The Treasury markets maintained their strength through the weekend as they reached new 7 1/2 week highs, but they lost some of their upside momentum coming into Monday’s action. Protests in China over ongoing Covid restrictions have weighed on global risk sentiment, which in turn have driven safe-haven flows towards Bonds and Notes. Early reports that US “Black Friday” sales reached a record high may bode well for “Cyber Monday”, and that has kept further Treasury gains in check.
The Dollar started out this week with moderate strength, but it took a sharp turn to the downside and was under significant pressure coming into Monday morning’s action. While protests in China initially drove safe-haven flows towards the Dollar, it continued to be undermined by a tempering of the Fed’s anticipated rate hike pace. With the Dallas Fed’s latest manufacturing business index reading expected to remain firmly in negative territory, the Dollar may need to hear hawkish comments from the Fed’s William in order to regain upside momentum as the Dollar is within striking distance of reaching a 3 1/2 month low.
The Euro had an abrupt change in fortune as it shook off early losses and has reached a 2-week high early on Monday. The Yen has extended last week’s recovery move through the weekend and was within striking distance of a 2 1/2 month high. The Swiss franc held within an inside-day range early this week, but it has lagged behind the Euro and remains well below its mid-November high. The Pound was also a notable laggard early this week as it had trouble holding its ground in positive territory. The Canadian dollar rebounded from early lows but held in negative territory coming into this week’s action.
Global markets took a negative shift over the weekend and were generally under pressure coming into Monday morning’s action. There were reports of protests in China after they reached a new record high for daily new COVID cases, both of which have cast a shadow over global risk sentiment. Asian shares finished Monday with moderate losses and were led to the downside by the Hong Kong Hang Seng indices. European stock markets and US equity index were posting moderate losses early this week. Much of the market’s focus will be on early readings for “Cyber Monday” sales, which may come in strong after last Friday’s record “Black Friday” results.
GOLD, SILVER & PLATINUM:
Unrest in China over Covid lockdowns seemed to provide gold and silver with a bit of a lift at the start of this week, but so did a weaker dollar. The markets were bailed out last week by weakness in the US dollar, but the bull camp could be disappointed with the lack of reaction to signs of a less aggressive US Federal Reserve. Unfortunately for the bull camp, Indian gold imports were reported to have declined in October with Indian officials also reporting a 17.38% decline of imports in the April through October timeframe (relative to year prior figures). In retrospect, the trade should be discouraged with the lower import figures as the World Gold Council recently indicated improving Indian demand.
With the big range down failure in December palladium briefly pushing prices below the psychologically important $1,800 level on Friday, the bear camp has control to start the new trading week.
Copper started out the week out under pressure, but it was able to post a sharp rebound after trading to its lowest level in more than three weeks. The protests in China have been a source of pressure, as that does not bode well for the near-term demand outlook. While the market has managed to claw up and away from last week’s spike low for a second time, ongoing Covid infection concerns in China create a significant layer of fundamental resistance.
With a poor close last Friday and initial downside follow-through pushing nearby crude oil futures well below critical consolidation low pricing of $75, the bear camp started out the trading week with a technical edge. Seeing daily new Chinese Covid cases balloon to record high territory, accompanied by protests in several major Chinese cities, could foster demand destruction fears that embolden the bear camp. While the implementation of the global price cap for Russian oil is approaching, some buyers may have pulled back on their purchases. However, in a world market (especially for oil), buyers are likely to buy at prices they deem attractive regardless of an international embargo. We see China’s pulling back on purchases from Russia last week as a method to extract deeper discounts. India has also shown a softer pace of buying, prompting some analysts to predict crude oil prices below $70 in the next two weeks.
Both product markets started out this week’s trading under pressure, although RBOB and ULSD have held up better than crude oil throughout the month of November. While the natural gas market showed divergence with petroleum prices for most of last week, the markets seemed to be back in sync early this week with natural gas under pressure.
The Argentine government will introduce another temporary exchange rate for soy exporters today, according to an Economy Ministry. Soy companies have committed to exporting at least $3 billion while the rate is in place. The government is giving a temporary exchange rate for soy exporters between today and December 30, setting the new rate at 230 pesos per dollar, well above the official exchange rate of 166 per dollar. There is a clash between tight soybean supply for now but an outlook for record production this season and a massive global production surplus. In addition, US policy on biofuel is tightening world vegoil supply temporarily. Palm oil production is on the decline seasonally and demand for palm is strong due to the record discount compared to other oils including soybean oil.
