As indicated several times last week, the treasury bond market appears to be “looking through” a list of potential major pitfalls to smoother economic waters ahead. We base that on the fact that treasury bonds into the low today were trading nearly 10 points below the August highs, despite the fact that the virus continues to hold back activity and non-Chinese economic data is suspect. We are also concerned about pressing the short side of the bond market given what is likely a net spec and fund short near record levels.
We continue to think that the euro, Swiss franc, pound and Canadian dollar have factored in an ongoing progression to sustain global recovery. We also suspect investors/speculators are heavily participating in the long side of the Swiss franc and euro from the belief that they are risky currencies likely to offer the biggest return in the event that the global economy continues to recover. The Dollar bias has shifted up, but we do not get the sense that the Dollar is poised for a significant upward thrust. However, surging US infection counts and market acceptance of a US failure to get a stimulus package has resulted in a risk-off environment to start the week.
After seeing repeated buying waves from periodic hope of a stimulus package, equity prices last week appeared to partially throw in the towel with long liquidation also fostered by headlines touting record daily infections in geographically diverse locations. An issue that has not been given too much focus yet is the fact that treasury yields are poised to reach the highest levels in 7 months, and that in turn could create some rotation from equities. Global equity markets were all lower at the start of this week with declines ranging from 0.3% to as high as 2.4% in Germany.
GOLD, SILVER & PLATINUM:
We view gold and silver to be very vulnerable to further selling this week off infection inspired slowing fears, a rising dollar and from technical related pressure. Even though US deaths counts are holding relatively low, the absolute number of new cases is distressing and there is the rising specter of a return to lockdown which obviously rekindles deflationary fear. At this point, it would not seem like a stimulus deal will be reached ahead of the election and that adds another weight on the back of sentiment. In fact, even a small deal might be-seen-as disappointing to the marketplace now and the failure to save psychology in the face of expanding momentum of inflections should put gold, silver, and most commodities under severe pressure.
With a huge range up extension at the end of last week, it would appear as if the platinum market has set itself apart from the rest of the precious metal markets. While some of the lift for platinum might have been the result of spread trading, the rally was forged on a jump in trading volume and that suggests the bull camp might now be more vulnerable to the macroeconomic deterioration from stimulus disappointment and from troublesome infection counts. Platinum positioning in the Commitments of Traders for the week ending October 20th showed Managed Money traders were net short 2,225 contracts after increasing their already short position by 1,430 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 533 contracts to a net long 13,914 contracts.
A reversal from last week’s highs in copper was partially the result of the failure to get a US stimulus package, but also because of the ever rising infection counts (inside and outside of the US) and finally because of strength in the Dollar. Going forward, talk of returning to lockdown rekindles non-Chinese copper demand fears and it would already appear as if a liquidation wave is in motion this morning. While some longs decided to bank profits and move to the sidelines last week, significant additional long liquidation is highly likely given the over-extended long positioning held by the Specs.
Given the deterioration in macroeconomic conditions, we see a decline in crude oil back to the bottom of the 2-month consolidation lows. Certainly an extension of the negative political/stimulus situation combined with record infection surges in the US, Italy France Germany and Poland adds to demand destruction fears. Cushioning prices against a wholesale washout is evidence from last week that the Chinese demand story has been extended into the future, with refiners recently buying for delivery in January. While it might also be old news it was reported that Chinese imports from the US in September reached a record level with Brazil also seeing significant purchases from China. We might further acknowledge that China is in-the-midst of another 5-Year planning meeting this week, and that will likely yield headlines supportive of further growth and even larger oil consumption. Nonetheless, the near term belongs to the bear camp and to macro-economic conditions. However, it should be noted that a tropical storm in the Gulf is forecast to become a hurricane and the track is once again right at key US oil facilities.
The surge higher in palm oil futures at the start of this week was led by smaller October production for Malaysia and also strong exports so far in October in spite of the price rally. In addition, Indonesia will raise its shipment levy to fund its B30 biodiesel blending program and this added to the bullish tone. November soybeans closed 10 cents higher on the session Friday, and this left the market with a gain of 33 3/4 cents for the week. The market managed a new contract high for the 5th session in a row Monday. Talk of better weather for South America plus a lack of new buying interest from China are seen as short-term negative forces. Technical indicators are extremely overbought. After posting contract highs for six sessions in a row, December meal experienced an inside trading day. A shift from positive to more negative outside market forces has added to the short-term negative tone as the market attempts to correct the overbought condition.
While overbought, short-term demand factors look positive. Taiwan bought 65,000 tons of corn overnight. The Ukrainian grain traders union indicates that Ukraine’s 2020 corn harvest will likely come in near 30 million tons from 35.9 million in 2019. December corn posted a new high for the move for the 4th session in a row Friday and technical indicators are extremely overbought. December corn managed to rally 17 1/4 cents for the week. Exporters announced the sale of 100,000 tonnes of US corn sold to unknown destination. Chinese demand remains much stronger than expected and traders are still nervous that Nebraska and Iowa yields might be adjusted down eventually.
