Market psychology has settled on the idea that the US Federal Reserve Chairman is poised to shift “hawkish” with policy. The perception that the Fed Chairman will become more aggressive is partially justified by his re-nomination for a 2nd term as a new Fed Chairman might have waited to make major changes at the very beginning of their term. While the Treasury bond market is showing some retrenchment from the highs posted at the end of last week, the market has held most of the noted rally off the arrival of omicron in the headlines last Friday. Apparently, the markets are content to factor in a concerning outcome from the mutation found in South Africa. However, the jury remains out for at least 2 weeks before science provides an answer to the severity and communicability of this new strain.
While US scheduled data last week was disappointing, traders see the data as increasing economic uncertainty in the marketplace. The dollar is also underpinned by a current market view that the US Federal Reserve Chairman is poised to shift policy toward inflation fighting, and that should provide the dollar index with solid fundamental support around 96.00. The trade is still “smarting” from the significant washout in the dollar last Friday in the face of an obvious and potentially historical risk off development and a temporary probe down to 95.85 is possible.
We categorize the rally in the euro last Friday as a counterintuitive of fundamentally flawed reaction. While not a major negative issue, inflation data from Spain was very soft and Europe was already in a flare of infections before the South African virus news was widely known. In short, we see recent gains in the euro may be an opportunity to get short at favorable levels.
While the Yen certainly showed evidence of flight to quality activity last Friday, we are highly suspicious of the currency’s capacity to maintain that fundamental standing. While domestic scheduled data is not a driving force for the Yen, large retailer sales readings from Japan were disappointing and the Japanese stock market was one of only three equity markets to be under pressure at the start of this week. Like the euro, we are surprised with the reaction in the Swiss to the massive risk off vibe from late last week. However, we see the Swiss seemingly expensive within its anticipated trading range.
It should be noted that the Pound traded lower consistently throughout the month of November and has engineered the latest declines without significant volatility. It should also be noted that the Pound forged little in the way of gains in the face of the dollar washout Friday and that highlights the trades ongoing fear of vulnerability of the UK economy in another serious Covid wave lockdown. UK mortgage approvals and net lending to individuals came in as a negative for the Pound.
Global equity markets at the start of this week were mostly higher with the exceptions the Chinese, Australian and Japanese markets which traded fractions lower. Early analysis suggest that Black Friday/Cyber-Monday sales are disappointing but cyber-Monday sales could still surprise in the end. While oil sector stocks are likely to recover and provide lift for the broad market, significant economic uncertainty remains in place and could result in a sudden revival of selling. On the other hand, traders should not rule out the potential for the latest strain to be controllable but obviously the market could see a series of declines like last Friday if current vaccines are less effective than they are against initial strains of the disease.
GOLD, SILVER & PLATINUM:
With divergence between gold and silver prices at the end of last week, it appears as if silver is embracing a physical commodity market focus while the gold market is garnering some flight to quality buying. In other words, gold is skirting the threat of demand destruction and instead is holding together off the prospect of safety buying. In a surprising development, the dollar fell in the face of the risk off environment at the end of last week, which explains some of the gold market’s ability to rally/diverge with the rest of the precious metal complex. Unfortunately for the bull camp, the gold market failed to hold the brunt of Friday’s rally, thereby putting a portion of the bull camp under duress into the start of the new trading week. Some would-be bulls probably see the return to restricted travel as a development that will halt the progression toward tighter rates/tighter policy in the US.
We see the PGM markets as classic physical commodity markets vulnerable to deteriorating demand expectations ahead. In fact, it could take a significant rally in gold to provide support to PGM prices as the prospect of increased demand from the auto sector (off reports that the chip shortage is beginning to lessen) could be extracted in the event the flare in infections causes world governments to lockdown travel. From the initial reaction, palladium has decided to embrace the deflationary side of the current situation and therefore we see a key pivot point in December contract at $1,800. On the other hand, the $1,700 level looks to be fair value unless the Omicron virus is resistant to vaccines and is truly more transmissible than Delta. Not to be left out, the platinum market also came under definitive liquidation pressure in the wake of the South African virus news and has found a critical pivot point at $950. Unfortunately for the bull camp, recent news about the potential for switching from high priced palladium to cheaper platinum in auto catalysts is pushed into a background mode.
At least to start out this week, December copper has managed to regain its 200-day moving average. Fortunately for the bull camp, daily LME copper stocks declined by 3725 tons after 3 daily stock inflows in a row last week. While we doubt the copper market will react as negatively as was seen in the initial Covid outbreak, seeing a mutation less vulnerable to current vaccines could evoke a selloff of significance. So far, December copper saw a $0.22 decline off the latest virus twist, but the market seems to have respect for the $4.25 level. The copper market in January 2020 slid from $2.92 down to $2.15 from the initial lockdown of the US.
While internal fundamental developments might not dominate price action early this week, the market should garner support from rumblings that OPEC+ might reconsider their plan to bring back incremental supply with each passing month. OPEC+ meets on Wednesday with the cartel indicating it will focus on the omicron strain of the coronavirus. The crude oil market is also likely to find support from a 17% decline in global crude oil in floating storage especially with Asian-Pacific storage down by 24%! Obviously, a noted technical bounce is justified after crude oil on Friday experienced its 7th worst daily decline in history! However, until the threat of a return to lock down is diminished traders should remain on guard as a resumption of deflationary selling could easily surface.
The natural gas market was one of the very few physical commodities to stand up to the prospect of demand destruction from the latest variant of the coronavirus last Friday. However, the January natural gas contract early this week opened in the lower half of the Friday trade and appears to be vulnerable to further declines. In retrospect, the gas market could have been disappointed with last week’s EIA report showing the US storage deficit as a percentage of the 5-year average narrowed from 2.2% to 1.8%. In our opinion, the prospect of a winter shortage is heavily impacted by the level of US supply relative to the 5-year average and we expect the deficit to begin to expand again in the coming weeks.
