Wkly Futures Market Summary July 3.23

BONDS:

Treasuries initially forged fresh downside extension breakouts but ultimately rejected the washout in a possible sign that 126-00 has become some form of value. On the other hand, today’s scheduled data fosters ongoing talk of a US recovery, hope for falling inflation and perhaps some doubt the Fed will need to hike rates 3 more times. With the PCE report thought to be a very important inflation measure for the Fed, last Friday’s softer reading carries significant weight. While it appears, treasuries are returning to classic fundamental trading patterns, we need to see prices consistently falter in the face of positive data ahead to suggest the markets are fully “getting back to normal” and away from seeing strength off the prospects of recession from over tightening.

CURRENCIES:

With the dollar posting a higher high, a wide trading range and a noted failure of the early high last Friday, the charts give off the impression of a temporary blowoff top. Perhaps dollar bulls decided to bank profits in the face of signs of moderating US inflation, soft US personal spending, and disappointing Chicago purchasing managers index readings. The primary benefactors of last Friday’s dollar weakness were the Swiss franc, euro, and British pound. From a technical perspective, the path of least resistance remains up in the dollar.

While the charts in the euro are not patently bearish, they favor the bear camp with a very definitive pattern of lower highs and lower lows likely to extend this week. Adding to the negative chart set up is disappointing euro zone manufacturing readings for June especially with German manufacturing falling at the fastest clip in 3 years!

While the Yen has managed to respect support at 70.00 from the middle of last week, classic fundamental and technical signals leave the trend pointing down. While the Swiss franc is unlikely to be driven by Swiss inflation readings, the latest readings from Switzerland showed inflation is moderating which in turn probably allows the Swiss National Bank to be less aggressive with rate hikes. In retrospect, the charts in the Pound remain negative with lower highs and lower lows surfacing consistently over the last 3 weeks. With the Canadian dollar managing to consolidate in the face of strength in the dollar last week it is possible the currency will track with as opposed to opposite the dollar index this week.

STOCKS:

Clearly, the latest sign of lower inflation combined with positive scheduled data from earlier last week has reduced recession fear and has in turn created fear of missing out on equity market gains. Sentiment was also stoked by Apple’s market value climbing back above the $3 trillion mark. Another supportive development came from prospects of record quarterly vehicle deliveries by Tesla in bullishness toward airline stocks which posted the most significant gains in 2 years. Global equity markets early this week were mostly higher with gains in some Asian markets reaching 1.4%.

While the S&P has not technically posted a higher high early this week, the market sits just under Friday’s highs and are trading higher relative to Friday’s strong close. Like the S&P, the Dow Jones futures also sit just under last week’s spike high in the initial trade this week, with the Dow slightly cheaper given current prices remain significantly below 2023 and 2022 highs.

GOLD, SILVER & PLATINUM:

While global equity markets were higher early this week and produced a measure of risk on sentiment, economic news was generally discouraging with European and factory activity contracting last month while Chinese June PMI readings marginally improved but were heavily offset by a survey predicting “gloom to spread from weak Chinese growth”. Fortunately for the bull camp the dollar is showing only minimal strength as a 10th straight daily outflow from gold ETF holdings highlight a market still out-of-favor with investors. Gold holdings year-to-date are now down 1.2%! Silver ETF holdings also declined last week by 1.86 million ounces and are fractionally lower year-to-date.

Like the gold and silver markets, the PGM markets lack a specific fundamental force capable of shifting sentiment away from the bear case. Obviously, the technical conditions of platinum and palladium are becoming significantly oversold from classic short-term technical measures, with platinum in June forging a high to low slide of $162! Unfortunately, from a historical perspective the charts now offer little support until $875 with the market recently not benefiting from signs of further inflows to Platinum ETF holdings.

