While treasury bonds forged a temporary upside breakout to the highest levels since June 2nd last Friday, the market promptly fell back from that level adding to the credibility of further range trading ahead. Obviously, the bull camp was cheered by disappointing US S&P global manufacturing, composite, and services preliminary PMI readings for June. It goes without saying that treasuries left the trading week with a much-improved bullish fundamental case especially with a forecast from Europe suggesting the probability of a hard landing has increased.
The Dollar moved back into a mode to benefit from renewed recession fears (economic uncertainty) in the Euro zone. While US data last week has been soft, European data has been softer and the trade is less confident in the ECB than the US Fed when it comes to navigating difficult situations. Without a surprising shift back into a global “risk-on” mood, it could be difficult to take the bid out of the Dollar market and take the ask out of the non-Dollar currency markets. In retrospect, the dollar saw a burst of flight to quality buying as word of the mutiny of mercenaries hired by Russia surfaced.
While the Yen has not posted a new low for the move early this week, disappointing Japanese coincident index and leading economic index readings disappointed the market while corporate service price index readings prompted ongoing inflation concerns. Buying in the Swiss franc early this week gives off the impression of flight to quality buying interest perhaps because of the Russian situation and perhaps from the recapitalization concerns of the Bundesbank. The Pound charts favor the bear camp with prices lingering just above last week’s spike low. In retrospect, the Canadian dollar performed impressively in the face of a negative shift in market focus last week.
While there were plenty of negative company-specific headlines last week, the bear camp appears to be more interested in the prospects of a global slowdown which in turn would hit upcoming earnings. Unfortunately for the bull camp, the markets are unlikely to see a benefit from evidence the US Fed will hold steady rates in its July meeting and therefore bad economic news should remain bad for stock prices. Global equity markets at the start of this week were lower with the Shanghai composite and RTS Index losses approaching 1.5%. The path of least resistance remains down in global equities with fears of global slowing compounded by ongoing central bank calls for further rate hikes.
The charts in the Dow remain patently bearish with investor confidence injured and global economic prospects deteriorating. Unlike other sectors of the market, the NASDAQ futures has respected and built a credible consolidation support zone around 15,000.
GOLD, SILVER & PLATINUM:
While gold and silver were trading higher early this week from a weaker dollar, both markets enter this week’s trade without an unwavering bullish fundamental force. However, at the end of last week gold at times showed signs of flight to quality buying interest off increased global economic uncertainty and that could extend into the new trading week. In fact, global growth was revised downward by two separate entities while a senior Chinese economic official has indicated China must act quickly to support their recovery. It is also possible that gold is drafting a measure of flight to quality buying interest from weekend events in the Ukraine war theater as mercenary forces from the Wagner Group apparently rebelled against Russia and regular Russian forces and were pushing toward Moscow before a deal ended the infighting.
The silver market also remains on a downward track on the charts and is currently out-of-favor given slackening forward physical demand views. Since the last COT report mark off, July platinum has declined $50.00, and the market has returned to a previous consolidation low on the charts at $925.
With a senior Chinese economic advisor calling for Swift and aggressive support for the Chinese economy, copper should see headwinds from Chinese copper demand expectations dissipate. However, if the Chinese government acts swiftly with aggressive stimulus programs targeted at infrastructure, that could quickly ignite copper buying after a 2-day high to low correction of nearly $0.16. Clearly, the copper market was significantly overbought from a $0.40 rally over the previous 5 weeks. In fact, with the aggressive rally taking place in the face of disappointing Chinese economic progress and most recently in the face of a negative shift in global economic sentiment, the sharp declines was a justified healthy correction. A normal retracement of the late May early June rally was violated on Friday but then rejected at $3.811.
While the magnitude of risk off from ongoing fears of global slowing has not expanded significantly, fear of slumping global energy demand remains a fixture. Evidence of the bear control in the market is the lack of a definitive upside reaction to what some have labeled was a coup attempt in Russia from Russian hired mercenaries. However, traders see little near-term threat of disrupted Russian oil flows, but the risk of pressing the short side of the crude oil market is certainly increased by the weekend events. In a clear negative supply-side development, weekly floating crude oil inventories increased by 15% over the last week. It should be noted that Asian-Pacific floating crude supply was up 34% and at the highest levels in 13 months! Therefore, concern for Asian crude oil demand is justified but is somewhat offset by calls quick and aggressive stimulus from an official Chinese economic advisor.
Like the crude oil market, the gasoline market remains vulnerable despite last week’s high to low break of nearly $0.19. Also like the crude oil market, vulnerability for gasoline prices from fear of softening demand are facilitated by deteriorating economic readings.
Action in the soybean complex in the coming 48 hours will be almost exclusively determined by rainfall totals from the past and upcoming forecasts. While we see Monday afternoon’s crop conditions report as a “coin flip”, the duration of the current cooler and wetter pattern has become significant at the same time the geographical spread of rain events has been expansive. However, a circle of extreme dryness remains in Illinois and portions of neighboring states. Therefore, soybean crop conditions Monday afternoon could be up or down, with a slight edge sitting with those expecting “minimal improvement”. It is possible that Monday’s soybean crop conditions will have a limited impact with the trade seeing next Monday’s crop conditions report producing better conditions from weekend rains in a reverse “C” pattern arcing from Minneapolis, Detroit, Columbus and down to Nashville. Portions of northern Wisconsin, portions of Northeast Indiana, southern Indiana, Kentucky, and Tennessee also saw some areas receiving more than 1.5 inches.
