2 consecutive sessions and that could extend volatility into this week’s trade. Adding into the corrective track in bonds is the uptick in average hourly earnings and higher University of Michigan five-year consumer inflation expectations readings for January. Obviously, the much stronger-than-expected US payroll report from Friday justifies the two-day decline of nearly 3 points in bonds as major surprise jobs reports can take several sessions to adequately factor into prices.
Instead of being saved by the bell, dollar bulls last Friday were saved by a surprisingly strong US nonfarm payroll report. However, while the dollar has forged an upside breakout to the highest levels since early December, the currency markets have been unable to sustain breakouts for almost 3 weeks. On the other hand, the size of the gain in US nonfarm payroll should clearly distinguish the US as a stronger economy than China, Europe, and the UK. The higher high at the start of this week in the dollar following the higher high on Friday signals the trade has shifted its focus from fears of a March rate cut to ideas the US economy looks to avoid recession.
As the dollar goes, the euro goes in the opposite direction. The euro could see some minimal cushion from recent signs of residual inflation and from favorable French, Italian and German services PMI readings and also see find support from favorable composite PMI readings from France, but those readings were countervailed by disappointing German composite PMI readings and very disappointing German import and export figures for December.
While the equity markets fell back following a much stronger than anticipated US nonfarm payroll data last Friday (which prompted a surge in treasury yields), prices recovered and posted new highs before midsession in a sign that the bull market remains in place. However, the subject of overvaluation, particularly in big tech could soon become a problem for the markets. Global equity markets at the start of this week were mixed with the Shanghai stock exchange composite trading down 1% and extending last week’s significant losses.
In retrospect, the S&P last week seemed to anticipate a positive US jobs result but has partially succumbed Monday morning to the disappointment over a virtual elimination of a March rate cut. While the Dow continues to get mixed classic fundamental signals from interest rates and exchange rates, large cap stocks remain locked in the impressive recovery rally which began at the middle of last month. Despite the NASDAQ showing relatively more volatility than other sectors of the market, seeing Meta Platforms (Facebook) gain $196 billion in equity on Friday (apparently from very positive views toward the Vision Pro virtual reality glasses) and seeing Amazon.com shares jump 7% on Friday (from AI prospects) gives the bull camp significant fundamental momentum.
GOLD, SILVER & PLATINUM:
Not surprisingly, the gold market started off under noted pressure this week with a six day low largely because of the upside breakout in the dollar to the highest level since mid-November and from a slight increase in US treasury yields following a hawkish speech from the US Fed chairman Sunday night. With the gold market adding to the January recovery rally last week before failing and reversing the market was giving off technical signs of an intermediate top last week. Unfortunately for the bull camp, outside market impacts of the dollar and treasuries shifted patently bearishly after the much stronger than expected US nonfarm payroll reading. While we thought the silver market was tracking physical demand fundamentals last week, the much better-than-expected US jobs report and ongoing gains in equities has not cushioned the market, thereby leaving the potential for a retest of $22.00 in place.
With the Shanghai stock exchange composite closing 1% lower (a 52-week low) and continuing its recent plunge, concerns of softening Chinese copper demand are front and center and on the back of the copper market early this week. Even though the copper market managed to rally in the first three days of last week’s trade and managed that in the face of persistent expansion of fear toward the Chinese economy (and concerns for Chinese copper consumption), the market reversed and closed very poor on the charts suggesting a trade back below $3.80 is in the offing. Adding into the negative Chinese copper demand theme is the largest weekly increase in Shanghai copper stocks last week since February 2023 which left the total inventories at the highest level since July 2023.
With strength in the dollar, ongoing significant declines in the Shanghai Stock Exchange index, news of a decline in Spanish 2023 crude oil imports and perhaps most importantly, a lack of positive price action from intense US and UK attacks in the Middle East, the bias in energy prices remains down. Furthermore, crude oil in floating storage increased 8.3% last week and buyers are beginning to avoid the Red Sea with attempts to buy from closer selling destinations. With the sharp plunge in crude to end last week’s trade reaching the lowest level since January 17th, the market could be headed down to $70.00 unless there is a clear sign that Iran or some other Middle East country has stepped in in favor of Iran.
While gasoline will find some intermediate support from the extremely low US refinery operating rate, spillover pressure from weakness in crude oil and negative charts should give the bear camp an edge to start the new trading week. With the diesel market holding up better than crude oil and gasoline in the face of last week’s washout, the market may have “catch up” selling ahead.
