In our opinion, the sharp upside action in US bond and note prices following last Friday’s jobs data was massively overdone especially with various components of the job report countervailing. The critical nonfarm payroll headline reading much above expectations, but an uptick in the unemployment rate certainly prompted some economic consternation. Apparently, seeing 10 million plus jobs remain open from the JOLTS report was not enough to countervail the unemployment rate jump. It is also possible that average hourly earnings on a month over month basis did not soften enough to moderate inflation fears which will become even more important in the face of next week’s monthly CPI and PPI report cycle.
Clearly, the flight to quality environment the last week has returned in force in treasuries to start the new trading week, with bond prices approaching 2-point gains above Friday’s close. Certainly, the threat of a US financial banking system contagion is on the minds of global markets and the flight to quality buying is significant enough to be present beyond the treasury markets! In fact, gold, which has mostly lost its historical standing as a “hedge against inflation” and has mostly lost its “safe harbor” standing over the last decades is seeing “safe haven” buying today because of SVB. Therefore, SVB fear is significant and adds to the pre-existing allure of US treasuries.
Even though the US dollar plummeted last Friday, and forged surprising declines in the wake of a payroll report which favored growth over slowing trade expectations and was apparently pricing in “strength in the US jobs market”. However, taking a step back, the US economy remains in good stead, upcoming inflation readings are likely to present buying of the rumor and we also suspect periodic predictions of a 50-basis point rate hike from the US Fed will lift the dollar. Nonetheless, the hard break in the dollar index is likely to provide a very advantageous long entry opportunity. It is somewhat rare to see the US dollar slide in the face of global financial uncertainty events. In fact, seeing the dollar slide in the face of strong gains in gold and treasuries signals less flight to quality status for the US dollar.
While the euro has surprised with a multi-week high in the early action this week, we are highly suspicious of a sustained rally in the euro if the global economic outlook deteriorates significantly from the US bank situation or if US inflation remains hot.
Even though the previous standing of the Japanese economy and the Bank of Japan have been poor, the currency has seemingly become the recipient of some flight to quality flow today. It should be noted that the Swiss franc was already displaying classic flight to quality buying behavior last week from whispers of the inability to contain global inflation and the currency today has been given added lift as a harbor of safety.
Even though the Pound has not seen significant windfall from the breakdown in the dollar, the currency has rallied and is receiving flow of dollars out of the US. With a failed upside breakout and a drift back toward last week’s lows early, the Canadian dollar has been declared guilty by geographic and economic proximity to the US economy and the US dollar.
In our opinion, the ability of the US equity markets to avoid significant declines late last week was a function of the nearly unbelievable gains in US treasury futures prices and because the totality of jobs data might be considered a Goldilocks result. In other words, the higher-than-expected nonfarm payroll reading offset the jump in the unemployment rate and in turn potentially caused a portion of the trade pressing the downside to bank profits and move to the sidelines. Global equity markets overnight were sharply lower with the market in the UK suffering the largest losses.
Obviously, fears of a US bank/financial institution contagion undermined global equity markets at the start of this week and has kept the US early Monday trade off balance. Seeing the S&P near Friday’s sharp range down extension lows early this week indicates the bear camp retains control and uncertainty among investors has been extended into another trading week. Surprisingly, the NASDAQ has held up better than other sectors of the market and appears to have found value close to the 12,000 level.
GOLD, SILVER & PLATINUM:
While a lower low for the dollar and the lowest trade since February 16th certainly justifies strength in gold, some portion of the significant overnight pulse up move is likely to be flight to quality interest surrounding the California bank failure. Furthermore, Goldman Sachs over the weekend predicted the Fed will not hike rates later this month because of the current stress in the financial sector! The flight to quality buying of gold and treasuries without purchases of the dollar highlights some concern of a US financial contagion but contagion is not widely feared as of this writing. It should be noted that Indian gold ETF holdings saw a record inflow last month, but that inflow was preceded by massive withdrawals over the prior 3 months. Apparently, Indian gold investors are attracted to gold now on price weakness!
With the silver market showing significantly less upside action than gold from the May contract low on Friday, the silver bull camp is likely narrower in scope than in the gold trade. While we expect ranges in platinum to remain narrow, we also expect the general bias in prices to try to link positively with gold.
While the copper contract continues to respect and waffle around consolidation support just under $4.00, the early trade is encountering pressure from fear of a financial crisis which could trip up the global economy. We suspect the consolidation low support zone was given fundamental underpin following a 5-digit decline in weekly Shanghai copper stocks at the end of last week. However, to track higher in the $3.98 to $4.25 trading range will require much better global equity market action and perhaps very positive news from Chinese industrial production and retail sales releases for the month of February early in the Wednesday Asian trade.
The crude oil trade continues to focus on ever changing global demand views and not surprisingly global energy demand views early this week have shifted negative from US bank sector travails. Obviously, the recent primary focus of the energy trade has been China and the “pace of Chinese energy demand recovery”, but the market is likely to take a break from that focus over the next several sessions. Fortunately for the bull camp, US crude prices on Friday saw US jobs data as a positive demand development instead of cause for fresh economic headwinds from even higher US interest rates. Unfortunately for the bull camp outside market forces are likely to prevail over internal energy market fundamentals at least into midweek.
