On the one hand, the sharp slide in treasury prices following US jobs data last Friday, was justified but a low to high recovery of nearly 2 points from the post job’s report slide low might have been overdone. In fact, given the nonfarm payroll gain was double expectations and prior month payrolls were revised higher, the bear camp leaves the trading week with clear fundamental control. Typically, a very surprising monthly nonfarm payroll report result takes more than one trading session to fully settle into prices. However, the treasury markets were aggressively oversold from last Friday’s spike down move and spec positioning has certainly become excessively short.
While treasuries were showing strength at the start of this week from the attacks over the weekend, the US cash treasury markets were closed for the Columbus Day holiday and ranges were narrower than normal.
The action in the dollar last Friday should be quite unnerving for the bull camp, as very strong September US payroll readings should have pulled a wave of buying to the dollar. Furthermore, the dollar failed to benefit from upward revisions from prior monthly payroll readings, perhaps because of a slight softening of US wages which can be a sign of moderating inflation. Therefore, the dollar might be signaling an intermediate top, especially if ultra strong jobs data does not result in some hawkish commentary from the Fed.
In retrospect, the euro was lucky to have managed a bounce at the end of last week as classic fundamental news from both sides Atlantic was bearish for the euro. . In retrospect, the Canadian dollar was excessively oversold from a technical perspective into last week’s low.
The strength in equity prices last Friday was surprising as the markets displayed the capacity to discount “good economic data is bad for equity prices”, perhaps because wage data showed a softening of inflation thereby comforting the Federal Reserve. The markets likely drafted support from merger talks between Pioneer Natural Resources and Exxon Mobil. However, the UAW strike continues but there that “bargaining activity has picked up”. Surprisingly there were markets posting gains at the start of this week, despite what appears to be much more than simple military exchanges between Israel and Hamas.
All things considered, seeing the S&P shut off the aggressive August through early October selloff last week in the face of several bearish entrenched fundamental issues (rising rates, political battles, debt ceiling issues, etc.) might indicate value has been found above 4,235.
Like the S&P, the Dow futures have apparently found value above last week’s spike lows and the trade/investors have been comforted by the much better than expected jobs report. As indicated several times last week, the NASDAQ continues to show the strongest signs of life with the market building consolidation low support over the past three weeks and potentially poised to breakout up to the highest level since September 20th early this week.
GOLD, SILVER & PLATINUM:
Not surprisingly, gold and silver are benefiting from the uncertainty created by the attack of Israel by Hamas. Fear of hostilities throughout the Middle East usually results in a knee-jerk reaction rally in gold, especially with respect to events involving Iran. However, many gold traders are rightly suspicious of the rally, and are likely to step into fresh short positions once it becomes clear other countries/parties are not entering the conflict. According to Bloomberg, gold rallied and failed in January 2020 when Iran launched retaliatory missile strikes on US bases in Iraq and a rally also failed in 2019 when oil flow through the Straits of Hormuz was threatened by.
With the Chinese back from an extended holiday and their economy likely boosted by the holiday travel surge, traders should be monitoring all news from the Chinese property sector, action in the yuan and Chinese domestic gold prices as their does appear to be flight to quality buying of gold going on inside China.
However, the PGM markets do not show consistent sensitivity to outside market signals and are likely to continue to erode. On the other hand, the palladium market with the declines at the end of last week likely has a record net spec and fund short while the platinum with the declines late last week might only be approaching neutral positioning.
Apparently there were reports of strong Chinese demand early this week as Chinese entities returned from holiday and possibly caught up on operations. However, prices should be limited following news that copper inventories in key Chinese facilities increased by 20,500 metric tonnes from September 28th to October 7th, with the latest reading 10,900 metric tonnes above year ago levels. The most positive development for the copper market is last week’s triple low formation which provides a thin layer of support early this week. While the end of the extended Chinese holiday might result in a smattering of upbeat economic Chinese press reports, the woes of the property sector remain and would be buyers are unlikely to step in in force without another stimulus package.
So far, the battle between Israel and Hamas has resulted in an anticipatory supply threat, but a real supply threat could surface if Iran begins to play a prominent role in the conflict. However, a portion of the large bounce is justified given the sheer magnitude of the attacks which distinguish the current situation from periodic skirmishes. According to some estimates, 1,200 people have been killed and with the US moving ships into the region that could spark a negative reaction from the Arab world. Certainly, the outbreak of hostilities in the Middle East tempers global economic sentiment and in turn questions global energy demand. However, the ultra-strong US jobs report last Friday and the return of China from holiday should help cushion prices against demand fears.
In retrospect, last week’s EIA report was patently bearish for gasoline with a very large 6.4-million-barrel inflow, the annual year over year surplus more than doubling in one week and EIA weekly implied gasoline demand falling by 600,000 barrels per day. On the other hand, seeing Russia extend its gasoline export ban and given very strong US jobs data escalating demand fears from the past three weeks should be heavily discounted.