Anticipation of another downtick in conditions Monday afternoon and key areas of the corn belt missing weekend rains means the bull camp has a slight edge at the start of this week. Despite good weekend rains in western areas of the corn belt, eastern and southwest belt areas were short-changed and follow up rains look limited until at least late this week. In addition, an overall lift in food prices due to the uncertainty over Putin’s future may help support early this week. On the other hand, the bear camp can look at the 6-10 day weather maps showing above precipitation for the western and southern corn belts with temps normal to below and normal precipitation for the 8-14-day period and gain confidence. The distribution of rain will be very important and upcoming pollination weather can make or break the crop. Not surprisingly, some traders are pointing to a seasonal down cycle ahead with the recent break giving credibility to that argument.
Russian uncertainty favors more upside gains. Prices found a strong bid at the start of this week as traders believe risk premium is needed with questions surrounding the world’s largest wheat exporter and how Russia’s leader will respond in coming days to the biggest challenge of his 25-year rule. Putin must reassert his authority somehow and questions on what that looks like must be worrying to the wheat bear camp. Although, so far, we have not heard of any disruptions to exports. There are some weather concerns as well as a heat wave in China scorches Beijing and surrounding areas, however, N Europe and spring wheat areas of the Black Sea are seeing an uptick in moisture as will central India this week after disappointing early monsoon rains.
August lean hogs saw a key reversal top last Thursday that suggests a near term top is in. This is reinforced by the fact that open interest declined 22% during the rally, indicating the move was primarily short covering. However, pork prices are firm, and this may offer some fundamental support. The USDA pork cutout released after the close Friday came in at $95.14, up 5 cents from Thursday and up from $89.60 the previous week. This was the highest the cutout had been since November 11, 2022. Friday’s Cold Storage Report showed there were 525.871 million pounds of frozen pork in storage as of May 31, down from 564.433 million on April 30 and 546.071 million a year ago. Supplies tend to peak in April, and the decline in May follows a seasonal pattern, but this was the first time this year they have fallen below year-ago levels, which could be an indication that supplies are finally becoming unburdened.
Friday’s Cattle on Feed Report came in at the bearish end of expectations, and the futures could open sharply lower this week on this news. The report showed placements for the month of May at 104.6% of last year versus an average trade expectation of 102.0% and a range of expectations from 100.1% to 103.7%. Marketings came in at 101.7% of last year versus 101.6% expected (range 101.1% to 102.0%). On feed supply as of June 1 came in at 97.1% of last year versus an average expectation of 96.7% (range of 96.4% to 96.9%). The report was bearish, especially for the deferred contracts, as it showed placements well above the average expectation and above the top end of the range. The on-feed number was bearish as well, coming in above the top end of the expected range.
The Cold Storage report on Friday showed there were 423.465 million pounds of US frozen beef stocks in storage as of May 31. This was down from 452.000 million on April 30 and 526.119 million a year ago. Stocks have fallen steadily since the start of the year, and on May 31 they were only 80.5% of last year versus 84.9% in April and 111.6% in January. This is a bullish trend, but the data is retrospective as opposed to forward-looking.
The cocoa market is on-track for a ninth monthly gain in row, with prices having risen 38% (886 points) since the low last September. Recent Commitments of Traders reports have shown speculators holding a near record net long position, which leaves the cocoa market vulnerable to heavy selling if support levels are taken out. September cocoa continued to hold within its mid-June consolidation zone as they went on to finish Friday’s trading session with a moderate loss. For the week, September cocoa finished with a loss of 33 points (down 1.0%) which broke a 3-week winning streak. Sluggish risk appetites and chronically high inflation have weakened near-term demand for chocolate, and that remains a source of pressure for the cocoa market.
Coffee prices were unable to have a positive daily result during last week’s holiday-shortened trading as the market continues to be pressured by a bearish Brazilian production outlook. Other major producing nations continue to have supply issues, however, and that could lead to coffee prices finding their footing soon. September coffee found significant early pressure and stayed on the defensive all day as it reached a 4 1/2 month low before posting a sizable loss and a fifth negative daily result in a row last Friday. For the week, September coffee finished with a loss of 15.90 cents (down 8.8%) which was a fourth negative weekly result over the past 5 weeks.
The cotton market faces demand concerns and apparently has no desire to build a weather premium. December cotton was lower on Friday on disappointing export sales, a stronger dollar, lower equity markets, and a general risk-off attitude, and it is close to breaking below a six-month trading range. US cotton export sales for the week ending June 15 came in at 42,721 bales for the 2022/23 (current) marketing year and 187,615 for 2023/24 for a total of 230,336. This was up from 164,651 the previous week but below the four-week average of 312,600. Two weeks ago, sales were above 500,000 bales and the highest they had been since January 2022. Cumulative sales for 2022/23 have reached 13.653 million bales, down from 15.555 million a year ago and the lowest for this point in the marketing year since 2015/16.
Sugar prices failed to take out their late April high twice, the first time in early May and the second time at the start of last week. While in both cases they fell back to the same price levels, the severity of their Thursday/Friday downdraft suggests that sugar has further downside left to go. October sugar fell to a 2-week low as it finished Friday’s trading session with a heavy loss. For the week, October sugar finished with a loss of 180 ticks (down 6.9%) which broke a 2-week winning streak and was a negative weekly reversal from Tuesday’s 5 1/2 week high.
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