Once again the invisible hand of the Fed (or the fear of the invisible hand of the Fed) served to lift treasury prices last week despite evidence of inflation, very strong US retail sales readings and in the aftermath of a very disappointing auction. On the other hand, the Delta variant infection rate has virtually exploded and quadrupled from the lows posted over the last month. We would also note that US scheduled data on-a-daily basis has maintained a pattern of positive data points matched up against negative data points which in the end indicates the economy is uneven and potentially losing momentum. The big question is, will the Delta variant because regional activity restrictions and provide the bulls in treasuries with a fresh and significant catalyst?
In our opinion, the dollar is back into a flight to quality focus with the primary uncertainties in the marketplace the potential progression of the Delta variant infection surge. However, the dollar might also be drafting support from an ongoing pattern of mixed US scheduled data as that could leave the economy vulnerable in the event of another wave of infections and regional or localized lockdowns. The dollar was in a flight to quality mode at the start of this week with the index spiking higher, This could set the stage for return to the late March high which is another 50 points above the early trade. While one might have expected the dollar to have been undermined as-a-result of the significant US infection jump last Friday and Saturday, the trade instead is discounting the wave or thinks the Delta wave will wreak more havoc outside of the US than inside. The July 13th Commitments of Traders report showed Dollar Non-Commercial & Non-Reportable traders net bought 3,704 contracts and are now net long 16,723 contracts.
The Yen has broken out to the upside to start this week as it is likely to benefit from flight to quality buying and could garner some long-term stop loss buying given an upside breakout of a long-held downtrend channel resistance line. While a highly suspicious view, some think the Yen is being lifted by the euphoria of the Olympics. Not to be left out, the Swiss franc extended down with the currency forging a 7-day low early in the week before turning back to the upside. As indicated in several other non-dollar currencies, however, the Swiss franc could be under significant threat of infections, given its relaxing of restrictions and a vulnerable population from unvaccinated individuals.
The stock markets were on edge about something late last week as prices have stalled and in the case of the S&P retrenched over the past week. In fact, despite favorable corporate earnings news and dovish Federal Reserve chairman dialogue, the markets have still lost their very uniform strength seen before this week’s high. Obviously, the Delta variant infection spread is a component of investor concern, but it is also likely that disappointment with the progression toward a self-propagating recovery is beginning to cause valuation concerns.
Global equity markets at the start of this week were lower with declines typically ranging from -1.6% to as high as -2.1%. While some will suggest that the equity markets are primarily under pressure due to weakness in tech sector stocks, we suspect the surge in daily infections is the primary driving force. On the other hand, President Biden is engaged in a war of words with Facebook regarding misinformation killing people and with the tech sector has been the stalwart performer in the markets since the May lows that is not insignificant. Traders should monitor the CDC website this week for the latest update on the number of US infections. However, it should be noted that the earliest readings released will be for Sunday figures which have been lower than other days of the week.
GOLD, SILVER & PLATINUM:
The reaction in gold and silver prices to the overall market condition at the start of this week is a major disappointment to the bull camp, as a surge in US and global infections has fostered uncertainty and gold and silver appear to have embraced a slowing/deflation theme. In our opinion, the metals markets are correctly adjusting lower for the potential of renewed headwinds in the economy (mainly the international economy) with the US less vulnerable due to its high vaccination rate. In retrospect, investors also appeared to be turning negative toward gold and silver at the end of last week with gold ETF holdings cut by 188,572 ounces on Friday for the biggest one-day decline since June 7th and that decline was the 3rd straight day of declines! Last week, ETF gold holdings declined by 286,225 ounces, while silver ETFs increase their holdings by 1.47 million.
After gaining favor over palladium, the platinum market failed and reversed course in a fashion that nearly punctures last week’s optimism emanating from the talk of manufacturing substitution for palladium. Unfortunately for the bull camp, the net spec and fund long in platinum adjusted into the recent high leaves the market vulnerable to further liquidation with the market in our view not mostly sold-out until the net spec and fund long falls below 18,000 contracts. Platinum positioning in the Commitments of Traders for the week ending July 13th showed Managed Money traders net bought 746 contracts and are now net long 4,346 contracts. Non-Commercial & Non-Reportable traders are net long 23,375 contracts after net buying 1,533 contracts.
On one hand, the copper market is down aggressively to start this week’s trading but on the other hand, China logged a net gain in June copper concentrate imports of 5% compared to year over year readings and that should increase the chance that September copper will respect consolidation low support. It should be noted that Chinese June refined copper output increased by 2.6% over year ago levels in what we consider to be a fresh bearish influence. As indicated in PGM coverage this morning, China’s intention to discourage speculation weighs on prices for key all inputs to their economy including platinum.
In addition to a pre-existing washout move on the charts, crude oil is undermined as-a-result of demand fears from the surge in Delta variant infections and from news that OPEC plus has agreed to a supply increase for August of 400,000 barrels per day, with further intentions to increase production by 2 million barrels per day before the end of this year! In our opinion, the potential for renewed “demand destruction” could seriously knock prices down as that fundamental lifted the market persistently between March and early July! While the $5 washout last week probably serve to deflate the net spec and fund long position in crude oil, it is likely that the spec long adjusted to the high last week posted the largest net long since October of 2018! Therefore, the magnitude of potential stop loss selling in crude oil could be quite significant. The July 13th Commitments of Traders report showed Crude Oil Managed Money traders net bought 7,621 contracts and are now net long 381,491 contracts. Non-Commercial & Non-Reportable traders net bought 181 contracts and are now net long 628,312 contracts. Going forward, the trade will quickly pick up on this week’s Reuter’s poll for US crude oil inventories, and at the same time will be focused on the change in US gasoline inventories.
