With a sharp range up extension in treasury prices late last week, September bonds probed the highest levels since May 22nd. The gains in prices (decline in yields) were fully justified by an avalanche of soft US ISM and construction spending numbers. The only positive economic reading from the US came from a very minimal uptick in the S&P global manufacturing PMI reading for June. Looking ahead, the trade expects the lowest nonfarm payroll gain since the initial pandemic panic and that in turn could send bond prices up to the highest level since late April in the coming week.
While the US dollar did not make a fresh contract high late last week , it did forge a fresh higher high and managed its gains in the face of a near sweep of softer than expected PMI and ISM data. In fact, the dollar managed to remain strong despite a decline in and ISM manufacturing prices paid reading for June as that could be a precursor to evidence that inflation is beginning to moderate. In the end, the US dollar should continue to win by default as the trade retains competence in the US Fed’s ability to stop inflation without sending the US economy into a hard landing. This week’s early headlines tout the euro at a 20 year low to the US dollar, with the dollar index also strong against all actively traded futures currency contracts.
As in many physical commodity markets, the Yen is caught in technical and fundamental downtrend status. Adding into the idea that the Japanese economy has the worst conundrum of the “need to hike rates on a staggering economy”, disappointing Japanese labor cash earnings and a bank services PMI contraction adds to the downward track. While the Swiss franc continues to hold up better than other non-dollar currencies to the dollar onslaught, the path of least resistance remains down. In fact, global inflation expectations have lost their ability to support the Swiss franc and a return to parity versus the Dollar is likely ahead.
With the Pound last week rejecting the sub 1.20 level and that level credible support on four major occasions since late 2016, a pause in the downside is possible. In fact, favorable UK composite and services PMI readings adds a fleeting measure of fundamental support for Pound prices.
The need to hike interest rates on a slowing economy conundrum is front and center in the Canadian dollar with the trade expecting the Bank of Canada to act aggressively. The Canadian dollar is also under pressure following a loss of momentum in Canadian manufacturing activity and expectations that their economy slipped into contraction as early as May.
While investor and trader anxiety moderated slightly late last week, big picture negative fundamental clouds populate the horizon. On the other hand, the S&P was already holding a very large net spec and fund short in the June 21st COT positioning report and further liquidation into new low territory for the year will likely put the net spec and fund short positioning at a level we consider to be “mostly oversold”. About the strongest arguments for a key low ahead is the potential for the market to exhaust selling interest. Global equity markets early this week were lower with the markets in Australia and Japan bucking the trend with minimal gains.
With a low to high bounce from last week’s low of 800 points in the Dow Jones futures and the market net spec and fund short, we suggest the oversold condition has been moderated enough to resume downside work. Fortunately for the bull camp, the markets appear to have entered the summer malaise which could help to “slow the decline”. With fresh lows ahead, the net spec and fund short in the Dow Jones is likely to reach the lowest level since just before the financial crisis! The Commitments of Traders report for the week ending June 28th showed Dow Jones $5 Non-Commercial & Non-Reportable traders are net short 29,626 contracts after net selling 722 contracts.
While the NASDAQ has shown the capacity to consolidate around the 11,500 level over the past 4 weeks, news flow from the tech sector remains bearish and is accentuated by bearish macroeconomic psychology. However, the NASDAQ positioning remains net long as of early last week, thereby setting the stage for additional long liquidation and the failure of key support down at 11,351. Nasdaq Mini positioning in the Commitments of Traders for the week ending June 28th showed Non-Commercial & Non-Reportable traders net sold 7,388 contracts and are now net long 20,569 contracts.
GOLD, SILVER & PLATINUM:
With a fresh contract high in the dollar index, a 50-basis point rate hike from the Bank of Australia and a mixture of results from global PMI readings, the bear camp in gold starts the holiday shortened US trading week with an edge. However, gold prices are drafting support from surprise news of a significant jump in Indian gold imports last month. Apparently, Indian retail and dealers were enticed by the significant decline in gold prices as June imports reached 49 tons compared to only 17 tons on a year-over-year basis. Perhaps some buyers were privy to the upcoming Indian gold import tax.