March corn has stayed inside of the November 15 range ever since. If the South America crop is as big as advertised, US corn could struggle to move on the export market. However, sales are strong this past week and ethanol demand is improving. If Argentina weather continues on a drier trend, traders might begin to take notice soon. The weekly export sales report showed that for the week ending November 17, net corn sales came in at 1,850,271 tonnes for the current marketing year and 628,054 for the next marketing year for a total of 2,478,325. Cumulative sales have reached 32.5% of the USDA forecast for the 2022/2023 marketing year versus a 5 year average of 44.6%.
The wheat market remains in a steady downtrend off of the October 10 peak. A more steady flow of grain from the Ukraine plus the lack of a major production issue from key exporters except for Argentina has kept the market in a steady downtrend. In addition, US wheat is not that competitive on the world market. Egypt’s wheat reserves are enough for more than five months of consumption. While Ukraine crop might be smaller, Russia has seen a record production this year and will likely move the wheat onto the world market. The weekly export sales report showed that for the week ending November 17, net wheat sales came in at 511,769 tonnes from trade expectations for 250,000 to 600,000 tonnes.
February hogs have stayed in a choppy consolidation pattern since October 19, but the short-term cash fundamental news remains bearish, and the market looks vulnerable to more long liquidation selling over the near term. Pork production normally declines by 100-300 million pounds from the fourth quarter to the first quarter. This year, production is expected to decline just 65 million pounds versus 281 million pounds last year. This is a bearish factor. The cash market remains in a short-term downtrend, and pork product prices remain in a downtrend as well.
April cattle remains under the negative technical influence of the November 23 sweeping key reversal. The market experienced follow-through selling on Friday, and the short-term consumer demand tone could be negative early this week with weakness in the stock market and concerns about Asian demand. The supply outlook for April cattle is clearly bullish, with first quarter beef production expected to be down 405 million pounds from the fourth quarter, for its largest decline for that period since 2019 and the second largest since 2014. In addition, first quarter production is expected to be down 4.5% from 2022 and second quarter is expected to be down 7.3% on the year. A continued technical correction over the near term looks like a buying opportunity.
After holding within a tight consolidation zone in front of the Thanksgiving holiday, cocoa’s abrupt turnaround has lifted the market back above its 200-day moving average. However, bearish demand indicators overnight have pressured the cocoa market early this week. With recent bullish supply developments providing support, cocoa may bounce if outside forces weaken. For the week, March cocoa finished with a gain of 28 points (up 1.1%) which was a third positive weekly result over the past 4 weeks. In addition, cocoa had a positive weekly reversal from Wednesday’s 3-week low. “Black Friday” sales in the US reached a record high and were 2.3% above last year’s levels, which helped to soothe cocoa’s near-term demand concerns and provided early support.
Coffee prices were able to finish last week on an upbeat note. For the week, March coffee finished with a gain of 9.95 cents (up 6.4%) which broke a 2-week losing streak. In addition, coffee was able to overcome a more than 1.5% selloff in the Brazilian currency which put carryover pressure on the coffee market as extended weakness in their currency will encourage Brazil’s production to market their remaining coffee supply to foreign customers.
The export sales report last Friday was disappointing for the cotton market. Instead of net sales, there were net cancellations of 116,428 bales for old crop, with China cancelling 109,546. This seemed to verify concerns about Covid lockdowns and their potential effects on Chinese demand. The report showed sales for the week ending November 17 net cancellations of 116,428 bales for the 2022/23 (current) marketing year and net sales of 12,323 for 2023/24, for a total of -104,105. This was down from 33,155 the previous week and the lowest since April 2020.
While sugar has dealt with increased production from India and Thailand, the bearish shift in Brazil’s production outlook kept the market on the defensive last week. Unless it can find fresh support from key outside markets, sugar is likely to extend its pullback. For the week, March sugar finished with a loss of 72 ticks (down 3.6%) which broke a 3-week winning streak. Crude oil and RBOB gasoline weakness is seen as a bearish force and combined with a sharp selloff in the Brazilian currency drove sugar prices into negative territory last Friday.
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