Even though treasury prices posted significant gains off of last Thursday’s lows on Friday, prices generally remained within last Thursday’s range in a sign that control of the market is lacking. However, the bull camp certainly has an edge with the definitive rejection of Thursday’s spike low, but also because of soft University of Michigan sentiment readings, rising flight to quality buying interest from events in the Middle East, and suggestions from the Fed’s Harker that US interest rate hikes are likely completed. While recent US economic data has not been definitively positive, seeing the Fed’s Harker reiterate his views the Fed is probably done hiking interest rates again in a speech on Monday should provide lift to bond and note prices.
As in gold and treasury markets, the dollar likely saw a wave of flight to quality buying last Friday from the potential for incendiary events in the Middle East over the weekend. In fact, given dovish dialogue from the Fed’s Harker and much softer than expected University of Michigan sentiment reading the dollar posted a five-day high and appeared to be headed back to contract highs. Surprisingly, last week’s CPI and PPI readings did not discourage dovish dialogue from Fed members this week which furthers the argument that the dollar is receiving safe haven flows.
Despite the dollar trading in a tight range early this week, the potential for significant volatility remains in place. However, the war in the Middle East has not yielded fresh flight to quality interest in the dollar.
European inflation news generally favored Euro bears as part of that negative Euro influence offset by recent views of a dovish Fed.The Pound is undermined because of a very minimal gain in UK home prices, which Reuters pegged as the smallest since the global financial crisis. Comments from the Bank of Canada suggesting higher long-term interest rates are not the preferred policy to battle inflation was partially offset by a forecast that the Canadian economy was not headed for a deeper recession.
Despite a significant jump in US treasury prices, dovish direction from the Feds Harker and signs of softer import price inflation, equity prices came under pressure last Friday. Unfortunately for the bull camp, favorable bank earnings and other bullish developments were overshadowed by escalating uncertainty in the Middle East. It is also possible that a $4.00 rally in crude oil prices created concern of economic slowing from reduced consumer disposable incomes. Global equity markets at the start of this week were mixed with a slight edge to the bear camp, while commodities were also mixed with a very slight edge to the bull camp. In retrospect, the market’s inability to show sustained strength from comments from the Fed’s Harker last week that the Fed might be “done” hiking interest rates highlights lack of bullish resolve and the presence of a bearish tilt. However, the focus of the trade today is likely to shift to earnings as the earnings season picks up pace.
While US interest rates are not at the high levels seen at times last week, treasury market action suggests rates are more likely to rise which should thicken resistance in the Dow. As opposed to the S&P, the Dow futures hold a massive net spec and fund short (the largest since the financial crisis) and that is a very bearish signal of sentiment toward large company shares.
GOLD, SILVER & PLATINUM:
What goes up aggressively can correct aggressively and that is more the case in gold early this week than in silver. Clearly, the markets were not supported by weekend developments in Gaza and with a thin US economic report slate at the start of this week, the primary focus will likely be on a speech from the Fed’s Harker. While the US intentions to contain the Middle East crisis are laudable, many times those types of efforts prove fruitless. Surprisingly, evidence of China’s central bank increasing liquidity in their banking system has not cushioned their equity markets indicating ebb and flow of from the Chinese currency is not a primary focus of the metals trade. If anything, the action in the Chinese currency was slightly bearish to gold.
While signs of increased liquidity from the Bank of China lends support to copper prices, bearish price projections from Citigroup emboldens the bear camp. Furthermore, talk of improved seasonal demand from China is also offset by last Friday’s massive jump in Shanghai copper. Similarly, last week’s supportive move by the Chinese government to support the big four Chinese banks is lost on the trade early this week as Chinese stock markets traded lower. Reports of level copper premiums for sales in Europe from Codelco and reports of declining copper premiums from the company into the US clearly offsets aggressive Chinese efforts last week to sharply reduce copper premiums paid next year.
With an early new high from the move, the bull camp in crude oil has extended control into the new trading week. While last week’s US inventory data challenged the tight global supply argument (largely in place from early July until late September), the bull camp has shifted its focus toward threats against Middle East supply. While the Arab world was relatively calm late last week with the retaliation by the Israeli army expanding, the beginning of a ground incursion into Gaza and calls for Palestinian people to move to the south of Gaza, leaves headlines from the Middle East as likely a major catalyst for oil prices.
The diesel market has become the leadership market with reports of severe tightness in global diesel supply and improved seasonal demand expected ahead. While the gasoline market is likely to lag crude oil and diesel this week, significant gains in those outside markets should drag gasoline prices upward. Unfortunately for the bull camp, US gasoline inventories remain high and seasonal demand is expected to fall further leaving long RBOB positions as the riskiest in the petroleum complex. The natural gas market showed virtually no sensitivity to the outbreak of war in the Middle East and is unlikely to see lift from the beginning of a ground war and even from surging petroleum prices.
