We suspect the setback in treasury prices early this week is partly a reaction to the massive December rallies of 10-points in Treasury Bonds and the 3 1/2 point rally in March Notes and perhaps from a measure of typical beginning of the year economic optimism. While a Chinese Caixin manufacturing PMI reading for December showed a slight improvement, that is hardly justification aggressive retrenchment in US Treasury prices. However, there is talk that the markets have overplayed the prospect of an early US rate cut as the flip of the calendar has brought with it a series of longer-term forecasts indicating the markets are premature in their rate cut timing and in predictions suggesting that rates will remain “higher” for longer.
At least in the early going this week, the dollar continues to add to last week’s reversal and recovery effort. However, the dollar faces a very critical junction this week with a minimal negative view toward the economy likely to send the index below par. In other words, the trade is poised to reconfirm or begin to question the massive washout of the fourth quarter. On the other hand, the trade is likely to remain in a “Goldilocks” posture where a mix of positive and negative US data is likely to favor the bear camp. We seriously doubt the dollar can post a recovery to downtrend channel resistance drawn from the November and December high but a first retracement of the December washout up is possible but not likely.
Global equity markets at the start of this week were generally higher, except for the markets in Shanghai, Hong Kong, and Moscow. Like the treasury markets, the stock market is overbought technically and fundamentally! However, the trend is up with interest rates supportive, softening inflation supportive and from the usual investor optimism from the beginning of a new year with portfolio balancing and small investor New Year’s resolutions to save, invest and make more money. While the CME Fed Watch tool has not had a dominating impact on equities, that tool puts the probability of a rate cut later this month at only 10.9% but that number is likely to make a dramatic change during a holiday shortened week of jobs related data.
GOLD, SILVER & PLATINUM:
The bulls started the New Year in control as gold prices rallied after Israel attacked Syria in response to a rocket attack, and Turkey arrested 33 Israeli “spies”. There is fear that this might be the start of a deeper regional destabilization following the US Navy’s sinking of three Houthi ships in the Red Sea, and Iran sending a warship into the Red Sea. US interest rates were higher and the dollar managed to rally sharply to start the year. The bulls shook off these macro headwinds as there is much euphoria around gold to start the year, and there are plenty of bulls lined up to buy. The bulls have been expecting interest rate cuts in 2024 and weaker than expected Chinese data keeps this theme alive to start the new year.
Copper started out this year under noted pressure as a slight improvement in Chinese PMI data was discounted. Although there has been speculation of further Chinese stimulus, this has yet to show up even as China’s President Xi gave a speech outlining China’s economic woes. In a more direct bearish development last week, Chinese Shanghai copper warehouse stocks increased by 2,187 tonnes insinuating soft Chinese domestic demand. Several of European PMI’s came in above trade estimates, but they are all still well below 50, and the trade chatter suggests the euro zone may already be in a recession.
We suspect part of the recovery action in crude oil early this week is beginning of the year allocations with another portion of the buying interest resulting from global crude in floating storage declining by 16% last week. In fact, Asian Pacific floating storage fell by 32% and now stands at 33.3 million barrels. The market is also likely to draft fresh support from intensified fighting in Ukraine, increasing clashes between the US Navy and Yemeni terrorists and most importantly from news that Iran has sent a warship into the Red Sea.
Like the crude oil market, the gasoline market is showing corrective gains early this week off increased military movement in the Red Sea, but the market remains overbought in speculative categories and should see headwinds from a decline in December Indian gasoline sales. While the diesel market is showing corrective bounce action early, the recovery is the most anemic in the petroleum markets. In addition to the decline in Indian December diesel sales, the diesel market is also undermined by Russian plans to raise diesel exports by 18% or 817,000 barrels per day more than in December. The natural gas market has started the year extending a pattern of higher lows in higher highs beginning on December 21st.
The new year started off with all eyes on the Brazilian weather scene where some rains fell over the weekend in the driest areas and more is expected this week, which gives the edge to the bear camp to start the year. Crop stress is expected to shrink to just 10-15% of the belt after the rains this week; however, extended models show a drier trend returning mid-to-late month, which may keep the bears from pressing the market too hard.
