Just as investors stepped aside from equities because of the potential uncertainty of events in the Middle East over the weekend, we suspect shorts in treasuries stepped aside as a significant escalation of the war could turn treasuries into a flight to quality instrument. However, the bear camp should be emboldened by broad headline coverage of the benchmark treasury yield reaching the psychological 5% level. In addition to the potential for flight to quality buying from the Middle East, last week’s US economic data adds to the bull case. With a fresh downside breakout in prices resulting in the highest treasury bond Yields since 2007 (the beginning of financial crisis) bearish charts have been enhanced with downside follow-through very likely.
In retrospect, the dollar failed to rally last week following several typically bullish fundamental developments. In addition to the failure to rally from a decline in US initial claims, the dollar did not see flight to quality interest in the escalation of uncertainty in the Middle East. Perhaps the short-term dovish view from the Fed discouraged buying of the dollar for global investors are becoming skittish regarding the potential for a debt rating downgrade in the US. With the dollar unresponsive to escalating global economic, geopolitical, and unprecedented treasury market volatility, the currency index is obviously out-of-favor.
As in the dollar trade, the trade is hesitant to buy the euro and other nondollar currencies because of the potential from the historical flight to quality standing of the US dollar.
The trend in equities looks to remain down with last Friday’s rupturing investor sentiment and fostering a measure of anxiety. Not surprisingly, the equity markets failed to benefit from favorable earnings results from American Express and the oil services giant SLB. However, fear of what turmoil could face the equity markets on Monday’s opening because of Middle East events likely resulted in some investors liquidating in moving to the sidelines. Global equity markets at the start of the week were lower as were many physical commodity markets. Given the explosion in US interest rates, earnings news is likely to be downplayed this week in favor of renewed recession concerns and because of rapidly expanding uncertainty. Historically, investors do not like uncertainty and are already eyeing rotating into interest rate investments.
While the S&P will likely see upcoming big tech earnings as important events, without wildly outside of expectation results, macroeconomic concerns from surging interest rates are likely to dominate. While December Dow futures have respected the 33,000 level on two previous occasions this month, broad bearish fundamental conditions should foster downside follow-through action with the potential for a quick return to the 2023 lows below 32,500.
GOLD, SILVER & PLATINUM:
While the gold market is certainly overbought from the low to high October rally of $180, flight to quality uncertainty looks to entrench in the marketplace with the prospects of a ground war keeping the region and the world anxious. However, the markets have partially embraced potential for diplomatic efforts (perhaps because of the release of some hostages) despite the failure of such efforts early last week. On the other hand, given increased airstrikes, widespread expectations of a ground offensive by Israel and violence around the world, the prospect of a broadening of the conflict is rising.
Palladium positioning in the Commitments of Traders for the week ending October 17th showed Palladium Managed Money traders hit a new extreme short of 10,995 contracts. Managed Money traders added 556 contracts to their already short position and are now net short 10,995.
The path of least resistance is down in the copper early this week with December copper posting a new low and the lowest trade since 2022. While aggressive purchases of aluminum by China on a year over year basis is helping to support copper prices, Chinese economic news is neutral at best. Unfortunately for the bull camp, the International Copper Study Group pegged the global refined copper deficit at 33,000 tonnes in August which is only 3,000 tonnes larger than the deficit in July. Furthermore, the International Copper Study Group forecasts a significant jump in copper supplies next year with their last estimate projecting a 2024 surplus of more than 470,000 metric tonnes.
We are not surprised with a slight retrenchment in crude oil prices this morning as the trade is temporarily unmoved by the relentless Israeli bombardment of suspected Hamas targets in Gaza. It appears the Israelis are trying to soften up positions for a widely anticipated ground war. Several Arab groups, Arab countries and reported terrorist groups have warned there will be serious repercussions of an occupation force. Along those lines, the US Defense Secretary over the weekend suggested the US government is very concerned of an escalation or broadening of the war with the involvement of any other key oil producers in the fighting immediately throwing crude oil prices back to the late September highs around $92.50.
While the gasoline market showed leadership action last Friday, the trade fell away from the high in a fashion that could indicate an interim peak for prices. Furthermore, China appears to be drawing from reserves and increasing gasoline output with September production up 17.5% versus year ago levels and a 4.1% increase in Indian oil refinery activity in September. However, tensions in the Middle East remain high, the US refinery operating rate is very low on a seasonal basis and reports are that Chinese traffic congestion continues to improve.
