In retrospect, last week’s disappointing US scheduled data justifies the range up breakout in treasuries. In addition to strong demand for a 20-year US bond auction, fears of slowing in the future are surfacing from a list of corporate earnings reports. While possibly an overreaction, some traders are beginning to reduce their expectations for the magnitude of next week’s Fed interest rate hike. We also suspect treasuries are being lifted by ongoing declines in commodity prices as that could telegraph a peak in inflation has occurred. While it is possible that last week’s impressive rally in treasuries was partially the result a slight tempering of expectations on the magnitude of the coming US rate hike, those views should dissipate quickly as the week progresses.
An added injection of volatility this week is an auction cycle with the treasury offering 2-year notes and 5-year Notes.
The dollar index forged a very wide trading range last Friday and finished at the lowest level since early July. We suspect soft US scheduled data is ramping up concerns of recession in the US potentially becoming worse than other areas because the US Fed is expected to be the most aggressive. Those looking to on a weakening of the dollar should consider the purchase of puts and avoid being long the euro, as the euro is unlikely to gain against the dollar even with a dollar slide. Like other financial markets the dollar is likely to chop in a range bound by 1.0713 and 1.0556 in the first 2 1/2 sessions of the week.
The Yen has forged a 200-point recovery bounce and the ongoing view is that the BOJ will remain the most accommodative central bank in the foreseeable future. While the Swiss franc may extend its recovery off the mid-July low early this week, we see fresh selling interest developing. Economically the Swiss franc is viewed as a slightly better destination than the euro, but not as attractive as the dollar in the event of a surge of European recession fear. While the dollar might falter later this week, the Pound could carve out minimal gains at the expense of the euro. With the overnight damage from a 4-day low, a very large trading range and a looming aggressive US rate hike expected, the Canadian dollar should be restricted by significant top of the range resistance early this week.
After forging another higher high in the highest trade since June 10th, the equity market reversed course late last week despite a significant drop in US interest rates, a very optimistic forward American Express revenue forecast and an upward revision in Schlumberger revenue projections. Obviously, the market was pressured because of fear of sharply falling add revenue on social media platforms and also because of evidence that a surging dollar is hurting company performance.
While fundamentals are generally supportive, the approach of the FOMC meeting on Wednesday should discourage fresh buying. However, the E-Mini S&P net spec and fund short at last week’s low was likely at the largest level since early 2012 which suggests short covering was a large part of the surprisingly large recovery off the August lows.
As in other stock index futures, the Nasdaq futures remains net spec and fund short which has likely fed the recent rally and should continue to feed prices higher.
GOLD, SILVER & PLATINUM:
While we see the gold and silver markets tracking in tight ranges into the US FOMC rate decision, the gold market showed little reaction to a very bullish jump in June Hong Kong net exports to mainland China. Hong Kong June net gold exports were 43.5 tonnes versus 14.1 tonnes in May and given that China is the world’s largest gold consumer, that number should have sparked some buying. Furthermore, while the gold market managed a higher weekly close, we attach little significance to that reversal into this week’s action. Press coverage indicated the rally in gold was the result of a dramatic increase in concerns of recession, but recently gold and silver have not tracked flight to quality developments.
Similarly, silver ETF holdings last week declined by 11.2 million ounces. We have very little positive to say about palladium and platinum from a fundamental perspective! Both markets continue to see definitive liquidation from ETF holdings (a sign of negative investment sentiment) with platinum last week registering an outflow of 18,999 ounces putting the net outflow this year close to 10%. Similarly, palladium ETF holdings also decreased by 1,129 ounces and are now 13% lower year-to-date.
As in several other physical commodity markets, copper has recently recovered and has forged rally without definitive support from classic fundamentals. In retrospect, the massive outflow of copper from the Shanghai copper warehouse last week of 20,982 tonnes is very supportive as Chinese supplies are tightening and that serves to offset the unending lockdown pressure on copper demand. In fact, Shanghai warehouse stocks fell by one third and declined by 29.4% on a week over week basis. To put the tightness at the Shanghai exchange in further perspective, continuing the pace of withdrawal seen Friday for two additional weeks would virtually remove all stocks from the exchange.
The focus of the crude oil market remains squarely on the potential for significant energy demand destruction. On the other hand, crude oil could be seeing some minor initial support from a week over week decline in global floating crude storage of 1.65 million barrels. However, ongoing evidence of strong demand for Russian supply should mean that premium from the embargo should continue to be extracted from prices. In fact, with economic data around the world softening, a very strong dollar trend, a looming aggressive US rate hike and signs of a bearish shift in weekly EIA data that leaves the bear camp with significant ammunition. Furthermore, given the potential for the oil markets to exhibit significant washouts (and significant rallies), a swift move to and below the July low of $88.23 could be on the cards directly ahead.
The bearish outlook for gasoline remains definitive and is likely to get additional bearish fundamental news going forward. In fact, gasoline stocks in US have risen for 2 straight weeks with gasoline stocks at the critical “ARA” European hub also showing recent rebuilding. It goes without saying that gasoline demand concerns are justified from both seasonal and cyclical forces and could be dramatically reduced because of deepening global recession fear.
Clearly, the natural gas trade remains very concerned about the potential for sharply reduced or completely shut down flow from the Nord Stream pipeline. Given the Russian bombing of a key Ukrainian grain export facility almost immediately after signing a deal to cooperate on grain exports from Ukraine, increases the potential for Putin to play hardball with Europe.
