Clearly, US treasuries are not seeing flight to quality interest from the escalation of the war (the beginning of the ground war), but a sudden flight to quality reaction should not be ruled out especially if Iran and US military forces engaged directly. In a longer-term and a largely unknown process, the SEC is apparently poised to enact new rules attempting to rein in debt fueled trading bets in Treasuries and repos by hedge funds which the SEC suggests is needed to bolster financial stability. The markets think the new rules will likely force cash treasury trading and repo transactions to a single central clearing system. The details of how the new rules will be implemented, what will be altered and if the process will be immediate or gradual are not known.
In retrospect, the initial rally in the dollar last week was justified and expected due to US economic scheduled reports and in part due to talk of a potential recession in Europe. While we also suspect the dollar saw a measure of flight to quality buying, that action has been less than usual. It is possible that the retrenchment from the highs last week is profit taking/window dressing for the funds ahead of month-end. With the dollar tracking slightly weaker early this week and the dollar not benefiting from the launch of the feared ground war in Gaza, the bear camp retains a thin edge. Not seeing the dollar benefit from an escalation of the war (meaning direct involvement by the US and/or Iran ahead) would suggest to us that a major shift in view toward the dollar has taken place.
As indicated already, the US dollar maintains a very definitive macroeconomic and interest rate differential edge with most large actively traded currencies. However, despite softer Spanish CPI, a contraction in German GDP and disappointing euro zone consumer confidence, industrial confidence, and economic sentiment indicators for October, the euro trade appears to have embraced a very positive Eurozone services sentiment reading for October. Given data from the UK, the Pound has been unable to benefit from a softer dollar. However, trading ranges early this week look to be narrow perhaps because of the uncertainty from the war and from the looming FOMC press conference statement later this week.
Initial gains in equities last Friday were likely from short covering as uncertainty from the fighting in the Middle East expanded overnight following the US airstrikes against suspected terrorism strongholds in Syria before the bull camp the markets were not cheered by suggestions from Hamas that a release of hostages require a cease-fire. In other words, the markets were presented with the first sign of negotiations to deescalate the situation. Holding back equity markets last Friday were less than stellar results from Exxon Mobil, Chevron, and Boeing. Global equity markets were higher at the start of this week except for the markets in Japan, and Australia.
Certainly, the Dow has become heavily short-term oversold with the sharp plunge last Friday but as indicated in the S&P coverage this week, it is difficult to embrace a bullish fundamental theme capable of turning very bearish market sentiment around. The hills are alive with the sound of regulation of the AI industry and that should leave some headwinds for the NASDAQ in place this week.
GOLD, SILVER & PLATINUM:
Gold futures gapped higher at the start of this week to new post-Hamas attack high of $2,004. Gold positioning in the Commitments of Traders for the week ending October 24th showed Managed Money traders net bought 48,815 contracts and are now net long 90,682 contracts. Non-Commercial & Non-Reportable traders were net long 169,754 contracts after increasing their already long position by 43,725 contracts. With the December gold contract into the high last Friday sitting $37 above the level where the last positioning report was measured, the net spec and fund long is only the highest since July. Fortunately for the bull camp, the 2023 net spec and fund long high was 251,000 contracts compared to this week’s 169,754 contracts long which should leave the market with additional buying capacity.
We suspect silver will eventually benefit from continued gains in gold as flight to quality players look for cheaper alternatives than the soon-to-be overbought gold market. With the silver market at its lows last week $0.37 below the level where the last COT positioning report was measured, the net spec and fund long positioning has likely reached the lowest levels since the end of March.
Risk assets were mainly up at the start of this week giving copper prices a lift. On the supply side, Glencore reported a 5% drop in copper production compared with this time last year. This comes after Anglo American dropped its copper guidance last week as well. Inventory levels in both Shanghai and at the LME dropped last week. There have been rumors of a mass exodus of copper traders from Amer, China’s largest copper importer and trader. With $90.5bn in revenues, Amer represents 10% of the Chinese copper market. In addition to news of stimulus from the Chinese government, copper should also be cheered by the decline in weekly Shanghai copper warehouse stocks last week of 21,815 tonnes which put those inventories at the lowest level since September 2022.
The bull camp in crude oil should be disappointed with the lower price action in the wake of the launch of the Israeli ground attack of Gaza. While we give the edge to the bull camp, action at the end of last week also showed a lack of bullish resiliency with a war unfolding in the Middle East. In fact, with the launch of the Israeli ground attack, we suspect Arab relations with the West will deteriorate, potentially producing threats of not selling oil to those supporting Israel. Perhaps even more likely is an Iranian attack of oil tankers in the Gulf of Hormuz. With Iranian leadership last week making it clear that the US would not be exempt from retaliation, the escalation of the war could take many unexpected turns.
While we see the crude oil market as the tip of the bullish sword, the gasoline market last week had a $0.17 rally and likely has the largest net spec and fund long since July of last year. The diesel market also suffered a significant corrective track over the last two weeks and appears to have found value around $2.90.
