The treasury bond market ranged sharply lower late last week with the highest yield readings since the week of February 24th, but the market did bounce moderately from that low after the nonfarm payroll disappointment was quantified. We would note a gap on the weekly charts that begins one point below the Friday close and would be filled with a decline of 5 points below the Friday close. In retrospect, the nonfarm payroll result was heavily offset by declining infections, Johnson & Johnson vaccine news and another uptick in hopes for a swift passage of the rescue package. With the primary monthly US economic report on Friday (nonfarm payrolls) on its face disappointing, and in turn furthering the view that the US economy continues to decelerate under the unending extension of lockdowns is surprising. Therefore, it would appear as if the Treasury markets are factoring-in increased inflation potential.
With a new high for the move followed by a definitive reversal taking out the prior session’s low and a measure of disappointment from the US nonfarm payroll result, the bull camp in the dollar index is facing some adversity. In fact, given the pattern of declining US infections, another vaccine poised to be administered against the virus and yet another uptick in Hope for stimulus passage, traders should consider long entry in non-dollar currencies that have exhibited significant profit-taking declines recently. The dollar is showing signs of bouncing early this week, but a mere bounce label suggests that ultimately, we think the trend will remain down.
While most US equity markets managed new highs late last week, the amount of euphoria gains was disappointing in our opinion. In fact, the markets were presented with a long list of very bullish fundamental developments prior to the nonfarm payroll release, but a slight miss of the 50,000-payroll gain estimate appeared to deflate investor interest. In retrospect, last week’s avalanche of corporate earnings news should support the markets this week, especially if the stimulus package finally becomes law. Global equity markets early this week were all higher with the exception the Hang Seng. In other words, it would appear as if global equities have traversed a disappointing US nonfarm payroll report without embracing fear that the US economy is stalling under the unending infection wave. On the other hand, the daily US infection count for February 7th was only 107,489 and that continues consistent weekly declines since early January. In the end, the upward trend looks to extend with signs of inflation potentially a bullish impact on corporate earnings and corporate share prices.
GOLD, SILVER & PLATINUM:
Apparently many market participants continue to embrace the potential for a $1.9 trillion US stimulus package, but it would appear that some estimates are the stimulus will not be passed in the coming weeks. Furthermore, US treasury yields have clawed to a one year high and a Canadian investment bank has reduced its price objectives on a number of mining and precious metals shares. On the other hand, Bank of America Merrill Lynch sees gold prices reaching $2,063 this year before falling back to $1900 next year. Bank of America also forecast silver prices to average $28.74 this year and $31 next year in a forecast that is somewhat disappointing to the bull camp. With signs of early buying in the dollar and periodic negative divergence with silver and the rest of the precious metal markets, the gold market feels like it lacks significant bullish resolve and could be vulnerable in-the-event that equities falter and or the dollar returns to last week’s high. The bias might be bullish but gains in April gold are likely to be hard-fought given the presence of resistance from the underside of the January consolidation. Gold positioning in the Commitments of Traders for the week ending February 2nd showed Managed Money traders are net long 105,841 contracts after net selling 9,875 contracts. Non-Commercial & Non-Reportable traders are net long 289,578 contracts after net selling 4,401 contracts.
In retrospect, the strong finish last week seemed somewhat out of place for the copper market as exchange warehouse stocks increased last week, the US nonfarm payroll report was a little disappointing and indications on the Chinese migration for the holidays are for less travel. However, there are reports that travel limitations for the Chinese New Year have left some Chinese factories reducing downtime which in turn provides a surprise psychological support from demand expectations. Furthermore, the trade continues to embrace the idea that world copper supplies are narrowing despite what should be a seasonal pattern of building supply.
With Brent crude oil reaching $60, US equities posting new all-time highs to start the trading week and ongoing widespread views that global oil stocks will continue to narrow, the bull camp retains control. A Bloomberg story indicates that global supplies have declined by 300 million barrels since the aggressive OPEC plus production cuts last May. Last week’s global crude oil in floating storage report showed a 22% week over week decline (VLCC’s are at their lowest in 8 months) and US Gulf Coast supply is down by 58% on the week! Furthermore, time spreads remain in backwardation and that highlights ongoing bullish psychology among commercial traders. Even the technical condition appears to allow for more gains, as a breakneck February low to high rally of nearly $7, has not lifted the net spec and fund long in crude to the highs of the last 12 months. Therefore, the market would not appear to be “bought out” from a technical perspective yet.
The soybean market experienced choppy trade all week last week and May soybeans closed 1 3/4 cents lower for the week. The soybean market seems set for a resumption of its uptrend as demand data (export and crush) continues to come in at a record pace and points to historically tight US supply at the end of the 2020/21 marketing year. Any shipping or crop problems in South America would add to the bullish outlook. The Argentine President is threatening farmers with a tax hike or quota for exports as he seeks relief for families grappling with inflation that is forecast to reach 47% this year. For the USDA monthly supply/demand (WASDE) report on Tuesday, traders are looking for 2020/21 US soybean ending stocks to come in around 123 million bushels (estimates range from 105-140 million). This would be down from 140 million bushels in the January update.