The soybean market is probing for a short-term low with an oversold condition. The hook reversal for November soybeans after moving down to the lowest level since January 19 on Friday is a positive technical development. Talk that the weather premium has already been extracted from the market helped to support some short covering as the most critical weather for the growing season for soybeans is in the first few weeks of August. Temperatures in the Midwest are cooler and wetter for this week, but the heat returns to the Western Corn Belt into the first week of August with highs in the mid-90s. For the 8-14 day forecast models, August 1-7, the Dakotas, Nebraska, and western Iowa look to have well above normal temperatures with below normal precipitation for the Western Corn Belt and near normal precipitation Illinois and east.
The technical action is weak and the market pushed down to the lowest level since January 24 on Friday as traders see successful pollination for most of the Midwest. All of the weather premium and all of the war premium has been extracted from the market as traders see that cooler and wetter weather in the forecast for the next week or so. However, it does not look like much grain will be moving out of Ukraine anytime soon, and the August weather, at least the first week or so, does not look favorable for the filling stage for the corn crop. In addition, traders were hopeful that the agreement signed on Friday by Ukraine and Russia and the United Nations would help to start exports of Ukrainian grain from the Black Sea region.
September wheat closed sharply lower on the session Friday and the market traded as much as 52 1/4 cents lower on the day at one point. The market is oversold technically, and all of the war premium has been taken out of the market. On the last three lows on July 6, July 15, and Friday the RSI index was at 13.8, 26.2 and 28.6 respectively. This is a sign of a loss in downside momentum and suggest a near term low may be close at hand. Canadian officials pegged their 2022/23 wheat crop at 33.72 million tonnes, up from 21.65 million from the drought-induced crop last year, or up 55.7%. A deal was signed Friday to restart grain exports from Ukraine ports which have been paralyzed since the Russian invasion started. Millions of tonnes of grain are stuck in Ukraine and traders believe that exports will slowly resume over the near term. Major damage to the infrastructure, port facilities and rail are all factors which will keep the recovery slow.
August hogs closed sharply higher on the session last Friday and the buying has pushed the market up to the highest level since April 22. Producers are afraid to move hogs with the high heat, and packers are forced to bid up cash and product prices in order to attract live inventory. Production is already tight this summer and weights are already low so it is difficult to find producers to attract inventory. For the monthly USDA cold storage report, frozen pork stocks at the end of June came in at 540.9 million pounds, up 22.4% from last year but down 0.9% from last month. Stocks normally decline 5.7% for the month so the small drop this year is considered a bearish development. The USDA pork cutout, released after the close Friday, came in at $123.99, up from $121.90 on Thursday and $120.34 the previous week. This was the highest the cutout had been since August 13, 2021.
The USDA Cattle on Feed report was slightly negative with higher than expected placements. The news is a bit negative for October and December Cattle. The report showed June placements at 97.6% of last year versus trade expectations of 94.7% (range of 89.2% to 99.5%) versus last year at 92.8%. Marketings came in at 102% of last year. The average estimate was 102% with a range of 100.6% to 103%. June of last year was 102.6%. Cattle on Feed supply as of July 1 came in at 100.4% of last year versus the average estimate of 99.8% (range of 98.1% to 100.8%) and versus 98.7% in 2021.
August cattle experienced choppy and two-sided trade early Friday, but the market closed sharply higher on the day. The buying pushed the market up to the highest level since June 9th.
The cocoa market has received second quarter grindings data showing that demand in two important regions (Europe and Asia) saw modest improvement from last year’s levels. However, the prospect of lukewarm to sluggish demand over the rest of the year may keep cocoa prices on the defensive over the rest of July. September cocoa was unable to hold onto early support as it fell to a 1-week low before finishing Friday’s trading session with a mild loss. For the week, September cocoa finished with a loss of 24 points (down 1.0%) which broke a 2-week winning streak.
Coffee has been unable to sustain any upside momentum since mid-February as high inflation has diminished the outlook for restaurant and retail shop consumption. In spite of volatile price action over the past few weeks, there are signs that the mid-July lows will hold. September coffee came under early pressure and continued to slide further to the downside as it finished Friday’s trading session with a sizable loss. For the week, however, September coffee finished with a gain of 6.90 cents (up 3.5%) which broke a 2-week losing streak.
December cotton closed lower on Friday after spending the session inside Thursday’s range. The market closed higher on the week and up sharply from the previous week’s 10-month low. A Chinese official has warned of more flash floods and mudslides in Xinjiang (driven by glacial melt) as well as a widespread heatwave threaten their cotton crop. The Texas crop remains under threat by a long-lasting drought that has extended into a second year. The US 1-5-day forecast has little or no rain for the west Texas region but plenty of rain for the Delta and Southeast. The longer-term forecasts offer some chance of relief.
Sugar’s downdraft last week has erased most of its July recovery move and left the market within striking distance of a new 4 1/2 month low. While a rebound in key outside markets can help, sugar may also need to see bullish supply news to put some brakes on this current selloff. October sugar was unable to find its footing as it slid to a 2 1/2 week low before finishing Friday’s trading session with a sizable loss and a fourth negative daily result in a row. For the week, October sugar finished with a loss of 1.36 cents (down 7.0%) which broke a 2-week winning streak and was a negative weekly reversal from last Monday’s 6-week high.
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