The diesel market appears to have found some value at the $2.80 level and has ongoing global attention from “tightness of the global diesel market”.
Even though the global natural gas trade has indicated the Middle East conflict will not impact global natural gas supply flow, prices have extended on the upside as if other factors are present.
The surprise incursion by Hamas militants into Israel over the weekend has sent crude oil prices $3 per barrel higher and Israel is pointing the finger toward Iran, which could widen the conflict. Funds erased nearly all their net long position as of Wednesday last week and it has been since April 2020 that funds have held a net short position. The USDA supply and demand report will be out on Thursday of this week. Good harvest weather to start the week here in the US, then the last half of the week into the weekend heavier showers move into Nebraska, Iowa, and northern Illinois, which could create some harvest delays.
Geopolitical risk has taken center stage over the weekend as the major incursion by Palestinian militants into Israel has created the worst violence between the two countries since the Yom Kippur war 50 years ago this month. The effect of the conflict on grain prices has so far been bullish as grains rallied on the back of a $3 per barrel jump in crude oil. Israel is blaming Iran for helping Hamas plan the attack. In the past, conflicts that spread across the Mideast have caused some countries to adopt a policy of increasing their grain stocks in case a widespread war breaks out and supplies are harder to get. It may be too early yet to say if that’s going to happen but it must be put on the radar. Harvest progress report and export inspections will be delayed until Tuesday due to the Columbus Day holiday and progress is expected to be in the 35-40% range.
Reports at the start of this week that the US is sending military ships and aircraft closer to the Middle East region after the Palestinian incursion into Israel has sparked the worst violence there in 50 years. The violence will drive geopolitical wedges between countries that support the Palestinians and those that support Israel. Many citizens of countries in the Middle East rely heavily on government subsidized bread, and any hint of a threat to wheat supplies will give those countries reasons to increase imports of grain as a precaution. Look for additional tenders coming from the region in the next few days.
December hogs saw a sharp three-day rally last week that could leave them vulnerable to back and fill price action, especially if outside markets turn sour in the wake of the attack on Israel over the weekend. The attacks supported several commodities including crude oil, but this has the potential to spark a selloff in equities, which could spill over to other markets like hogs that tend to draw support from a strong economic outlook. On Friday the strong jobs number and the subsequent bullish reaction from the stock market lent carryover support to the hog market that allowed them to extend their recovery. December hogs have now reclaimed 50% of their decline from the September 20 high to last week’s low. The CME Lean Hog Index as of October 4 was 83.70, down from 84.28 the previous session and 86.14 the previous week.
Several commodity markets were higher early this week in the wake of the attack on Israel, and this could lend support to cattle as well. However, if the equities sell off and a risk off mood develops, this could put carryover pressure on the market. December cattle reversed support Friday from the strong US jobs report. The USDA estimated cattle slaughter came in at 112,000 head Friday and 17,000 head for Saturday. This brought the total last week to 628,000 head, up from 612,000 the previous week but down from 669,000 a year ago. The estimated average dressed cattle weight last week was 829 pounds, up from 827 the previous week but down from 830 a year ago. The 5-year average weight for that week is 831 pounds.
December cocoa experienced a positive technical reversal on Friday that suggests a near term low could be in place. It was not among the commodity markets that were higher at the start of this week in the wake of the attack on Israel, perhaps because it is not viewed as a necessity the way energy, grains, or sugar are. However, cocoa does face a potential global supply deficit for a third straight season, and if demand prospects are not diminished by the weekend’s events, the market may be able to build off last week’s low.
Coffee prices were higher at the start of this week and seemed to draw support from a generally positive mood in the commodities in the wake of the attacks on Israel over the weekend. This a reversal higher on Friday after trading to a new 28-month low, which was a positive technical development. Indications that this season’s Central American production may come in lower than last season provided fundamental support to the market going into the weekend. ICE exchange coffee stocks were unchanged on Friday, but they remain close to their lowest levels since November.
December cotton gapped higher at the start of this week as anxiety in the wake of the attack on Israel supported several commodity markets. The market fell to the 50-day moving average on Thursday and held that line on Friday, which is technically supportive. The trade is looking for declines in US 2023/24 cotton production, exports, and ending stocks in Thursday’s monthly USDA supply/demand report. The average trade expectation for US production is 12.91 million bales, with a range of expectations from 12.50-13.50 million. This would be down from 13.13 million in the September report. Exports are expected to come in around 12.10 million bales (range 11.65-12.4. million) and down from 12.30 million in September.
The sugar market was higher at the start of this week as it drew support from strength in other commodities, particularly the energy markets, which were higher in the wake of the attack on Israel over the weekend. With south Asia supply issues continuing to provide support, sugar could see a recovery move back to contract highs. The Brazilian real rallied from a new 6-month low to grind out a modest gain Friday, and this lent support to sugar on ideas reduces pressure on cane crushers to process sugar for export. Concern that this season’s Thailand production and exports will see a sharp decline in 2023/24 also supported sugar last week.
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.