With the anticipated sharp drop in rapeseed and canola production, and exports around the world, the world will be more dependent on soybean meal and oil supplies. In the long run, the market is counting on a high soybean yield from the US, and a significant surge in soybean production from South America next year. As a result, US weather for the next 2 to 5 weeks will be important to achieve that goal. Crop conditions are near the 10 year average currently, and there is no rain in the five day forecast for the Dakotas, Minnesota, Iowa and very little rain for Illinois Indiana and Ohio.
After last week’s rains, crop conditions might improve for the weekly update tonight, but the 2-week outlook still has above normal temperatures and below normal precipitation for the Western corn belt through the end of the month. Traders need to become more confident that a record yield is on the way in order to avoid further tightness for the new crop season. July corn went off the board this past week at 683 and traded above 750 and this pricing is a reflection of the tight ending stocks of 1.082 billion bushels.
The technical action in the wheat market is impressive and the short term forecast models are still threatening. There is very little rain in the 5-day forecast for Montana, the Dakotas, and Minnesota. The 6-10 day forecast model shows continued above normal temperatures for this region and below normal precipitation. In addition, the 8-14 day forecast models show above normal temperatures and below normal precipitation for this region all the way out to August 1st. Traders would like to see better rains for the Russia/Ukraine region in order to avoid some late season damage to the crop. IKAR has cut its forecast for Russia wheat production to 81.5 million tonnes from 83.5 million previous. The Ukraine grain harvest has reached just 8.6% complete.
The hog market is probing for a short-term peak as the outlook for increasing supply along with a pullback in demand from China could spark lower pricing. June pork imports by China reached 340,000 tons, -13.7% from last year. Year to date pork imports have reached 2.3 million tonnes, up 8.5% from last year’s pace. The continued strong advance in pork cutout values plus news of African swine fever in Germany were factors to support the strong gains in the hog market late last week.
Cash live cattle ended last week slightly higher than the previous week. Trade was light on Friday except for Nebraska, where 2,139 head traded at 121-123 with an average price of 121.93, down from an average of 123.87 the previous week. The 5-day/5-area weighted average price as of Friday afternoon was 122.59, up from 121.61 the previous week. The USDA boxed beef cutout was down $2.24 at mid-session Friday and closed $1.93 lower at $267.94. This was down from $278.59 the previous week and was the lowest the cutout had been since April 7. If beef could stabilize, long liquidation from speculators might slow. August cattle closed moderately lower on the session Friday and closed near the lows. The market experienced choppy and two-sided trade early in the day but Covid concerns and a weak stock market may have sparked long liquidation selling into the weekend.
While the market received evidence that second quarter demand was stronger than expected, the near-term outlook remains subdued which kept cocoa prices on the defensive late last week. Although it has fallen back into “bargain” price territory, cocoa could see significant downside follow-through early this week. September cocoa was unable to benefit from a “clean sweep” of positive quarterly grindings results as it gave up early gains and fell sharply to the downside as it finished Friday’s trading session with a sizable loss. For the week, September cocoa finished with a loss of 27 points (down 0.9%) which was a seventh negative weekly result over the past 9 weeks and was also a negative weekly reversal from Monday’s 1-month high.
After a sluggish start to the month, coffee prices regained upside momentum and were within striking distance of their early July highs at the end of last week. While the global supply outlook remains bullish, this current upsurge has been fueled by near-term weather concerns which will either be soothed (or given even more strength) by the middle of this week. September coffee built on early strength and reached a 2-week high before finishing Friday’s trading session with a sizable gain and a third positive daily result in a row. For the week, September coffee finished with a gain of 9.85 cents (up 6.5%) which broke a 2-week losing streak.
December cotton closed higher on Friday and near its high of the day after trading a few ticks above Wednesday’s contract high. Friday’s close was just shy of that high. Some traders are acknowledging how strong this year’s crop looks but see strong demand as well. Others think we are near the top unless there is a turn for the worse in the weather. Recent rains have all but eliminated any threat to the cotton crop in west Texas. Last week’s US drought monitor showed the dry areas that had been covering west Texas a month ago have now shrunk back westward across the Texas/New Mexico border. The 1-5 day forecast call for little to no rainfall in west Texas, with heavy amounts in the Delta and moderate in the southeast.
Sugar’s change in fortune late last week was in part by fresh Brazilian weather concerns that could evaporate quickly early this week. If global risk sentiment recovers and boost key outside markets, however, sugar would be able to regain upside momentum and head towards a retest of the early July highs. October sugar extended its recovery move to a new 1-week high before finishing Friday’s trading session with a sizable gain. For the week, October sugar finished with a gain of 43 ticks (up 2.5%) which was a third positive weekly result over the past 4 weeks as well as a positive weekly reversal from Tuesday’s 3 1/2 week low.
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