In our opinion, the treasury markets are poised for a temporary bounce from both technical and fundamental perspectives. In addition to a significant net spec and fund short position into the Thursday low, US data on activity in the economy clearly softened last week. We also think the financial turmoil in the UK will likely return and expectations for US data early next week project weakness. Although the bias remains down in treasuries from a big picture Fed fixated perspective, the rally this morning is surprising given the risk on mentality flowing from equities.
While the dollar spent a large portion of last Friday’s trade in the lower half of the prior large range downmove, it also spent most of the day in positive territory. In retrospect, the trade continues to discount evidence of soft US economic data and instead believes the Federal Reserve will continue to hike rates unless US economic conditions are severe. We see the dollar correcting an overbought condition, but expect it will regather its flight to quality and interest rate differential edge quickly.
Despite very favorable Japanese capacity utilization, industrial production, and Tertiary industry index readings for August, the Yen remains locked in a downward track on the charts. Certainly, the ECB’s intention to begin to run off the balance sheet discourages some sellers in the euro and Swiss franc but the status of the economy throughout Europe is likely to remain in favor of Swiss bears.
The new UK Chancellor reversed the tax plans of his predecessor and indicated he will raise 32 billion pounds from taxes and will limit subsidies for power companies. However, unwinding the economic and financial trouble facing the Pound will be difficult and time consuming as looming fear of an energy induced winter recession will be difficult to remove from the equation unless temperatures remain mild well into next month. In addition to an extreme oversold technical condition from last Thursday’s washout, the Canadian dollar is benefiting from a temporary softening of the US dollar.
Equity markets waffled around both sides of unchanged last Friday after forging a 5-day high which gave investors a bit of added confidence. While several major US banks posted profit “beats” news from that sector, was countervailed by a jump in loan loss reserves at Citigroup. The markets did see early support from a $25 billion buyout deal in the supermarket business and from less warlike comments from the Russian president who indicated there were no plans for further military mobilization in Russia.
While the Dow futures showed leadership at times last Friday, the 30,500 level has become thick technical support. With today a thin US economic report slate day the focus of the trade is likely to temporarily shift to corporate earnings from the financial sector ahead of the NYSE opening.
The technical action in the NASDAQ clearly favors the bear camp with the market showing very little bullish resiliency in the wake of strong recovery attempts in other segments of the market recently.
GOLD, SILVER & PLATINUM:
With a bit of risk on mentality, a softer US dollar and a dip in treasury yields, gold and silver have surprised the trade with a higher start to the trading week. However, the bias remains down in gold and silver with prices likely set to return to the late September lows ahead. On the other hand, in addition to lift from outside market action today gold is reportedly gathering strength from a shift from discount to premium in India which could be a sign of pre-festival buying for auspicious dates later this month in India. Furthermore, Chinese premiums remain $27 to $32 an ounce, with prices being lifted domestically because of a lack of new gold import quotas from the government.
As in other physical commodity markets, last week’s developments pulled the rug out from underneath the PGM markets with surging interest rates likely to pull down auto sales and decrease consumption of auto catalyst materials. While the platinum market held up better than the palladium market against big picture outside market negatives recently, the market is subject to wide fluctuations in global demand perceptions which leaves the bias pointing down.
As indicated in other coverage at the start of this week, the Chinese central planning meeting appears to be focused on Taiwan and Covid instead of stimulating the economy and boosting infrastructure activity. However, given that 14% of China is thought to be in Covid lockdown we suspect the planning meeting will soon produce some pro-growth initiatives. On the other hand, last week Shanghai weekly copper stocks doubled in a single week in a negative demand signal. However, supplies inside China remain tight but to make that tightness a trigger for a rally in prices likely requires a formal stimulus package announcement from the Chinese leadership meeting.
The charts in crude oil favor the bear camp early this week with the outlook for demand also favoring the bear camp despite the presence of early risk on sentiment flowing from equities. In a negative supply development crude oil in floating storage increased by 4.7% on a week over week basis and that news is amplified by last week’s large jump in EIA crude oil inventories of nearly 10 million barrels! Like most other physical commodity markets, the energy complex is likely to remain under pressure from big picture outside market forces. The prospect of more jumbo US rate hikes has rekindled strength in the dollar and eroded confidence in the world economy which in turn has rekindled demand destruction fear in energies.
While the charts in gasoline favor the bear camp, the continuation of refinery strikes in France has sparked the fear of significant shortages and could result in panic buying. With implied gasoline demand in the US last week plummeting, EIA gasoline stocks building and the year-over-year gasoline stock deficit narrowing, the bullish tilt toward gasoline has dissipated. In fact, speculative interest has likely shifted toward diesel, with volatility likely to expand in the face of any cold front in Europe. While some economists pointed to resilience among consumers in last week’s US retail sales report, extreme rate hike projections have undermined market psychology and in turn are pushing down demand projections.
There appears to be significant factors in play that could hurt soybean demand over the near-term and unless the weather is poor in Brazil or Argentina this coming season, the market looks vulnerable to more selling, especially if transportation issues continue to turn bearish. Harvest pressure plus a bearish tilt to outside markets including another surge higher in the US dollar and weakness in the stock market were all seen as bearish forces. Exporters announced the sale of 392,000 tonnes of US soybeans sold to China and also 198,000 tonnes of US soybeans sold to unknown destination. In addition, exporters announced the sale of 230,000 tonnes of meal to the Philippines.