While silver has managed to reject the depths of the washout last Friday the charts remain very negative, investors continue to flee, and outside market influences favor the bear camp. Like gold, silver prices since the last positioning report into the low Friday have declined by $1.50 thereby putting the net spec and fund long positioning down to the lowest level since June 2019. The Commitments of Traders report for the week ending June 28th showed Silver Managed Money traders are net long 993 contracts after net selling 6,816 contracts. Non-Commercial & Non-Reportable traders net sold 9,314 contracts and are now net long 17,926 contracts.
While the latest COT positioning report in palladium did not show a fresh “record short”, the positioning was within 70 contracts of a record. Even though the trade has not given the potential for supply losses from South Africa, much credence and the trade has consistently discounted the potential reduction in supply flow from Russia, the combination of dual supply threats should concern traders especially with speculators and funds historically short. The June 28th Commitments of Traders report showed Palladium Managed Money traders were net short 2,669 contracts after decreasing their short position by 91 contracts. Non-Commercial & Non-Reportable traders net bought 70 contracts and are now net short 4,441 contracts.
Obviously, the platinum market is fully discounting supply threats and in turn embracing the likelihood of demand destruction from a global slowdown. With the losses after the COT report was measured, we see the net spec and fund long at the most liquidated level since September 2018! Platinum positioning in the Commitments of Traders for the week ending June 28th showed Managed Money traders are net short 10,163 contracts after net selling 6,092 contracts. Non-Commercial & Non-Reportable traders net sold 3,390 contracts and are now net long 2,902 contracts.
Clearly the Chinese stimulus package and increased chatter of a reduction in US tariffs on Chinese goods has failed to temper demand destruction selling in anticipation of global recession. At the present time ongoing declines in LME copper warehouse stocks are of little consideration as the trade sees demand falling faster than supply is falling. However, some will contend that supply is building, and a surplus will build in the upcoming quarters.
At times early this week the crude oil bull camp gained control, with fears of tightening supply from the Norwegian offshore workers strike and evidence of escalating political tensions in Libya tempering demand fear. However, the question for the energy markets is the magnitude of energy demand “destruction” fears from a developing global recession. Certainly, a host of classic technical measures have been balanced with the recent washout from the June high, but without a constant threat against supply, crude oil is likely to slide well below the $105 level. While some will see the record Saudi price fixing into Asia as a sign of strong demand, others will suggest that is a precursor to less purchases by China of Saudi supply and more purchases of cheap embargoed Russian oil. However, overnight evidence of a slight softening of Russian oil exports has been noted but we see that as a temporary phenomenon.
We suspect the bounce in gasoline from last week’s low has temporarily discouraged some would be sellers. However, prices should remain under a liquidation watch from reports that US gasoline imports from Europe jumped by 57% over the last 7 days. While not a direct impact on gasoline futures prices, news of increased Chinese refinery activity could discourage some would be buyers of RBOB. Furthermore, the passing of the key US driving holiday should reduce seasonal based buying support. With the gasoline contract falling $0.40 from the most recent COT positioning report mark off, the contract is likely approaching the lowest net spec and fund long since March 2017.
The technical action on Friday was quite bearish and while there is heat in the forecast models, there is also rain. With the outlook for a massive surplus in global soybean production this year, and rain in the US forecast, the smaller plantings in the US was not enough to support the market near the lofty $15 level. This may change after prices adjust to a more normal level. If we plug in the USDA acreage into the supply/demand report, and leave other factors unchanged, ending stocks could slide to 143 million bushels as compared with the recent USDA estimate of 280 million and from 205 million last year. If yield comes in at 51.0 instead of 51.5 bushels/acre from the USDA, ending stocks could slide to 99 million acres. The USDA will provide a re-survey of plantings for Minnesota and the Dakotas as there was large unplanted area when the surveyed took place.
