While it may be premature to suggest that the treasury bond market is returning to classic reactions to fundamental developments, we see that action unfolding over the coming weeks. However, treasury prices failed to rally in the face of softer inflation readings from the PCE report and in the face of distinct weakening of the consumer from personal income and spending reports.
While the dollar index ran out of buying fuel at contract highs, technical and fundamental issues suggests the bull trend will continue. In fact, the US Fed remained definitively hawkish which likely will result in US interest rates expanding their interest rate differential edge versus Europe. Furthermore, with electric/heating feedstock prices in the UK and Europe already 10 times higher than in the US (and likely to head even higher) the threat of recession in the euro zone is significantly higher than the odds of recession in the US. The currency markets have fully embraced the US Federal Reserve’s resolve to snuff out inflation along with aggressive and sustained tightening.
With a spike down failure in the Yen to start out this week, fresh contract highs in the dollar, disappointing Chinese economic data and recent Japanese central bank commitments indicating they will continue to “hold rates down” it is not surprising to see the Yen plummet. While the Swiss economy might not suffer ultrahigh energy prices as much as other European countries (less heavy industry), consumers in Switzerland are likely to feel the pinch to keep their homes heated. Energy costs in the UK are every bit as severe as in continental Europe with UK consumers in large cities expected to face a barrage of higher costs for consumer goods, petrol, electricity, and interest rates. However, the Pound made a spike down move into fresh contract lows which discourages us from recommending a short sale.
Not surprisingly, the equity markets fell apart in the wake of the Fed’s promise to unrelentingly battle against inflation through the aggressive use of the monetary tools available to them. Apparently, suggestions from the Fed chairman that the magnitude of the September hike would not be determined until “all available data” was released into the late September meeting. In retrospect, last week’s flow of corporate earnings and sales/revenue forecast deteriorated relative to the early portion of the current earnings cycle. Global equity markets were lower at the start of this week with two notable exceptions being the Shanghai stock exchange composite and the RTS index in Russia. Obviously, the 1,000-point drop in the Dow last Friday weighs heavily on investor sentiment to start the new trading week. Furthermore, the Fed has solidified respect in the market for its intentions to snuff out inflation and that should discourage bargain-hunting and bottom picking.
In looking at the Dow chart, the destruction on the charts from last Friday has been magnified with the initial failure to hold at 32,000 today. As indicated already, panic is absent in the early going but anxiety is clearly scaring some investors to the sidelines.
GOLD, SILVER & PLATINUM:
With a fresh new contract high in the dollar in the early going this week, the reverberations of hawkish global central bank dialogue have extended into the new trading week. Therefore, it is not surprising to see both gold and silver off sharply, with gold posting a new low for the month and seemingly poised for a slide to $1,700. While gold ETF holdings on Friday increased by 23,447 ounces, last week investors pulled 187,681 ounces from holdings. Certainly, the strength in the dollar is the primary bearish focus of the gold trade, but most physical commodity markets have also seen buyers rush to the sidelines from Fed commentary indicating tightening policy will remain in place for some time. Sentiment toward gold and silver is so negative that sharp declines in global equity markets are not resulting in flight to quality buying interest.
With the palladium market unable to hold Friday’s range up retest of the $2,200 level, investment continuing to flow out of ETF instruments, and softer Chinese industrial profits released during the weekend, palladium looks to be on track to retest $2,000. Furthermore, spillover weakness from gold and silver, additional contract highs in the dollar, and risk off economic sentiment flowing from equities should thicken resistance in September palladium.
As indicated in our latest weekly market letter, we see the potential for a major short squeeze in the copper market in the coming weeks. In addition to several signs of extreme tightness inside China, the copper market continues to maintain a large net spec and fund short positioning. Furthermore, the Chinese government continues to aggressively support its economy and a recovery in Chinese copper demand could result in panic style buying ahead. In addition to a worldwide fear of global slowing from unrelenting central bank tightening, the copper market is under added pressure because of disappointing Chinese industrial profit readings released over the weekend.
In the coming trading sessions, determining the trend will likely be extremely difficult and could be determined by outside market forces. Obviously, the fear of European, UK, and US recession are front and center which in turn undermines energy demand prospects. Fortunately for the bull camp, global crude oil in floating storage over the last week declined by 7.8% with the biggest declines seen in the US Gulf Coast and the Middle East. In fact, OPEC+/Saudis threatening to cut production combined with residual demand fears should give the bear camp the edge to start the new trading week.
While the gasoline market rejected a major spike down move below $2.60 at the end of last week, the violation of a key chart support level, a relatively high refinery operating rate and the passing of the last major summer driving holiday of Labor Day ahead will probably result in a softening of physical and speculative buying gasoline.
The ULSD market is the most overbought market of the energy complex with the high last week $0.93 above the August low and the market closing $0.13 above the level where the COT report was measured.
As in other energy markets, natural gas prices flared up aggressively on Friday and then failed from that effort. The natural gas market should be supported following a media feeding frenzy off projections of the pain from energy costs in the coming winter. The markets are also supported from a continuation of ultra-hot and dry conditions in portions of Europe China and Japan.