Ongoing Brazilian harvest and rains scheduled for this coming weekend in Argentina are the market’s focus to start the week, which favors the bear camp. After 2 weeks of high 90s and 100s heat in Argentina, showers and moderating temperatures are expected this coming weekend. The Buenos Aires Grain Exchange says 59% of Argentine beans are flowering and 23% setting pods, which means upcoming weather is of increasing importance to the crop. AgRural says Brazil harvest is 17% done, compared to 10% average for this date.
The week begins on a bearish notice as prices look to be headed for a test of the contract lows seen last week. Rains in Argentina are expected late this week into the weekend and temperatures will moderate and if the rains arrive as expected, the subsequent reduction in crop stress takes away the only bullish news the market has going for it. The extremely large fund net shorts could become a bullish factor if prices begin to move high enough to trigger short covering, but in meantime, bullish fundamental arguments are going to be hard to find. Commitment of Traders data showed Managed Money increased their net short by 15,000 contracts to 280,000 contract short, nearing a record. USDA’s February supply/demand report will be out Thursday and ending stocks are expected at 2.149 billion bushels, slightly below the 2.162 billion in January. Brazil’s crop is expected to be cut 2 million tonnes from January and Argentina’s crop is expected to rise slightly less than 1 million tonnes.
March Chicago prices are inside the narrow range of the last 7 days and will likely struggle to gain bullish footing after good rains across the HRW belt over the weekend. The US dollar moved to an 8-week high early this week, and spillover pressure from corn and beans adds further headwinds for wheat. Beneficial HRW rains fell across the southern Plains over the weekend covering much of Nebraska, Kansas, Oklahoma and central Texas. China says they will raise the minimum price for wheat to encourage more production.
Thursday’s USDA February Supply/Demand report is expected to show US ending stocks at 647 million bushels, nearly unchanged from the 648 million in the January report.
Last week’s US export sales report was impressive, with pork sales for the week ending January 25 the highest since December 21, but the market failed to capitalize on that news. The dollar broke out to the upside on Friday and saw further gains overnight, which could dampen US export prospects. China domestic pig prices had a sharp rally early last week but backed off as the week progressed. Perhaps the rally was due to last minute buying ahead of the Lunar New Year holiday, which starts later this week. There may be more herd culling ahead in China that would boost near term supply.
April cattle are facing a key junction Monday at the 200-day moving average, which it has not crossed since November 7. The market garnered support last week from the USDA cattle inventory report that showed US cattle supply on January 1 was the lowest it had been since 1951. The report reinforced expectations that US supply will remain tight for the foreseeable future. The market was also supported by higher cash live cattle prices. As of Friday afternoon, the five-day, five-area weighted average price was $177.77, up from $175.28 the previous week.
Cocoa prices have only had two negative daily results over the past 18 sessions as they have risen 915 points (up 22%) over that timeframe. While the market continues to have a bullish supply outlook and resilient global demand, cocoa is well into technically overbought territory and may not require much in the way of bearish news to have a sizable pullback. March cocoa extended its longer-term uptrend and climbed above the $5,000 level for the first time since 1977 before finishing Friday’s trading session with a sizable gain and a sixth positive daily result in a row. For the week, March cocoa finished with a gain of 337 points (up 7.2%) which was a fifth positive weekly result in a row. Dry and very warm growing conditions over West African growing areas have negatively impact cocoa production over the past few months, and that continues to be a major source of strength for the market.
Coffee prices have lost upside momentum as the start of February and may face fresh demand concerns early this month. Until it can find supportive news from the supply side of the market, coffee is likely to slide further to the downside early this week. March coffee continued to see whipsaw price action as it pivoted back to the downside before finishing Friday’s trading session with a moderate loss. For the week, March coffee finished with a loss of 1.90 cents (down 1.0%) which broke a 2-week winning streak and was a negative weekly reversal from last Tuesday’s 5-week high.
March cotton extended its uptrend early this week to trade to its highest level since October 16. Cotton traders have been impressed with the pace of US export sales lately, and last week’s strong report sparked a new leg higher. The strong pace of exports suggests global supplies are tighter than previously thought. Open interest has been climbing on the rally, which is bullish as well. The dollar had an outside day higher on Friday to trade to its highest level since November 17, and it extended its gains early this week. This move could dampen US export prospects, but it does not appear to have had much impact on the cotton prices so far.
Sugar prices overcame a negative shift in global risk sentiment late Friday as they continued to find support from bullish supply developments. With several major producers having export bottlenecks, sugar prices can maintain upside momentum and extend a 2024 recovery move this week. March sugar was able to rebound from early pressure as they went on to post a moderate gain for Friday’s trading session. For the week, March sugar finished with a gain of 0.12 cent (up 0.5%) and a fifth positive weekly result in a row. India’s production declined this season resulted in their government restricting the use of cane juice to produce ethanol.
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