The 1-5 day forecast calls for 1 1/2 to 3 1/2 inches of rain for a large portion of the winter wheat belt in the southern Plains, and this will help ease concerns for the crop and might be considered a short-term bearish force. The market is still operating under the negative technical influence of the October 21st key reversal for December Kansas City wheat. Weather conditions improved for Russia wheat growing areas last week and there are some scattered rains in the forecast for this week. Pakistan is tendering to buy 320,000 tons of wheat. Egypt bought 165,000 tonnes of wheat from Russia on Friday. December wheat closed 10 cents higher on the session Friday and this left the market up 7 1/2 cents for the week. Ideas that the virus is causing end users around the world to own more wheat inventory than normal has added to the positive tone. Turkey purchases 175,000 tonnes of wheat. France’s soft-wheat crop was 45% planted as of Oct. 19th, up from 12% a week earlier and compares with 27% at the same time in 2019.
The USDA pork cutout released after the close Friday came in at $91.53, down $6.92 from Thursday and down from $97.90 the previous week. This was the lowest the cutout had been since October 6. For the week, December hogs closed 260 points lower. The CME lean index as of Oct 21 was 78.60, down from 78.69 the previous session but up from 78.49 a week before. This leaves December hogs at a discount of $11.43 as compared with the five-year average discount of $6.65 for this time of year. April hogs closed lower Friday and closed lower every day last week. The selling has pushed the market down to the lowest level since September 10.
The USDA Cattle-On-Feed report was considered bearish with placements coming in at 105.9% of last year as compared with trade expectations near 102.5% of last year. This was near the high end of trade expectations. Marketing’s for the month of September came in at 106.2% of last year which was just slightly above trade expectations. Total cattle supply on feedlots as of October 1 came in at 103.8% of a year ago which is a record high for October and compares with trade expectations at 103.2% with a range of 102.7-103.9.
Cocoa prices did see end-of-week long liquidation and profit-taking on Friday, but that was not enough to prevent a fourth positive daily result in the past 5 sessions. While a major demand-side event is at the end of this week as global risk sentiment remains subdued, cocoa has near-term bullish supply factors that can help to extend this current recovery move. December cocoa reached a new 3-week high at midsession before losing upside momentum, but it managed to hold its ground in positive territory as it finished Friday’s trading session with a modest gain. For the week, December cocoa finished with a gain of 118 points (up 5.0%) which broke a 4-week losing streak. A rebound in the Eurocurrency provided carryover support for the cocoa market as it will make it easier for Euro zone grinders to acquire near-term supplies.
Coffee’s inability to follow-through on Thursday’s outside-day higher has left prices at the bottom-end of their September/October downtrend. Although global demand concerns (particularly for Europe) will remain a front-and-center issue for the market through the fourth quarter, coffee prices are well into near-term oversold territory now and it will not take much in the way of bullish supply/demand news to trigger a near-term bounce over the next few sessions. December coffee held within a fairly tight inside-day range, but could not fully shake early pressure as it finished Friday’s trading session with a moderate loss. For the week, December coffee finished with a loss of 1.65 cents (down 1.5%) and a third negative weekly result over the past 4 weeks. A pullback in the Brazilian currency weighed on coffee prices as that will further encourage Brazil’s producers to market their near-term coffee supply to foreign customers.
The market has coiled up and looks vulnerable to a break, but another tropical storm is likely to hit Louisiana and leave hefty rain totals for the Delta. With the extreme overbought condition, and the surge in virus cases plus a general sense that the market has already priced in some hurricane losses, the market may have put in a short-term peak. The 1-5 day forecast is still a concern with hefty rain totals for the Delta and the southeast US plus even some rain for Texas. However, the 6-10 day and 8-14 day forecast models are dry. If outside market forces turned sour, the market looks vulnerable to a corrective break. Even if we assume that the USDA will adjust US production down by 1 million bales due to hurricane losses, US ending stocks would still come in at 6.2 million bales which would be down from 7.25 million last year but still up from 4.85 million bales for the 2018/19 season and 4.2 million the previous year.
The sugar market does not seem to have the supply fundamentals for a continued bull trend, but fund traders have been active buyers, and the market has remained in a steep uptrend. With the market remaining at near-term overbought levels and with a net spec long position at its largest level for several years, sugar remains vulnerable to additional long liquidation early this week. March sugar held within an inside-day range, but could not sustain upside momentum as they finished Friday’s trading session with a mild loss. For the week, March sugar finished with a gain of 29 ticks (up 2.0%) which was a sixth positive weekly result in a row which is the market’s longest weekly winning streak since the second quarter of 2016.
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