Weekend rains in Argentina, slightly lower energy prices and good harvest progress expected this afternoon are putting slight pressure on beans this morning and we give the slight edge to the bear camp. Although Argentine bean planting doesn’t begin in earnest until November, weekend rains of 1 to 3 inches were beneficial but much more will be needed to reverse the effects of the recent drought. The Rosario grain exchange says some Argentine farmers who were planning on putting in an early corn crop are now deciding to plant beans instead.
Weekend rains in Argentina were beneficial for a good portion of their corn growing area and that is giving the bear camp the slight edge. Although some showers are forecast for northern Brazil they are expected to be light and the 10 day rainfall will remain below normal. Argentina’s election went a bit different than expected as the current economic minister led with 36% of the vote and libertarian candidate Melei received 30% of the vote. The two will now face a runoff election to decide the result on November 19th. Peronist social policies have crashed the economy and caused runaway inflation so it is interesting the public would vote for someone in the current administration.
Although beneficial rains fell in some of Argentine’s wheat areas over the weekend, the spreading Mideast violence is more important and should be a supportive factor to the market this week. The weekend featured worsening violence and protests in the Mideast as Hezbollah, backed by Iran, joined the fight and fired rockets into Israel and the Yemen Houthis threatened Israel if they go through with the Gaza ground incursion. Furthermore, an Israeli missile accidentally hit an Egyptian border facility and reportedly the US is asking Israel to wait on the ground war so negotiations for US hostages can continue.
December hogs finally broke below the May contract low on Friday after testing that level for three sessions. This leaves the next target area down at 63.50. The futures are trading at a steep discount to the cash market, with the December hog basis on October 18 at 12.43 versus 7.18 a year ago and a five-year average of 6.96. This could ultimately lend support to December hogs, but the market is facing a seasonally weak period for hog prices, large production, and heavier hog weights. The market is also concerned about the potential for recession, with long term Treasury rates soaring and the stock market jittery about the war in the Mideast.
Last Friday’s Cattle on Feed report was negative across the board, with placements, marketings and on-feed all coming in at the bearish end of expectations. On top of that, placements and on-feed were above the high end of the range of expectations. Placements for the month of September came in at 106.1% of last year versus an average trade expectation of 101.2% and a range of 95.9% to 104.8%. September marketings came in at 89.4% versus 90.4% expected (range 89.5%-91.5%). Cattle on Feed supply as of October 1 was 100.6% of last year versus 99.7% expected (range 99.0% to 100.3%). The results indicate that supply is increasing at a faster rate than expected.
December cocoa overcame a disappointing third quarter North American grindings report on Thursday with a sharp rally on Friday and a gap higher open at the start of this week. This has put the contact high from mid-September in the market’s sights. Asian and European third-quarter grindings data were also below year ago levels, but they were higher than expected, and this has eased concerns that high prices are cutting into demand.
December coffee was close to at the start of this week after last week’s move to its highest price level since August 3. The market has gained 16% in just nine sessions, which has left it in an overbought condition, but there has been no technical indicator of a top. ICE exchange coffee stocks fell 190 bags on Friday and reached an 11-month low. The drawdown in stocks has underpinned prices, as it suggests that demand has been strong enough to overcome increased Brazilian supply from their 2023/24 crop. A rebound in the Brazilian currency has provided additional support on ideas it will ease pressure on Brazilian growers to market their supply to foreign customers.
December cotton has fallen to its lowest price level since July 17, as the market puts aside the tight US supply and focuses on a more ample global supply. This negative attitude has been fed by a resumption in the downtrend in equity markets, which bodes poorly for cotton demand. Global stock markets were down at the start of this week as concerns mounted over the war in the Middle East. Traders are also concerned about Chinese demand, and they will be watching economic data closely.
March sugar was lower at the start of this week on follow-through selling from last week after the market put in a 4-1/2 week high on Wednesday. India’s Food Secretary said last week that his country is not likely to face any shortages of sugar in their domestic market, and this was views as increasing the chance that India would resume sugar exports later in the marketing year. The market had priced in expectations that the export ban would last the entire season. This statement offset support from recent strength in energy prices and in the Brazilian real. Brazilian sugar production remains well ahead of last year’s pace.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.