This year will start out with prices on a sideways/lower trajectory after last Friday’s year-end close was just a few cents off the low for 2023 and down 30.5% for the year, the largest decline in 10 years. Brazil rains fell as advertised over the holiday weekend hitting some of the driest areas, more is expected this week, but models suggest a drier trend returning mid-to-late month. A Maersk cargo ship was attacked over the weekend by the Houthis and was repelled by the U.S. Navy, which resulted in Iran sending a destroyer into the Red Sea area, raising shipping risks further. A prominent South American crop scout left his Brazil and Argentine corn crops unchanged and said Safrinha corn planted area could be down 15-20%.
Geopolitical and global shipping risks are the features to start the new year as Russia attacked the port of Odessa again with drones and the Houthis attacked a cargo ship in the Red Sea. Reportedly, the U.S. Navy repelled the attack and sunk three Houthi boats, which resulted in Iran deploying a destroyer to the Red Sea area. 2023 ended with a loss of 20.7% for SRW futures and a 27.7% loss for HRW. Ukraine said 13 million tons of cargo has moved through the grain corridor, but shipping risks are elevated in the area after a ship hit a sea mine last week.
February hogs remain under the negative influence of the December 22 Hogs and Pigs report, which showed hog supply close to year ago levels but higher than expected. Another strong weekly export sales reports did not seem to provide much support. The report showed US pork sales for the week ending December 21 at 23,830 tonnes for 2023 delivery and 24,042 for 2024 for a total of 47,872. This was down from 56,319 the previous week but was the second highest since November 2. Cumulative sales for 2023 have reached 1.766 million tonnes, up from 1.603 million a year ago but below the five-year average of 1.841 million. The largest buyer this week was Mexico at 21,891 tonnes, followed by Japan at 9,199 and Australia at 3,881. China bought 2,042 tonnes.
February cattle continue to consolidate inside a range bound by 167.35 and 171.00, which it has held for 10 sessions. The market drew support last week from blizzards and cold weather in the Northern Plains. The region looks dry this week, but the 6 to 10 and 8 to 14 day forecasts call for above normal precipitation and below normal temperatures, which could affect weight gain. Cash live cattle traded higher last week in decent volume. As of Friday afternoon, the five-day, five-area weighted average price was 172.17, up from 170.60 the previous week.
The cocoa market has been in a 15-month uptrend that has seen prices double in value from their 2-year low in September 2022 to a 46-year high last Tuesday. Cocoa finished that session with a negative daily key reversal, and followed that with three negative daily results to finish out 2023. With commercials already increasing their selling going into year-end, the cocoa market remains vulnerable to profit-taking and additional long liquidation during the first week of 2024.
Coffee’s fourth quarter uptrend saw five pullbacks of 10 cents or larger, the last of which (and largest in size) was a 15.70 cent decline from Thursday’s high to Friday’s low. With the market continuing to find support from Robusta production issues, coffee prices should be close to finding a near-term low early this year. March coffee turned sharply to the downside early in the day and remained on the defensive as they finished Friday’s trading with a very large loss. For the week, March coffee finished with a loss of 4.50 cents (down 2.3%) which broke a 2-week winning streak.
The possibility that the New Year will bring some active export trade seemed to support the cotton market at the start of this week. Friday’s weekly US export sales report showed sales for the week ending December 21 at 369,857 bales for the 2023/24 (current) marketing year and 2,640 for 2024/25 for a total of 372,497. This was up from 147,991 the previous week and the highest since November 2. Cumulative sales for 2023/24 have reached 8.492 million bales, down from 8.747 million a year ago and the lowest for this point in the marketing year since 2016/17, but this is not surprising given the relatively small US crop this year.
After reaching a 12-year high in November, sugar prices embarked on a steep 29% decline through last week. While the sugar market saw a sharp rebound on Thursday and quickly gave back those gains on Friday, it managed to hold above last week’s lows which may indicate that a longer-term low may be in. March sugar reversed all of Thursday’s sharp upside breakout as it could not shake off early pressure and finished Friday’s trading session with a very large loss. For the week, March sugar finished with a loss of 0.04 cent (down 0.2%) which was an eighth negative weekly result in a row.
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