While we continue to see the gasoline market as the strongest fundamental component of the petroleum complex, the trade last Friday severely damaged chart support with a failure below $2.60.
Soybeans traded lower last Thursday and last Friday in spite of downward revisions in Argentina and Brazil soybean production and the market is inching lower at the start of this week. The market seems to have the short-term supply news from Argentina to rally, but the technical action remains weak. Brazil exports to the world could rise to as high as 94 million tonnes, a 19% increase over last year. Soybean oil finished the week with another down day.
Canadian canola oil futures fell to the lowest level since January of 2022. Vegetable oils around the globe were sharply lower on the week last week.
The hook reversal after trading down to the lowest level since August 4th is a positive technical development for the corn market, and the reversal comes from an extreme oversold condition. However, the market is testing Friday’s lows this morning and if taken out, this would negate the reversal. Traders in the corn market await fresh news of the extension of a deal between the UN and Russia that would keep grain exports flowing out of Ukraine. However, Russian officials claim they are not in negotiations yet to extend grain exports for Ukraine. Meetings are set to start today in Geneva. U.S. corn exports to destinations other than China are at a multi-year low, showing tepid demand for US exports at moment – a further hindrance on prices.
From a deeply oversold level, it will not take much in the way of positive news to expect a recovery bounce. The wheat market found support on Friday from short covering going into the weekend, and also from a sharp break in the US dollar. Wheat futures hit the lowest level since July 13th of 2021 on Friday before closing higher on the session and the hook reversal is a positive technical development. Traders were also looking for a concrete resolution between the UN and Russia that would extend a deal that allows grain exports out of Ukraine.
With pork production about unchanged from a year ago this past week, and with a more stable pork product market, futures are in a position for a technical recovery bounce as the market corrects from the oversold condition. The market had priced-in a bigger production outlook but the stability in cash and pork product prices has been enough to spark short covering and some new seasonal buying. April hogs are trading at a premium of 6.29 to the cash market as compared with a premium of 1.70 last year and the 5 year average premium of 3.45 at this time of the year. April hogs closed sharply higher on the session Friday and well off of the early highs. The slower than expected slaughter this past week plus a jump in pork values helped to support the gains. Estimated US pork production last week was 545.3 million pounds, up from 510.2 million the previous week and 543.2 million a year ago.
The cattle market remains in a choppy to lower pattern but is holding above the early March lows and the mid-February lows. A firm tone to the cash and beef markets has been enough to provide underlying support. Beef production was down 5.2% from a year ago last week and a tightening supply situation continues to provide underlying support. Weights remain low enough to suspect that producers are current with marketing’s. April cattle closed moderately lower on the session Friday and the selling pushed the market down to the lowest level since March 3rd. Slow exports and sluggish trade in the beef market helped to pressure the market last week. The USDA estimated cattle slaughter came in at 114,000 head Friday and 18,000 head for Saturday. This brought the total for last week to 634,000 head, up from 629,000 the previous week but down from 637,000 a year ago. The estimated average dressed cattle weight last week was 826 pounds, down from 827 pounds the previous week and 843 a year ago. The 5-year average weight for that week is 827.8 pounds.
While inflation levels have been in a longer-term decline since last year, the negative shift in global risk sentiment late last week has put cocoa’s demand concerns back into a front-and-center position. Even with recent bullish supply developments in West Africa, cocoa is likely to be pressured by additional long liquidation early this week. May cocoa opened under pressure and remained on the defensive all day as it fell to a 3-week low before finishing Friday’s trading session with a sizable loss. For the week, May cocoa finished with a loss of 56 points (down 2.0%) which was a second negative weekly result over the past 3 weeks.
While the US jobs data saw mixed results, the collapse of Silicon Valley Bank weighed heavily on global risk sentiment. This weighed on cocoa prices as that may weaken its near-term demand outlook.
After falling more than 20 cents below its late February highs, coffee prices were able to find their footing in spite of severely negative global risk sentiment going into the weekend. With the market still technically oversold, coffee prices may be able to maintain upside momentum early this week. May coffee came under early pressure and reached a 4-week low, but regained strength late in the day as it finished Friday’s trading session with a sizable gain. For the week, however, May coffee finished with a minimal loss of 0.05 cent which was a second negative weekly result in a row, but it just missed posting a positive weekly reversal.
May cotton collapsed last Friday, falling to its lowest level since November 28 and closing limit-down. Large cancellations by Pakistan of US cotton reported in last week’s export sales report has raised concerns about global demand. Pakistan has been the second largest buyer of US cotton for the current (2022/23) marketing year. There was a report about Pakistan facing a crisis with foreign exchange. A strong jobs report for February also raised expectations that the US Federal Reserve would extend its tightening policy and increase the chances for recession.
Sugar prices were able to overcome negative global risk sentiment late last week and will start this week’s action within striking distance of a new 6-year high. With a significant increase in Brazil’s near-term supply expected over the next month, sugar prices are overvalued at current levels. May sugar came under early pressure, but regained strength late in the day as it finished Friday’s trading session with a minimal gain. For the week, May sugar finished with a gain of 24 ticks (up 1.1%) which was a second positive weekly result in a row.
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