Traders were hopeful that the Pro Farmer crop tour would show a smaller yield than the USDA August estimate. The tour pegged yield at 51.7 bushels per acre, which is down slightly from the August estimate, but production was pegged at 4.535 billion bushels which is slightly above the August USDA estimate and a record high and considered a bearish development. Outside market forces carried a bearish tilt. November soybeans closed sharply higher last Friday and experienced the highest close since July 29. Brazil export premiums are at a high level and producer selling is slow and this has helped to support the local market. At the Brazilian port of Paranagua, the export premium for the contracts with shipment scheduled between September and October have been at USD 2.60/bushel last week. It will be several more months before the tight stocks situation in Brazil is relieved by the forecast for a record high crop.
Russia’s sunseed crop looks to be a record high, and sunflower oil is moving out of the Black Sea region now. In addition, the outlook for a huge recovery in the Canadian canola crop from last year plus the massive discount of palm oil to other veg oils, the market could see pressure.
After the close Friday, the Pro Farmer crop tour pegged the corn crop at 13.759 billion bushels, which would be the smallest since 2019, with an average yield of 168.1 bushels per acre. This compares with the current USDA estimate of 175.4 bushels per acre with production at 14.359 billion bushels. This is a bullish report and yield is down 4.2% from the USDA estimate just a few weeks ago. If we plug-in 168.1 yield, and leave the rest of the USDA numbers unchanged, ending stocks drop to 791 million bushels with a stocks/usage at 5.4%. The lowest stocks/usage on record was 5% in 1995/96 season. December corn closed moderately higher on the session after a lower opening, and experienced the highest close since June 24. Continued concerns over the potential for the crop tour to show smaller yield and production than the current USDA estimate helped to support.
December wheat closed moderately higher on the session last Friday as the market recovered some of Thursday’s steep losses. The market closed 34 1/4 cents higher on the week last week after first trading down to the lowest level since October 18th. This is a positive technical development. Strength in the other grains and talk of the oversold condition of the market helped to support. In addition, technical indicators continue to show significant divergence in RSI which suggests a loss in downside momentum.
The USDA pork cutout released after the close Friday came in at $100.95, down 62 cents from Thursday and down from $115.95 the previous week. This was the lowest the cutout had been since May 17. October hogs closed lower on the session Friday after choppy trade. A collapse in hog prices helped to drive pork values down 12.9% for the week. However, traders are pricing in a $20 break in the cash market as compared with the five-year average break of $10 from late August into October. This may limit the downside potential over the near term. In addition, the market experienced a successful test of key support last week and closed back above this support.
October cattle experienced choppy to higher trade early in the session last Friday but closed moderately lower on the day. The selling pushed the market down to the lowest level since August 3rd. Some weakness in the cash market plus talk that Labor Day specials are complete plus the current slaughter which was up 3.8% above last year’s pace last week, were all seen as negative factors. The USDA boxed beef cutout was down 19 cents at mid-session Friday and closed 78 cents lower at $262.76. This was down from $264.28 the previous week and was the lowest the cutout had been since May 20. Cash live cattle traded lower last week. As of Friday afternoon, the 5-day, 5-area weighted average prices was 144.33, down from 146.06 the previous week.
Cocoa prices held up fairly well during last Friday’s severe negative shift in global risk sentiment and key outside markets that weakened its near-term demand outlook. With supply-side factors returning to a front-and-center position in the market, cocoa should finish August by breaking a 4-month losing streak. December cocoa held within an inside-day range near the top-end of this week’s activity, but could not hold onto early strength as it finished Friday’s trading session with a mild loss. For the week, however, December cocoa finished with a gain of 39 points (up 1.6%) which was a third positive weekly result over the past 5 weeks and was a positive weekly reversal from Tuesday’s 3-week low.
From mid-July until mid-August, the coffee market saw coiling price action, with sharp rallies followed by quick pullbacks. After a daily reversal on August 19, prices rallied more than 26 cents (+12%) in just four sessions, but the coffee market has a bullish supply outlook that could improve further by the end of September. December coffee came under early pressure and in spite of late rebound finished Friday’s trading session with a modest loss. For the week, however, December coffee finished with a gain of 24.75 cents (up 11.6%) which was a third positive weekly result over the past 5 weeks.
December cotton closed higher on Friday and experienced the highest close since June 17. The dollar reversed higher, but this had little effect on cotton as traders are more focused on the poor US crop and the expected strong export demand even as the dollar gains strength. Reports that China will take more steps to support their economy were supportive as well, as that would support US cotton exports. The 1-5-day forecast calls for ample rain across West Texas and moderate amounts in the Delta. The 6-10 and 8-14 day forecasts call for normal to above normal chances of rain across Texas, the Delta, and the Southeast. The rain is coming too late to save the Texas crop, and we are getting to the point in the season where growers will be concerns about rainfall damaging open bolls.
After seeing coiling action for most of last week, sugar’s upsurge on Friday lifted prices back above their 50-day moving average for the first time since mid-August. While key outside markets are providing carryover support, sugar is also receiving bullish supply news that can help sugar maintain upside momentum through month-end. October sugar continued to build onto early support as it reached a 1 1/2 week high before finishing Friday’s trading session with a sizable gain. For the week, October sugar finished with a gain of 38 ticks (up 2.1%) which was a third positive weekly result over the past 4 weeks.
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