Wkly Futures Market Summary Jan 22.24


The treasury bond market finished last week with volatile trading and a positive set up on the charts. Fundamentally, the ability to post new highs for last week after several positive US jobs reports suggests the 122-00 level in March bonds offers some form of value. The bull camp was also justified in the strong finish given disappointing US existing home sales results because of safe haven buying off rising concerns of Chinese debt problems. While not a significant bullish signal, treasury bonds have added to the rejection/recovery move off last Friday’s spike down move with the strength early this week somewhat surprising in the face of what looks to be a continuation of risk on sentiment flowing from US equities.


As in many financial markets, last week’s economic news presented vastly different economic signals with US economic data (especially from jobs) showing the US economy is holding together, while data from Europe and the UK rekindled recession concerns. In fact, UK retail sales plummeted by a startling 3.2% while German producer prices fell by 1.2% on a month over month basis and by a shocking 8.6% on a year-over-year basis. In conclusion, the dollar left the trading week with a newfound macroeconomic differential edge.

The slight upward tilt on the euro chart is surprising considering very concerning economic news flow from Germany last week and with the odds of a first quarter US rate cut dropping almost daily. In fact, the euro should be under fresh pressure given significant weakness in German exports to the US and China especially with German producer prices falling by a massive 8.6% last month. While we see no definitive winner in the currency markets as a race to the bottom continues), the pound could win by default especially if the prospects for UK tax cuts in the budget become a campaign issue.


In our opinion, the action in US equity markets last week was very impressive and very important to upcoming trends. In our opinion, it appears the markets have broken away from the “bad news is good for equities” posture and no longer need the assistance of the Fed. It also seems as if investors are fully embracing the AI phenomenon as the greatest thing since the initial development of the Internet. Global equity markets at the start of this week were generally higher except for the markets in China which traded significantly weaker. Perhaps the Chinese equity markets were disappointed in the lack of a rate cut by the Peoples bank of China especially after Beijing last week instructed some heavily indebted local governments to halt infrastructure spending. At least in the near-term, investors are not disappointed with the evaporating prospects of lower US rates which are apparently more than offset by a lack of alternative investments and or fear of missing out.

Like the S&P, the Dow has posted new highs early despite negative news from several Dow components. Obviously, seeing the investigation of Boeing 737 planes broadened is troublesome but the markets today appear to be focused on the continuation of a “Goldilocks” US economy. Despite reports of a Tesla price cut and a Tesla production issue in Germany, the NASDAQ has also forged new highs and is likely to extend.


While the US dollar is showing some vulnerability on its charts early this week, treasury yields may have temporarily peaked leaving the primary outside market influences slightly supportive of gold. However, we see no reason to take control away from the bear camp with the hedge funds reducing their long positioning last week, another week of ETF holding declines, an overbought net spec and fund positioning, a residual negative global commodity market environment, and perhaps most importantly from growing economic concerns in China.


Apparently, the copper trade was not disappointed with the lack of an interest rate cut from China overnight, as prices are under only moderate pressure early today. However, some traders expect Chinese inventories to be built up into the February holiday as evidenced by the increase in Chinese bonded supplies last week and the second straight week of increased Shanghai exchange copper inventories. With the aggressive rally at the end of last week lifting the March copper contract toward downtrend channel resistance, the bear camp could be offered an opportunity to get short at favorable risk and reward levels on the charts.


While it appears that crude oil is destined to remain within a broad $5.00 per barrel trading range, prices are in the upper quarter of the range and fears of slumping global demand are ringing louder than fears of Middle East supply disruptions. Furthermore, Libya has restarted production from its largest oilfield, hedge funds reduced long positions last week and despite recent strong Chinese oil import data (apparent demand rose by 8.6% in December), signs of economic problems in China should be tempering Chinese oil demand prospects.

In conclusion, the gasoline market is oversupplied, demand is average to soft, and the speculative trade is overbought. Even though the recent polar vortex posted record cold and a surge in heating demand, heating degree days were running significantly below normal into the outbreak of cold and have returned to normal which favor the bear camp in ULSD.