An expected higher start to the week for soybeans after last week’s post-report performance finally puts the bulls in charge, especially with the USDA confirming tight ending stocks for the season. The unchanged month over month US carryout certainly reinforces the importance of South American weather through the winter. US harvest progress is expected in the 57 – 60% range and after some heavy rains over parts of the Midwest in the last three days, drier weather this week will allow farmers to get back in the fields quickly. NOPA crush will be released Monnday and the average guess is 161.7 million bushels. Oil stocks are expected at 1.208 billion pounds. US crush should stay very strong through the winter. Commitment of Traders data showed funds were long 2,000 contracts as of last Wednesday, and the strong action late last week probably added to the net longs.
Corn’s bull camp gets the edge to start the week although fresh market moving news is scarce. Seasonal strength is expected in the last half of October as harvest moves past halfway. Harvest delays should be short-lived with mostly dry conditions expected this week across the Midwest. Harvest progress is expected to be in the 45 – 48% range. Heavy rains over the last three days may result in some slight improvement of US Midwest River levels but the upcoming drier trend will mitigate the gains. The drought in the northern Amazon is disrupting corn barge movement to the northern Brazil ports.
Weekend events in the Mideast are bullish as the conflict is deepening and Israel’s neighbors are warning don’t go too far. A widening of the conflict is bullish wheat as countries may look to extend their stockpile of supplies with the ongoing uncertainty in the region. Interestingly, Egypt’s Minister of Finance says there’s a good possibility Egypt will hedge wheat in 2024 in case of a rally in prices, something they have not done in recent years. US soft red wheat is the cheapest in the world and a slight pickup in US demand is expected. Ukraine says Russia has destroyed 300,000 tonnes of grain in port attacks recently.
It may be too much to ask for much of a rally in hogs in the face of soft pork prices, seasonally higher hog weights, and expectations for a large increase in US pork production this quarter. The weekly export sales report on Friday was disappointing, with US pork sales for the week ending October 5 at 21,250 tonnes, down from 42,893 the previous week and the lowest since July 27. The four-week average is 30,500 tonnes. Cumulative sales for 2023 have reached 1.446 million tonnes, up from 1.312 million a year ago but below the five-year average of 1.474 million.
December cattle were supported last week by higher US cash cattle prices, but that support was undermined Friday by a poor export sales report. The market also felt pressure from hotter than expected price inflation data that raised concerns about beef demand, but recent Fed commentary have suggested they are leaning towards no rate hike next month, and this idea could ease concerns about demand. As of Friday afternoon, the five-day, five-area weighted average cattle price was $184.22, up from $182.67 the previous week. US beef export sales for the week ending October 5 came in at 9,076 tonnes, down from 13,602 the previous week and the lowest since September 2. The four-week average is 13,700. Cumulative sales for 2023 have reached 751,500 tonnes, down from 906,700 a year ago and below the five-year average of 829,000.
Cocoa prices have yet to regain strong upside momentum following the start of the 2023/24 season, but they have lifted clear of 3-month lows despite a “risk off” mood seen in many global markets. Near-term demand will be a front and center issue for the market this week, but a bullish supply outlook should continue to underpin cocoa prices early this week. December cocoa fell back from an early 1 1/2 week high but regained strength late in the day to finish Friday’s outside day session with a mild gain. For the week, December cocoa finished with a gain of 46 points (up 1.3%) which was a second positive weekly result in a row.
Since early June, coffee prices have seen a pattern in which a selloff to a new low has been followed by a period of consolidation and then a subsequent rally that could not be sustained. At last Tuesday’s low, December Coffee had declined 43.95 cents (23%) from its June 8 close. Since then, it has put together four positive daily results in a row and rallied 11.20 cents. December coffee broke out of its September/October consolidation zone to the upside and went on to post a sizable gain for Friday’s trading session. For the week, December coffee finished with a gain of 8.85 cents (up 6.1%) which broke a 3-week losing streak and was a positive weekly key reversal.
The US cotton crop is tightening, but global supply appears large enough to meet demand. In the USDA supply demand report last week, US cotton ending stocks were lowered to 2.8 million bales, down from 3.0 million in the September report. This is the lowest since 2016/17. World ending stocks at 79.92 million were down from 82.84 million last year but up from 76.64 million two years ago. The world numbers were revised down by some 10 million bales from the September estimates, but that was due to change in way the USDA accounts for the Brazilian crop, and it did not reflect any change to actual supply.
Sugar’s Friday rally was due in large part to significant carryover support from energy prices that will likely remain a source of strength this week. With a bullish supply outlook from south Asia also underpinning the market, sugar is likely to remain well supported early this week. March sugar followed through on Thursday’s late rebound with a sizable gain during Friday’s trading session. For the week, March sugar finished with a gain of 29 ticks (up 1.1%) and a second positive weekly result in a row.
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