COPPER:

While the copper market has managed a modest recovery from last week’s spike low, four different Chinese efforts to support/stimulate their economy have failed to provide confidence of a recovery. In fact, world commodity markets remain concerned of softening Chinese physical commodity demand. Fortunately for the bull camp, Chinese Caixin manufacturing PMI data for June was stronger than expected but was unfortunately below the previous month. However, a portion of the copper trade is disappointed with the 7,889 to a net inflow to Shanghai weekly copper warehouse storage last week with an increase of 13.1% on the week seen as a sign of soft Chinese copper demand.

ENERGY COMPLEX:

Even though crude oil is likely to remain within a $6 trading range, prices look to continue to recover from lows which likely overstated weakness in global energy demand. Granted, economic data from China and Europe continues to disappoint and so far, the markets are simply not confident Chinese stimulus efforts will produce results quickly. On the other hand, global economic sentiment continues to improve on the back of signs of ongoing strength in the US economy despite a possible extension of the US rate hike cycle. In fact, there are classic signs of improving energy demand beyond simple hope that better scheduled data will ultimately provide improved energy demand. Last week US gasoline imports from Europe hit a 12-month high, Chinese traffic activity has returned to pre-Covid levels and US implied gasoline demand readings have been impressive over the last two months. According to Bloomberg, US oil demand in April as measured by the EIA reached a 16 year “seasonal high” if consumption of natural gas liquids and feedstock for plastics are included in measurements.

Clearly, the gasoline market has regained its leadership position and with last week’s strong rally and strong close we see a trade back toward the next resistance point of $2.57 this week in August gasoline. However, China and Russia have indicated they plan to ramp up fuel exports this month and that could result in gains early this month coming out later in the month. Despite rumblings several weeks ago of surging interest in diesel and diesel crack margins, demand measures continue to show anemic consumption leaving diesel as the weakest component of the petroleum markets.

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BEANS:

Obviously, seeing US producers plant the smallest area since 2020 with a 5% decline from last year and an astounding 4.2 million acres below industry surveys is a shockingly bullish surprise. In fact, the decline in acres was so large there is justification to wonder if the adjustment is an error. Combining the sudden shift from adequately supplied to the potential for rationing supply from one hour to the next, is the reality that the US soybean crop saw one of the worst starts in the last 12 years. However, the last 10 days have brought repeated waves of storm fronts across the entire growing region with initial rainfall totals disappointing and scattered. However, current storm tracks are dropping more rain with some stalling and capable of delivering drought busting precipitation. On the other hand, tonight’s crop conditions report will shift the focus back to yield and away from acres. In a quick analysis of outcomes using a low yield of 51 bushels per acre results in a stock to use ratio reading of only 1.3%, while utilizing a 52 bushel per acre yield also results in an extremely tight stocks to use ratio of 3.2%. Similarly, a 51 Bushel per acre yield produces critically low ending stocks of only 55 million bushels, with a 52 bushel per acre yield leaving US ending stocks at 141 million bushels which is still a dramatically tight scenario.

CORN:

As in the soybean market, the corn market saw the USDA report as a game changer. However, with corn acres coming in 2.2 million acres above market estimates, the importance of lost production from drought has been severely reduced but, in our opinion, not eliminated. In fact, the corn crop was expected to come under severe stress even before planting with subsoil moisture in moderate to severe drought standing from the beginning. Furthermore, the latest US drought monitoring map shows huge areas of the primary US corn production area remaining in moderate and severe drought as of June 27th. Therefore, with total precipitation amounts not remarkable until the latest weekend systems, we think the corn trade with Friday’s action has significantly overstated the likely size of the US corn crop at harvest. However, using a low yield of 176.1 bushels per acre could produce an ending stock level of 2.1 billion bushels while a higher yield of 181.5 bushels per acre yield could produce ending stocks of 2.6 billion bushels.

WHEAT:

Friday’s report reaction may have factored in the worst of the bearish news. The USDA Stocks and Acreage report was a shocker with huge acreage changes in corn and beans and a more minor increase in acres for all wheat, up over 900,000 from the March Intentions report. Most of the increase was in Spring wheat, which was up 500,000 from March Intentions and will put some pressure on Minn compared to KC and Chicago, especially if spring conditions improve a few percent this afternoon as expected.