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We give the bull camp a slight edge to start the week on the short-term improvement in technical conditions after last week’s reversal off support and improved export demand last week. Soybean prices in Brazil, as represented by the BM&F BOVESPA index for Parana, fell to their lowest since August 2020. Brazil soybean basis is $0.80 under Chicago March futures, the largest discount since May as early harvest supplies began to be available. Brazil harvest is 5% done compared to 3% average and in Mato Grosso, which accounts for 29% of Brazil’s total bean production, 13% is harvested compared to a 7% average.


Although March corn bounced off key support last week, upside follow-through is needed to confirm at least a short-term turn higher. Speculative fund short positioning is getting very crowded and now stands at upwards of 260,000 contracts, the largest in history for January, while commercials hold a net long position of 50,000 contracts. It is notable to remember that funds generally don’t go into the spring months with such a large net short position due to weather risks. Total grain shorts across the CBOT stand at 456,000 contracts. Open interest has had its largest 3-week surge since May 2019 and was up another 23,000 contracts on Friday.


The bull camp can point to the technical reversals late last week and ongoing Mideast tensions as a reason to push prices higher this week, however, the Plains are expected to see beneficial moisture which may limit rally potential. Iran-backed militants struck a US airbase in Iraq and shipping attacks have reduced Suez Canal transits by 40% compared to this point in January last year.


A strong pork cutout indicates good demand, but a quick recovery in US pork production following the extreme cold and snow earlier this month may limit any further advance in hog prices. There is a winter weather advisory that stretches from eastern Kansas and Oklahoma through Missouri, the southeastern two-thirds of Iowa, and across Illinois, Indiana, southern Michigan and much of Ohio that could slow movement of hogs to market. However, the extended forecasts show a shift to above normal temperature across the US, with below normal precipitation over much of the Midwest.


The USDA Cattle on Feed Report on Friday showed placements for the month of December at 95.5% of a year ago, which was right on the average trade expectation. (Expectations ranged from 91.5% to 98.0%.) December marketings came in at 99.1% of last year versus 99.3% expected (range 98.2% to 100.7%). January 1 on feed supply came in at 102.1% versus 102.2% expected (range 101.4% to 102.5%). A winter weather advisory extends down into eastern Kanada and Oklahoma, and some areas have winter storm and freezing fog warnings. Extreme cold reached all the way down into Oklahoma this past weekend, which could provide support to the market today.


Last week’s fourth-quarter grind totals for Europe, Asia, and North America were all down from year ago levels, yet the cocoa market responded with a rally to new 46-year highs. The 2.5% year-over-year decline for European grindings was near the low end of expectations calling for a decline of 2-5%. North America saw a 2.95% decline versus expectations calling for declines of 6%-10%. The rebound in global consumer sentiment and a move to new all-time highs for the S&P 500 are viewed as supportive to demand. European and US equity markets were higher again at the start of this week.


The NY Arabica coffee market has drawn support from tight Robusta supplies as well as strong economic data, specifically in the US, which is viewed as bullish for demand. The Houthi attacks on cargo ships in the Red Sea have slowed shipments of Vietnamese Robusta beans to Europe, forcing European buyers to look to Brazil and other areas, and this has lent support to the Arabica market as well. Colombia’s fourth quarter output surge brought their 2023 production to 11.347 million bags which was their largest 12-month running total since November 2022. However, output remains well below their annualized pace from 2015 through 2021.


Cotton bulls had been hoping to see increased business ahead of the lunar new year, and they got it. March cotton rallied sharply on Friday in the wake of a bullish export sales report and traded to its highest level since October 30. US cotton export sales for the week ending January 11 came in at 437,647 bales (current and new crop combined), up from 284,478 the previous week and the highest since November 2. Cumulative sales for 2023/24 have reached 9.306 million bales, up from 9.068 million a year ago but below the five-year average of 11.046 million for this point in the marketing year. Sales have recently crossed above year-ago levels for the first time this marketing year.


Czarnikow is forecasting Mexico’s 2023/24 sugar production to come at 4.7 million tonnes, down 15% from 2022/23 and their lowest in 10 years. They are blaming poor cane development this year due to insufficient rain as well as poor yields during processing. Mexico is the largest source of US sugar imports, with the USDA projecting 836,000 metric tonnes to be shipped to the US during the 2023/24 season. This suggests that Mexico will have to import from Central America to fulfill its export quota to the US. Last year they imported heavily from India, but India’s drop in production this year is expected to keep them out of the export market.

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