Following a weaker than expected set of Chinese inflation readings, Canadian unemployment had a much higher than forecast increase. In addition, the Fed’s George said that she prefers steadiness and steadfastness over speed with future Fed rate hikes. Treasuries were unable to build on early strength and finished last Friday’s trading session with mild losses. Given the ability to respect last week’s spike down extension lows, the build out of a consolidation pattern and given treasury prices are tracking positive in the face of global equity and commodity market optimism, that should indicate last week’s lows as strong fundamental value.
The Dollar stayed under significant pressure throughout the day as it finished last Friday’s trading session with a heavy loss and a negative weekly reversal. An inability to retest Wednesday’s 20-year high fueled profit-taking and long liquidation going into the weekend. Hawkish commentary by ECB officials provided a boost to the Eurocurrency that lifted it back above parity with the Dollar. With a downside extension of last week’s washout and the violation of psychological support at 108.00, the charts favor the bear track at the start of this week. However, the dollar could be under pressure because of growing hope that aggressive US rate hikes could be near an end.
The lack of strength in the Yen at the start of this week in the face of a fresh lower low in the dollar highlights the entrenched bearish view toward the Japanese currency. With the BOE continuing to offer warnings of turmoil from the ongoing conundrum of rising UK rates in a slowing environment, the minimal rally in the Pound off significant dollar weakness is not surprising. While a portion of the Canadian dollar rally over the prior 3 trading sessions is likely a reaction to dollar weakness.
Global markets continued to build on early strength as they have a positive tone at the close of last Friday’s trading session. Positive guidance from Kroger helped to soothe market concern over rising food prices. US equity markets extended their early gains and finished with sizable gains. Global equity markets at the start of this week were all positive with some gains above 2%. While central bank dialogue continues to reiterate the need to continue the battle against inflation, investors are growing hopeful that US inflation data this week will bring evidence of moderating prices. Global economic news released early this week was thin with New Zealand visitor arrivals in July jumping a massive 344% from year ago levels, a contraction in UK industrial production, a softer than expected gain in UK manufacturing production, a significant improvement in Japanese machine-tool orders for August and a slightly stronger than expected Italian industrial output month over month reading for July.
Like the S&P futures, the Dow Jones futures have also extended last week’s impressive rally with the likely cause of that rally anticipated relief from the very aggressive US rate hike cycle. The early gains this week were impressive considering the negative headline flow for two Dow stocks.
GOLD, SILVER & PLATINUM:
With the dollar extending last week’s reversal/slide and reaching the lowest level since August 26th early this week, the precious metal markets clearly start the week with support from currency market action. In our opinion, the markets were upbeat in anticipation of evidence on Tuesday that US inflation might be coming under control. In other words, both commodities and equities are hopeful that jumbo rate hikes from the US Fed are over or will be over after next week’s FOMC meeting. In fact, metals, equities, and other commodities are tracking positive at the start of this week despite the promise of more quantitative tightening from the European Central Bank. Therefore, the bull camp in gold and silver is factoring in expectations for a decline in CPI of 0.1%. The gains in commodities early this week was impressive given the additional Chinese Covid city lockdown announcements over the weekend.
Like other precious metal and commodity markets, the palladium market has extended last week’s impressive recovery rally and has matched the highest price since August 26th in action early this week. While the PGM markets have not tracked tightly with the ebb and flow of fears of slowing from aggressive global central bank action, the markets this morning are obviously taking part in what appears to be an interest rate relief rally ahead of extremely critical US inflation data Tuesday.
Given the weekend announcement of spreading lockdowns in China (2 more major cities) the strength in December copper this morning could be a signal that copper prices down at $3.40 represent fundamental value. Like other physical commodity markets, the copper market charts have shifted in favor of the bull camp and have managed that action despite an increase in LME copper warehouse stocks last Friday, residual Chinese slowing fears and, in the face, lingering fear of slumping Chinese copper demand. It should be noted that Shanghai copper warehouse stocks last week declined by 3% leaving the primary global copper supply measure very tight.
Fortunately for the bull camp, crude oil appears to be poised to benefit from improved macroeconomic sentiment flowing from growing speculation that the US central bank might become less aggressive if this week’s US inflation data shows a “contraction”. From a shorter-term perspective, energy prices early this week are also benefiting from fear of a breakdown in Iranian nuclear talks. In our opinion, if retail fuel prices continue to fall, the Biden administration will be less likely to agree to a deal which largely favors Iran. It is also possible that crude oil prices will benefit from further efforts to implement a Russian oil price cap. Furthermore, the bull camp should remain inspired by comments from the Russian President threatening to stop all oil supply in the event a European price cap is imminent.
Certainly, gasoline futures are benefiting from spillover strength in crude oil early this week, but we see recent gains as a temporary bounce in a bear market. Fortunately for the bull camp, private services noted a contraction in global fuel oil supplies last week and an increase in Chinese independent oil refinery operating rates.
The soybean market faces the USDA report Monday and has absorbed bearish supply and demand news over the last few weeks. Vegetable oil prices continue to collapse with palm oil at a 20 month low, and Argentina soybean producers are thought to have sold 3 to 4 million tonnes of soybeans this past week. This should increase meal and oil sales and could pressure prices over the near term. November soybeans closed sharply higher on the session Friday but still lower on the week. Exporters announce the sale of 104,000 tonnes of US soybeans sold to Taiwan. Positioning ahead of the USDA supply/demand report plus bullish outside market influences helped to support. December meal also closed higher on the day but with an inside trading session and still closed lower on the week. December soybean oil closed moderately higher on the session and experienced follow-through buying from Thursday’s hook reversal, but also closed lower for the week.