The slow planting pace in Brazil and strong soymeal demand give the edge to the bull camp. A Brazil Ag consultancy said bean planting is 38.4% complete and that compares with 52.3% done last year. In addition, southern Brazil continues to get heavy rains which have caused some replanting concerns. Central, Western and some parts of northern Brazil are expecting scattered showers this week, but concerns remain, especially for northern Brazil. Argentina will see scattered showers this week and conditions are improving overall. Soymeal was the star of last week and has moved well into overbought territory technically. However, it must be noted, soymeal is a different animal than soybeans due to its limited shelf life and there are no global reserves of meal to be tapped when shortages occur, or prices get high.
Market moving news is scarce at the start of this week and prices are chopping in a small range since the middle of last week, frustrating both bulls and bears. There is no current compelling bullish story for corn, although longer-term it’s all about South American weather. There is some concern regarding the slow planting pace of beans in Brazil as that can delay second crop Safrinha corn planting and push pollination into the dry season. Second crop corn accounts for roughly two-thirds of Brazil’s total corn output. Brazil’s Center-West drought areas will see some better rains this week, but a rebound to normal precipitation is not expected over the medium-term.
Despite increasing geopolitical risks, whet prices have been unable to gain traction and Kansas City wheat fell to another new contract low, keeping the bears in control. The weekend featured more beneficial rains across the southern Plains and that is pressing prices lower on KC. Israel says the second stage of the war has begun with a ground operation into Gaza, and the US warns of elevated risks of the conflict widening. Mass protests have broken out across the Mideast and Turkey’s president warned Israel that Turkish troops could enter Gaza in support of the Palestinians.
December hogs finished last week with three straight higher closes, as the market continued its recovery off contract lows. The larger than normal discount to the cash market had been lending support to the futures, but the rally has closed the gap. As of October 25, the discount was 10.77, down from 12.04 the previous session but still higher than 8.72 the last year and the five-year average of 7.29. The CME Lean Hog Index as of October 25 was 78.19, down from 78.41 the previous session and 80.45 the previous week. The USDA estimated hog slaughter came in at 482,000 head on Friday and 191,000 for Saturday. This brought the total for last week to 2.614 million head, up from 2.610 million the previous week and 2.564 million a year ago.
December cattle rallied sharply last Friday and recovered a good portion of the losses they incurred earlier last week in the wake of the Cattle on Feed report from October 20. Cash cattle prices have stabilized and boxed beef values are higher. While the on-feed report showed a surprising increase in placements for the month of September, traders were reminded of the overall tight supply situation and how long it may take to change that. Last week’s export sales report showed US beef sales for the week ending October 19 at 21,342 tonnes, the highest since July 20. Cash cattle prices were lower last week, but they recovered by Friday, and this turnaround was viewed as supportive.
The cocoa market has been in a long-term uptrend since September 2022, with prices rising 1,657 points (up 75%) over that timeframe. Cocoa has been one of the strongest performing markets this year, and it has increased more than 400 points since the start of October. However, cocoa may have gotten ahead of itself over the past few weeks and could be vulnerable to a pullback. December cocoa fell back from a new 44-year high early in the day, but continued to hold its ground in positive territory as it finished Friday’s trading session with a sizable gain. For the week, December cocoa finished with a gain of 158 points (up 4.3%) which was a fourth positive weekly result in a row.
Coffee’s October rally appears to have run out of steam as it finished last week’s trading with three negative daily results in a row. Until the demand outlook is strengthened by improved global risk sentiment, coffee is likely to remain on the defensive this week. December coffee was unable to hold onto early gains as it finished Friday’s trading session with a modest loss. For the week, December coffee finished with a loss of 4.30 cents (down 2.6%) which broke a 2-week winning streak and was a negative weekly reversal from last Wednesday’s 4-month high. Recent rainfall over Brazil’s major Arabica growing areas should improve the prospects for their upcoming 2024/25 crop and continues to weigh on coffee prices late last week. Brazil’s 2024/25 Arabica crop is an “on-year” in their 2-year crop cycle, which normally leads to an increase in production from the previous season. There have been bottlenecks with loading ships at Brazil’s major port of Santos, which may slow down their coffee exports over the next few weeks and has provided mild support to coffee prices.
December cotton is continuing its recovery off the mid-month lows, as it balances a poor US crop with mediocre demand expectations and what appears to be enough global supply, and it may not be ready to resume its downtrend until US harvest is further along. US crop conditions are close to record low levels, and ending stocks are expected to be the tightest since 2016/17. Wet weather in west Texas has delayed harvest and raised concerns about quality, but conditions look drier this week. The 6-10- and 8-14-day forecasts show below normal to normal chances of rain for most of Texas. Last week’s Crop Progress report showed 41% of the US crop was harvested, with Texas at 40% as of October 22. An update will be released this afternoon.
Sugar prices have seen coiling action for most of October but will start this week on course for a fourth positive monthly result in a row. With signs that stronger energy prices are improving the ethanol demand outlook, sugar prices should remain well supported going into month-end. March sugar was able to build onto early support as it finished Friday’s trading session with a moderate gain. For the week, March sugar finished with a gain of 49 ticks (up 1.8%) which was a third positive weekly result over the past 4 weeks.
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