December corn continues to find selling pressures as transportation issues, harvest pressures and a bearish tilt to outside market forces has helped to pressure. The sharp rally in the US dollar and very sluggish export sales news added to the bearish tone. The weekly export sales Report showed that for the week ending October 6, net corn sales came in at 200,191 tonnes for the current marketing year and 60,480 for the next marketing year for a total of 260,671. Traders were looking for 300,000-900,000 tonnes. Cumulative sales have reached just 24.6% of the USDA forecast for the 2022/2023 marketing year versus a 5 year average of 33.8%. Argentina corn planting is at the slowest pace in six years due to drought conditions.
With more intense fighting in Ukraine, traders see the odds of a new agreement for the export corridor as a less likely event, and this supported the bounce early this week. December wheat experienced the lowest close since September 26th on Friday as bearish demand indications have helped to pressure. Bearish outside market forces and continued weak export sales news helped to pressure. The surging US dollar and fears of transportation issues ahead added to the bearish tone. Hopes of progress in negotiations after a meeting between Turkey and Russia on the Ukraine export corridor added to the negative tone. Russia and Ukraine are both seeking changes to the grain-export deal as part of discussions to extend the initiative beyond the current deadline next month, according to the United Nations.
Extreme weather in India devastated both the winter-sown wheat and summer-sown rice harvests, pushing up retail food prices to a 22-month high. As a result, India’s federally-owned cereal inventories, have dropped to a five-year low. The government was only able to obtain approximately half of its target because farmers were increasingly selling to private merchants due to rising export demand as a result of the Ukraine crisis. While rice supplies are enough to cover domestic needs, wheat stocks have plummeted to a 14-year low.
December hogs closed sharply higher on the session Friday and the buying has pushed the market up to the highest level since September 26. For the seventh day in a row, the market has taken out the previous session high which leaves futures a bit overbought. However, the basis is wide enough compared to normal to offset short term technical indicators. The USDA pork cutout, released after the close Friday, came in at $100.23, down $1.21 from Thursday but up from $99.98 the previous week. US pork export sales for the week ending October 6 came in at 29,000 tonnes. This was down from 34,272 tonnes the previous week and below the four-week average at 31,890. Cumulative sales for 2022 have reached 1.312 million tonnes, down from 1.601 million a year ago, 1.768 million the year before that and below the five-year average at 1.405 million.
Since late September, the cattle market has remained in a choppy consolidation phase as positive supply news has been offset by a more bearish demand tilt for beef. A firm tone for the beef market short-term and some strength in the cash market gives the bulls a slight advantage short-term. However, there could be significant demand issues longer-term and we still cannot rule out that beef production will end up higher than expectations into the fall. December cattle opened sharply higher on the session Friday but closed slightly lower. Traders suspect tightening supply ahead but the market is also concerned about a very weak consumer demand tone developing due to high inflation. The USDA boxed beef cutout was up 72 cents at mid-session Friday and closed 45 cents higher at $246.98. This was up from $246.07 the previous week.
Cocoa prices were able to finish last week at the upper portion of their July/October trading range despite disappointing third quarter European grinding results. This would indicate that cocoa’s ongoing demand issues have been priced into the market, and that a shift in focus towards West African production can help to support. While cocoa fell back from early highs, it did manage to hold onto most of Thursday’s gains and finished last week with only a loss of 11 points (down 0.4%). High inflation levels in many nations have weighed on cocoa prices as that likely to reduce purchases of discretionary items such as chocolates. Concerns about a slow start to the Ivory Coast harvest have provided some underlying support to cocoa prices, and that could put additional emphasis on the latest weekly Ivory Coast port arrivals total released early this week.
The coffee market lost more than 21 cents in value (down 9.7%) in just three sessions. Even with reports of good Brazilian flowering over the past few weeks, coffee seems undervalued at current price levels. December coffee closed sharply lower Friday and dropped down to the lowest price level since July 15. For the week, December coffee lost 21.40 cents (down 9.8%) which was a second negative weekly result in a row. Improved weather for Brazil combined with more aggressive export activity in the past month were two key factors for the selling pressure last week. Long liquidation selling also emerged to add to the bearish tone to the market going into the weekend. Concerns about consumption were given additional weight with the surge in inflation, as that could result in consumers cutting back on their restaurant and retail shop purchases.
December cotton garnered some support from the weekly export sales report on Friday, but it failed to hold those gains as longer-term demand concerns persist. The report showed US cotton export sales for the week ending October 6 at 144,820 bales for the 2022/23 (current) marketing year and 34,816 for 2023/24 for a total of 179,636. This was up from 169,698 the previous week and the highest since September 1. Cumulative sales for 2022/23 have reached 8.285 million bales, up from 7.617 million a year ago and the highest for this time of year since 2019/20. Sales have reached 68% of the USDA’s forecast for the marketing year versus a five-year average of 58%. The largest buyer this week was Pakistan at 61,882 bales, followed by Bangladesh at 31,746, Mexico at 21,092, and China at 14,427.
Sugar prices have maintained an upward bias through choppy action over the past few weeks as the market has found support from recent bullish supply news from Brazil. The market is technically overbought and unless there is a positive turnaround in key outside markets, sugar is vulnerable to a pullback. For the week, March sugar finished with a gain of 0.9% which was a fourth positive weekly result in a row. Continued concerns with the slow pace of cane harvesting and sugar production in Brazil were a major source of strength. Many traders fear that continued wet weather all the way into the Center-South wet season could cause further adjustments lower in Brazilian sugar production, with Czarnikow reducing their 2022/23 Center-South production forecast by 700,000 tonnes down to 32.5 million. Keep in mind that Center-South late-harvested cane plants should benefit from recent rainfall following the dry conditions seen during the La Nina weather event.
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