March corn experienced some follow through to the downside after Thursday’s key reversal on Friday, but low volume and the small ranges do not leave much confidence that a major top is in place. The market faces a key USDA report on Tuesday and indications from the current export sales pace would suggest a low bar is set for the bulls. In addition, the UN Foreign Agriculture Organization lowered their Chinese stocks situation dramatically. The USDA has plenty of evidence to make a major revision higher in exports for this report. The market consolidated for much of the week with May corn closing unchanged on the session Friday and unchanged for the week. The weekly US export sales report for the week ending January 28 showed net corn sales of 7.520 million tonnes, a record high for a single week. Cumulative sales for the 2020/21 marketing year have reached 87% of the USDA’s forecast versus a five-year average of 57% at this point in the season. If we were to adjust the annual forecast higher to put cumulative sales at the average pace, the export estimate would increase by 1.312 billion bushels.
The wheat market found solid support early this week from bitter cold temperatures moving into the Corn Belt and for parts of the Plains. The USDA attache in Argentina believes 2020/21 wheat exports will reach just 11.3 million tonnes, down 700,000 tonnes from the official USDA forecast. In late January, crop conditions in Kansas were rated 43% good/excellent which was down from 46% at the start of the month of January, but still up from 34% one year ago. The market is struggling with a lack of a serious production issue for key North American exporters. Weather will become more important into the spring, and the bitter cold weather in the week ahead is a potential positive force. Cumulative wheat sales are still ahead of the pace to reach the current USDA estimate which will at least allow the market to expect a neutral or slightly positive USDA supply/demand update on Tuesday.
China’s national average spot pig price as of February 08 was down 0.2% from Friday. For the month, prices are down 7.3% and down 13.1% year to date and down 18.3% versus a year ago. Dalian live hog futures at the start of this week were up 4.0% from Friday’s close. Exports appear to be holding in better than expected while traders remain concerned over the setback in China production due to a jump in pig disease issues. Traders believe producers in China are afraid of the disease spread and are selling hogs now. The USDA pork cutout released after the close Friday came in at $83.19, down $1.29 from $84.48 on Thursday and $83.70 the previous week. April hogs closed sharply higher on the session Friday and the buying pushed the market up to a new contract high. The market closed 365 higher for the week. The surge higher in pork cutout values has added to the positive tone.
June cattle closed lower after a move to new highs on Friday and the reversal is seen as a negative technical development. However, the range was small and the volume light. April cattle closed slightly higher on the session and the early buying pushed the market up to the highest level in more than one year. For the week, April cattle closed up 192 points. Traders continue to believe there will be a very strong rally in the cash market in the weeks ahead, but steer weights remain at the highest level on record for this time of the year. Average dressed steer weights for the week ending January 23rd came in at 926 pounds, up from 925 pounds the previous week and 901 a year ago. The 5-year average weekly weight for that week is 892.2.
Cocoa prices have seen coiling price action since mid-December as near-term demand concerns have made it difficult to maintain upside momentum. The market continues to hold its ground above the mid-December lows, however, as a positive longer-term demand outlook has helped to underpin prices. May cocoa was able to bounce back from early and midsession pressure as a late rally helped it to finish Friday’s trading session with a sizable gain. For the week, May cocoa finished with a loss of 2 points (down 0.1%) and a second negative weekly result in a row. A sharp recovery rally in the Eurocurrency after reaching a new 10-week low provided cocoa with significant carryover support as that may help Euro zone grinders to acquire near-term supplies.
Coffee prices have not put together more than 3 positive daily results in a row as near-term demand concerns have made it difficult for the market to sustain upside momentum. Although it will start this week firmly within its recent consolidation zone, coffee may be on the verge of an extended upside move. May coffee was able to see early upside follow-through from Thursday’s wide-sweeping positive daily reversal, but lost strength late in the day before it finished Friday’s trading session with only a modest gain. For the week, however, May coffee finished with a gain of 1.65 cents (up 1.3%) which broke a 2-week losing streak and was a positive weekly reversal from last Thursday’s 3 1/2 week low. The Brazilian currency regained its strength going into the weekend, which in turn gave coffee prices an early boost as a stronger currency eases pressure on Brazil’s producers to market their near-term supply to foreign customers.
A key reversal from the contract high on Friday with the sharply lower close is a bearish technical development for the cotton market. The reversal suggests a near term peak may be in place. Part of the rally has been based on ideas that Chinese demand will stay strong and that US ending stocks will continue to tighten. While stocks may tighten, they seem a long way away from being tight. March cotton closed lower on Friday, giving back half of the gains from its breakout rally on Thursday, in what appeared to be a bout of profit taking ahead of the weekend. The market closed 1.54 higher for the week, and it has closed higher in five of the last six weeks. The dollar closed sharply higher on Friday and the stock market ended the week with strong gains. These moves were supportive to cotton. Friday’s Commitments of Traders report showed managed money traders were net sellers of 3,955 contracts of cotton for the week ending February 2, reducing their net long to 63,706 contracts. This action was lightly reversed with the rally on February 4. Non-commercial & non-reportable traders combined were net sellers of 5,007, reducing their net long to 91,793.
While it clearly benefited from strength in key outside markets, sugar has also found support from bullish supply/demand factors as well. If global markets can sustain a “risk on” mood, sugar can climb up to multi-year highs early this week. May sugar broke out of their recent consolidation zone to the upside and came within 3 ticks of a new high for the move before finishing Friday’s trading session with a sizable gain. For the week, May coffee finished with a gain of 62 ticks (up 4.1%) and the first positive weekly result in 3 weeks.
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