December corn closed sharply higher on the session last Friday and experienced the highest close since June 22nd. The market closed just shy of key resistance at 688, and this leaves bullish traders with a tough decision going into the USDA report. If yield comes in anywhere close to the crop tour results, the outlook for US and world ending stocks will tighten to historic levels. Outside market forces carried a very bullish tilt. For the reports, the average trade expectation for US 2022/23 corn yield is 172.4 bushels per acre, with a range of expectations from 170-174.9. This would be down from 175.4 in the August report. Corn production is expected near 14.089 billion bushels, which would be down 270 million bushels from the August update. US corn ending stocks are expected to come in near 1.195 billion bushels (980-1.412 range), down from 1.388 billion in August. World corn ending stocks are expected near 301.7 million tonnes (290-305.9 range) versus 306.7 million in August.
December wheat closed sharply higher on the session last Friday and experienced the highest close since July 11. The market seems to have had plenty of bearish news to break out of the July-September consolidation, but the major reversal for the US dollar and poor weather in Argentina were factors to spark significant short covering. Strength in the other grains and a much improved risk tone for global markets added to the positive tone. The average trade expectation for US 2022/23 wheat ending stocks is 618 million bushels (594-650 range), up from 610 million bushels in the August report but still be the lowest since the 2013/14 season. World ending stocks are expected to come in near 268.2 million tonnes (263.6-274 range), up from 267.3 million in August. This would be the lowest since 2016/17.
December Hogs appear to have posted a significant low last Friday, as the market fell to its lowest level since July 5 before closing moderately higher on the session. December futures are trading at a massive discount to the cash market, and it is difficult to come up with a scenario to rationalize this set-up. The CME Lean Hog Index as of September 6 was 101.48, down from 103.26 the previous session and 109.36 the previous week. This leaves December Hogs trading at an 18.76 discount to the cash market versus 17.18 last year and a five-year average of 5.00. If December Hogs were trading at the five-year average basis, they would be priced at 96.47, not at 83.12, where they were at the close on Friday. With US pork production expected to be 1.5% below year ago levels in the fourth quarter, there does not seem to be much reason for such a big discount.
The cattle market opened steady on the session Friday and closed sharply higher on the session. October cattle pushed up to the highest level since August 18. Traders see tightening supply into the fourth quarter as a supportive factor, and outside market forces carried a bullish tilt. The stock market rally is helping to ease concerns of weak demand ahead. The USDA boxed beef cutout was down 77 cents at mid-session Friday and closed 75 cents lower at $257.26. This was down from $258.07 the previous week and was the lowest it had been since May 12th. Cash live cattle traded in decent volume for a Friday at 6,901 head, but Thursday was the peak trading day for the week at 31,031 head. There were 956 head reported in Kansas on Thursday at $141, which was steady with earlier in the week and with the previous week. In Nebraska 3,824 head were reported at $142-$143 with an average of $142.93 versus an average of $143.87 the previous week. The 5-day, 5-area weighted average price as of Friday was $142.14 versus $142.62 the previous week.
Concern over demand destruction has weighed on many commodities during the third quarter, particularly for the cocoa market. With global risk sentiment and key outside markets on the mend, cocoa prices may be able to extend a recovery move well above its July/September consolidation zone. December cocoa was able to regain upside momentum and break a 3-day losing streak as it finished Friday’s trading session with a sizable gain. For the week, however, December cocoa finished with a loss of 56 points (down 2.3%) which broke a 2-week winning streak.
Coffee prices were unable to complete a positive weekly reversal, but their abrupt turnaround on Friday put firm brakes on their August/September pullback. If global risk sentiment continues to improve, coffee should be able to sustain upside momentum. December coffee was able to build onto a strong opening and climbed back above their 200-day moving average to finish Friday’s trading session with a sizable gain. For the week, however, December coffee finishing with a loss of 0.30 cent (down 0.1%) which was a second negative weekly result in a row.
December cotton closed moderately higher last Friday at the upper end of last week’s range but still down sharply from where it was at the end of August. The dollar broke lower on Friday, which is supportive to US export commodities like cotton and the dollar is sharply lower again today. Crude oil was higher as well, which makes man-made fibers less competitive with cotton. Traders are looking for a slight increase in the US production estimate for today’s USDA supply/demand report, but not much. The average trade expectation for US 2022/23 cotton production is 12.77 million bales, with a range of expectations from 12.20 to 13.50 million. This would be up from 12.57 million bales in the August report but down from 17.52 million last year. Ending stocks are expected to come in around 1.86 million bales (range 1.50-2.50) versus 1.80 million in August at 3.50 million for 2021/22.
Sugar prices continue to see coiling action that has gotten tighter in early September, which may be setting the stage for a longer-term trend decision. Although it should receive carryover support from the improvement in key outside markets, sugar remains vulnerable to a near-term pullback. March sugar was able to shake off early pressure as it finished Friday’s trading session with a moderate gain. For the week, October sugar finished with a gain of 7 ticks while March sugar closed with a weekly loss of 18 ticks (down 1.0%) which was a third negative weekly result over the past 4 weeks.
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