In retrospect, the treasury markets saw confirmation of a tectonic shift in market sentiment from a long-held inflation fear to broad acceptance that inflation has been put under control. The bull camp has also benefited from a shift in macroeconomic views toward the US with broadening concern that the US economy is stagnating and might begin to contract. Yet another potential historic bullish issue is the market’s large and long-held net spec and fund short positioning and that combines with equally aggressive leveraged short bond positions held by ETFs. In other words, further upside gains through critical chart resistance levels could spark a massive stop loss buying wave!
While the dollar managed to arrest its sharp early washout late last week and build consolidation around the 104.00 level, we see the path of least resistance pointing down. Obviously, the markets are very convinced the Fed is on hold for the foreseeable future and signs of slowing in the US should add additional liquidation pressure in the dollar trade. Fortunately for dollar bulls, fundamental signals suggest selling all currencies which is not feasible.
The bull camp is emboldened by the market’s capacity last week to avoid corrective action in the face of disappointing developments and because of the market’s resiliency following the action. With the corporate earnings headlines this week and downbeat expectations for the upcoming holiday shopping season the strength in equities is very likely the result of the decline in interest rates and relief that inflation expected to come under control. In fact, if the markets were exclusively focused on corporate news this week, there would be concern as positive earnings by some retailers required heavy discounting which can reduce future profit margins.
GOLD, SILVER & PLATINUM:
We see the action in gold and silver early this week as very discouraging and defeating for the bull camp, especially in gold given the sharp range down extension US dollar. In fact, with the Indian government pegging October gold imports jumped by 60% over year ago levels (the highest in 31 months), a surging bear case in the dollar and expectations the FOMC meeting minutes will again confirm the US rate hike cycle is done, the gold market should be up $11 instead of down $11.
Copper prices continue to power ahead early this week as the dollar weakens to its lowest level in almost three months. However, there have been a lot of gloomy stories coming out of China with worsening housing outlooks and worries over ING bank getting caught up in the bankruptcy of China’s largest copper trader. Furthermore, copper has managed to rise despite the Peoples Bank of China leaving interest rates unchanged despite their beleaguered real estate driven economy. In the end, copper continues to rise despite all this bad news suggesting the trade at its core is relieved with the end of the historic global rate hike cycle.
Higher action in crude oil early this week (a three-day high) in the face of a 24% week over week rise in global crude oil in floating storage is surprising given the aggressive downside action last week. However, the high to low washout in crude oil last week of $7.50 was justified by a very severe downgrade in global economic prospects following signs the US economy is slowing. Perhaps the trade is experiencing limited short covering from last week’s sharp slide with the January crude oil contract crossing up the shorts by regaining the 200-day moving average at $76.20.
Beneficial rains expected in northern Brazil next week will offer some temporary relief to stressed crops and that has given the edge to the bear camp. Rains are forecast to begin Sunday and last through Thursday of next week in the northern half of Brazil. No change in the forecast for southern Brazil, as periodic heavy rains are expected over the next week. Argentina’s crop conditions have improved on recent rains and the forecast looks mostly favorable.
Ideas of potential improvement in South American weather next week is keeping the bear camp in control. Central and northern Brazil are expected to see good rains starting late this weekend and into late next week. Southern Brazil, on the other hand, will see more excessive rains over the next seven days. Argentina’s weather looks mostly favorable. Weekly export sales are expected today in a range of 900,000- 1,700,000 tons.
The bear camp remains firmly in charge after December Chicago prices hit their lowest since October 12 on continued ideas of ample supplies and weak global prices. Harvest is moving forward in Australia and early yields have not been as bad as expected. Strategy grains slightly raised their EU SRW production to 125.8 million tonnes compared to 125.6 million last month. Ukraine has sown 91% of its winter wheat and has seen improved conditions after a dry October.
February hogs continue to chop around inside their November range as they search for a bullish fundamental to extend their rally off the October contract lows. Above normal US pork production trends this quarter and next could limit upside potential, and hog weights are slightly above average for this time of year. The CME Lean Hog Index as of November 15 was 75.68, down from 76.06 the previous session and 76.87 the previous week. The USDA estimated hog slaughter came in at 485,000 head Friday and 246,000 head for Saturday. This brought the total for last week to 2.649 million head, up from 2.577 million the previous week and 2.598 million a year ago.
Last Friday’s Cattle on Feed report came in neutral to slightly bullish, which could support the market this week. The report showed placements for the month of October at 103.8% of last year versus average trade expectations of 104.9% and 106.0% and a range of expectations from 99.8% to 108.1%. Marketings for October came in at 97.5% of last year versus 98% expected (range 97-98.5). Cattle on Feed supply as of November 1st came in at 101.7% of last year versus 101.9% expected (range 100.9% to 102.6%). Placements were below average expectations but not by very much. The on-feed number was neutral, and the marketings number was slightly negative.
Cocoa’s 3-day rebound recovered all of its losses from last Tuesday’s downdraft as the market continues to find support from bullish supply developments. While global demand has been resilient during a 14-month uptrend, cocoa prices are now at their highest levels since the late 1970’s. As a result, near-term demand concerns leave the cocoa market vulnerable to a near-term pullback. March cocoa was able to build onto early strength as it posted a sizable gain during Friday’s trading session. For the week, March cocoa finished with a gain of 94 points (up 2.3%) and a seventh positive weekly result in a row.
Coffee’s October/November rally appears to have run out of steam as it will start out this week’s trading 9.70 cents below last Thursday’s 4 1/2 month high. Unless the market can find fresh bullish supply news, coffee prices are likely to extend this pullback in front of Thursday’s holiday. March coffee followed through on last Thursday’s reversal by falling to a 2-week low before finishing Friday’s trading session with a sizable loss. For the week, March coffee finished with a loss of 3.90 cents (down 2.3%) which broke a 2-week winning and was a negative weekly reversal.
March cotton is correcting an oversold condition following a steep selloff from September, and it has drawn support from a more optimistic demand tone recently. US export sales have picked up over the past few weeks. Last week’s report showed net sales for the week ending November 9 at 358,735 bales, which was down from 439,698 bales the previous week and 544,953 the week before that, but they were still the third highest since June. China has been an active buyer, which is also supportive. Strength in US equity and bond markets last week lent support, and the dollar fell to its lowest level since early September. The cheaper dollar makes US cotton more competitive on the world market.
Sugar prices were in an uptrend for most of this year, with the market gaining 10.75 cents in value from the low in early January to their early November high (up 61%). The market appears to have lost upside momentum this month and looks to be vulnerable to a sizable downside move over the rest of this month. March sugar held within its tight 3-day range as they finished Friday’s trading session with a minimal loss. For the week, March sugar finished with a loss of 11 ticks (down 0.4%) and a second negative weekly loss in a row.
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