With Brazil planting now 91% complete, it may take a significant weather issue to keep the market in a short-term uptrend. While closing near the highs of the day, the market closed sharply lower on the session Friday as fears of a weaker global economy and fears of further shutdowns and a slower economic growth around the globe due to COVID helped to pressure. There is enough uncertainty over the virus situation to turn sellers active. The sharp drop in crude oil prices along with a drop of nearly 3% for palm oil last week added to the bearish tone. While there is some drier than normal conditions for parts of Argentina and far southern Brazil, it would take a major weather problem in South America in order to avoid a significant increase in supply.
Fears that expanding COVID issues will slow the global economy and spark speculative long liquidation selling in many markets helped to trigger the early selloff on Friday to the lowest level since November 10. However, the market rallied nearly 20 cents into the close to experience the highest close for March corn since July 1. This is impressive technical action in the face of bearish outside market forces. The collapse in the crude oil market was a major bearish force, but good export news plus a major collapse in the US dollar were positive forces. In addition, the Argentina and southern Brazil weather outlook is on the dry side and might have provided some underlying support. The weekly export sales report showed that for the week ending November 18, net corn sales came in at 1,429,161 tonnes for the current marketing year and 90,000 for the next marketing year for a total of 1,519,161.
COVID fears increased uncertainty levels across all commodity markets and equity markets, and this helped drive wheat prices sharply lower early in the session Friday. News that Egypt is tendering for wheat on the first break from the highs helped to support overnight. A very sharp break in the US dollar along with a recovery in corn helped the market close well up from the early lows. March wheat experienced follow-through selling from Wednesday’s sweeping key reversal which is a bearish technical development. The rally to the multi-year high on Wednesday was led by concerns about availability of global wheat supply from key exporters. Too much rain on the bumper Australia harvest was seen as a factor which might hurt quality. For the week, March wheat managed to gain 0.72%.
The sweeping reversal for February hogs after a rally to the highest level since October 8th is a bearish technical development. In addition, with cash markets near 72.50, new buyers were hesitant near 84.70 and the market looks vulnerable to at least correct the wide basis. China hog futures were down 3.7% early this week as Asia reacted to travel restrictions. Technically, the market took out the range of the last seven trading sessions before closing sharply lower on the day Friday. Technical indicators are at extreme overbought readings and the market looks vulnerable to at least a correction. The USDA pork cutout released after the close Friday came in at $81.68, down from $83.62 on Wednesday and $87.65 the previous week. This was the lowest the cutout had been since February 3. The CME Lean Hog Index as of November 23 came in at 72.56, down from 73.15 the previous session and down from 76.28 the week prior. China’s sow heard at the end of October was estimated at 43.48 million head, up 6.6% from last year.
While the technical indicators are at extreme overbought readings, the continued strong advance in the cash market plus the uptrend in open interest are seen as bullish forces. December cattle has managed to close higher for seven sessions in a row and had stochastic indicators at 92 and 96 with RSI is at 86.4 at the start of this week’s trading. While overbought, the cash market continues to advance at a strong pace. Much depends on the demand impact of the virus and the extent of shutdowns for the economy. Cash live cattle traded in light volume on Friday at prices that were in line with the gains from earlier in the week. In Kansas 1,111 head traded at 140 versus an average of 133.04 the previous week. As of Friday afternoon, the 5-day, 5-area weighted average prices was 137.96, up from 133.11 the previous week. The USDA boxed beef cutout was up $1.04 at mid-session Friday and closed 90 cents higher at $280.01. This was up from $276.16 the previous week and was the highest the cutout had been since November 16.
Cocoa’s downdraft on both sides of the Thanksgiving holiday has quickly dropped the market back into “bargain” price territory. In spite of bullish supply factors and a positive longer-term demand outlook, global risk sentiment will need to see a significant rebound before cocoa prices can find their footing. March cocoa started out with a gap-lower opening and remained squarely on the defensive as it reached a new 4-month low before finishing Friday’s trading session with a very heavy loss. For the week, March cocoa finished with a loss of 187 points (down 7.2%) which broke a 2-week winning streak.
Coffee prices have been resilient in the face of the new “Omicron” COVID variant as stronger at-home consumption should offset a larger portion of lost business from restaurant and retail shops. Coffee also has a bullish supply outlook that can help prices hold their ground near multi-year highs early this week. March coffee came under sharp pressure early in the day, but was able to make a quick recovery followed by choppy action as it finished Friday’s trading session with a moderate loss. For the week, however, March coffee finished with a gain of 9.55 cents (up 4.1%) and a third positive weekly result in a row.
March cotton gapped lower on the open Friday and sold off sharply on elevated concerns about a new variant of the Covid-19 virus. The selling pushed the market down to the lowest price level since October 29th. Reports of the new variant emerging from southern African nations that appears to spread more quickly, and which has raised some concerns that it may be more resilient to the vaccines panicked the markets. Heavy selling was seen in equites and crude oil, and this spilled over to many commodities, including cotton. Epidemiologists have stressed that it is too early to tell, but the structure of the new variant is what has raised concerns.
Sugar’s post-holiday downdraft was fueled in large part by severe weakness in key outside markets, but it could also face headwinds by a negative shift in demand prospects as well. With the potential for a third negative monthly result in a row, sugar could be vulnerable to additional long liquidation early this week. March sugar found its footing after a gap-lower opening, but came under pressure at midsession and reached a new 4 1/2 week low before finishing Friday’s trading session with a heavy loss. For the week, March sugar finished with a loss of 64 ticks (down 3.2%) for a second negative weekly result in a row.
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