HOGS:

Last week’s Hogs and Pigs report showed surprising increases in US hog supply for medium and lower weight hogs but a tighter than expected supply of hogs weighing more than 180 pounds. This has supported the July and August contracts but has pressured October, December, and others. The USDA estimated hog slaughter came in at 447,000 head Friday and 73,000 head for Saturday. This brought the total for last week to 2.332 million head, down from 2.372 million the previous week but up from 2.284 million a year ago. Estimated US pork production last week was 496.0 million pounds, down from 505.7 million the previous week but up from 484.7 million a year ago.

CATTLE:

US beef production is down from a year ago, and cold storage supply is tight. This helped lift cattle prices to all-time highs in early June, and after a modest, three-week correction, the market is back testing that high. US beef production is forecast at 6.755 billion pounds in the third quarter, down from 7.144 billion for the same period last year and the lowest for this quarter since 2017. US frozen beef supply was at 10-year highs for most of last year, but the supply has fallen off dramatically since January, from 534.0 million pounds on January 31 to 423.5 million on May 31. Frozen beef supply tends to decline in the first half of the year, but this year’s decline has been noteworthy.

COCOA:

While the cocoa market finished the second quarter by reaching a new 7 1/2 year high, the whipsaw price action seen over the last three days of June could indicate a near-term top may be close at hand. If global risk sentiment takes a negative shift before Tuesday’s holiday break, cocoa would be vulnerable to a sizable near-term pullback. September cocoa followed Thursday’s sharp selloff with a quick pivot back to the upside as it continued to build onto early strength as it went to post a sizable gain for Friday’s trading session. For the week, September cocoa finished with a gain of 150 points (up 4.7%) which was the fourth positive weekly result over the past 5 weeks.

Global markets finished June with a mostly “risk on” tone, which should provide a boost to cocoa’s near-term demand outlook that helped the market sustain upside momentum going into quarter-end. Friday’s key inflation readings (Euro zone CPI, French CPI and US core PCE) all came in lower than trade forecasts which further soothed cocoa’s near-term demand concerns. In addition, rallies in the Euro and British Pound provided carryover support to cocoa prices as their recent strength should help European grinders with acquiring near-term cocoa supplies. West African growing areas have rainfall in the forecasts for most days through the end of next weekend.

COFFEE:

Coffee had a downbeat finish to the second quarter as prices lost 31.35 cents in value (down 16.4%) in just over three weeks. While an active harvest pace in Brazil kept the coffee market on the defensive, coffee is showing early signs that a near-term low may be close at hand. September coffee was unable to hold onto early gains as it went on to post a moderate loss for Friday’s trading session. For the week, September coffee finished with a loss of 5,85 cents (down 3.6%) and a third negative weekly result in a row. Dry weather in Brazil’s major Arabica growing regions have helped the harvest catch up after earlier delays, while those areas have also not experienced any very cold temperatures that would cause frost damage to the trees.

COTTON:

US cotton planted area was revised lower in Friday’s Acreage report, and this suggests the US cotton endings stocks/usage ratio could be the tightest in three years. The report showed US 2023/24 cotton planted area at 11.087 million acres versus an average trade expectation of 11.119 million and a range of expectations from 10.5 to 12.0 million. This was down from 11.256 million in the March Prospective Plantings report and from 13.763 million last year. Plugging the new planted acreage into the supply/demand balance sheet would put US 2023/24 production at 16.24 million bales versus 16.5 million in the June 9 USDA supply/demand report and 14.47 million last year.

SUGAR:

The sugar market was able to put a decisive end to an 8-session losing streak last Friday but could not avoid a second negative monthly result in a row. Unless they can receive fresh bullish supply news, sugar prices may have trouble sustaining upside momentum this week. October sugar pivoted sharply to the upside early in the day, held within a tight consolidation before rallying late to finish with a sizable gain during Friday’s trading session. The expiring ICE July sugar contract received roughly 412,000 of sugar delivered against it, which is a comparatively small delivery for a July ICE contract. This provided support to sugar prices as it indicates stronger demand in the physical market.

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