Like soybeans, the corn market showed further capitulation to end a very negative week (Corn down 66 1/2 cents for week) and extended negative sentiment into the new month. In retrospect, declining prices has brought in a pickup in foreign tenders, farmers are likely to become less likely to sell cash and bearish weather is only “forecast” and is not “reality”. However, the corn market was presented with patently bearish 2021/2022 total Brazil corn output projections which were minimally offset by 2nd crop Brazilian estimate reductions from Safras. Brazil farmers have harvested almost one-third of second corn crop.
Russia wheat prices continue to come down as the harvest is in progress and traders see a big crop which should boost Russia exports and offset the lack of wheat from Ukraine. Technical indicators are extremely oversold but there is still no technical sign of a short-term low. Wheat prices reached a new 4-month low before finishing Friday’s trading session with a heavy loss. A strong rally in the Dollar weighed heavily on wheat prices as that will make US wheat supplies less attractive in the global marketplace. Bearish results from this year’s acreage and the June 1st stocks readings continue to put pressure on the wheat markets. Above average rainfall over spring wheat growing area was an additional source of pressure.
August hogs found some support from the strong cattle market on Friday and closed slightly higher with an inside trading day. A sharp selloff in the grain markets to pre-war levels lowers the cost of feeding, but it also reduces pressure on producers to reduce their herds. The threat of hot weather over the next couple of weeks does not seem to be sparking any concerns about animal stress either. The USDA pork cutout, released after the close Friday, came in at $107.61, up $2.74 from Thursday but down from $110.38 the previous week.
August cattle reversed sharply Friday and traded to the highest level since June 23rd. The biggest move happened right on the open, but continued to make steady, gradual gains throughout the morning. A firmer cash cattle market last week helped to set the tone, and a forecast for much above normal temperatures across most of the lower 48 states suggests cattle herds could see some stress over the next couple of weeks. It is expected to be over 100 degrees into Nebraska today.
Cocoa prices have seen 3 negative monthly results in a row as they lost more than 13% in value during the second quarter. Until the market’s near-term demand outlook improves, cocoa prices are likely to slide further to the downside before they find a longer-term floor. September cocoa remained on the defensive as it dropped to a new 19-month low before finishing Friday’s trading session with a moderate loss and an eighth negative daily result in a row. For the week, September cocoa finished with a loss of 118 points (down 4.9%) and a second negative weekly result in a row.
Many commodities continue to be pressured by lukewarm global demand in the face of high inflation. This has been particularly true for several markets that have had a bullish supply outlook this year such as coffee. With bullish supply factors continuing to provide support, coffee may be able to regain upside momentum following the holiday weekend. September coffee fell back from a 1-week high far into negative territory as it went on to finish Friday’s wide-sweeping outside-day down session with a sizable loss. For the week, however, September coffee finished with a gain of 1.40 cents (up 0.6%) which broke a 3-week losing streak and was a positive weekly reversal from last Tuesday’s 1-month low.
December cotton closed moderately lower last Friday and this was the third straight week of declines. The dollar was higher on Friday and pushed up against the June 15 highs, which put some pressure on cotton. Traders are balancing the increased likelihood of a global recession and demand destruction due to inflation against concerns over the crop in Texas. Last week’s crop monitor showed little improvement in the drought in west Texas, and an expansion of drought conditions in the Delta and southeastern US. The 6-10 and 8-14 day forecasts call for much above normal temperatures across the cotton growing regions.
The sugar market has been pressured over the past month by larger production and exports from India and Thailand. However, Brazil’s Center-South sugar production was 23% below last season’s pace by the middle of June, and that may help the market to regain to regain upside momentum following the holiday weekend. October sugar followed through on last Thursday’s pullback as they reached a new 4-month low before finishing Friday’s trading session with a sizable loss. For the week, October sugar finished with a loss of 24 ticks (down 1.3%) which was a sixth negative weekly result in a row.
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