Written Commentary
BONDS:
In retrospect, the action in treasury markets last week was strange with prices falling significantly despite very concerning weakness in two separate Fed regional manufacturing surveys. However, some traders attribute the sharp washout in treasury prices to declining flight to quality interest in treasuries off the premise that a debt ceiling deal will be forged, and a major crisis will pass. On the other hand, it is possible that Fed commentary today indicating the outlook for upcoming Fed policy is highly uncertain prompted shorts with significant profits to cover positions off reevaluation of the Fed pause view in the marketplace.
CURRENCIES:
With the dollar forging a minimal new high for the move and promptly failing and reversing to close last Friday sharply lower, a technical reversal appears to have been forged. While it is unusual for the dollar to rally in the face of moderating flight to quality interest from the debt ceiling problem, that issue is anything but settled. Therefore, the May uptrend in the dollar should not be discounted as the true upcoming trend. Even though the dollar has come into favor this month, like US treasuries the index is not seeing the usual aggressive flight to quality inflow typical in the face of major financial market concerns.
While the washout in the euro might have become overdone from a technical perspective at the end of last week, we see the fundamental bias remaining in favor of the bear camp. Like the euro, the Yen starts the new trading week with fresh fundamental pressure following much weaker than expected Japanese machinery orders report for March. We think the aggressive reversal from last week’s low in the Swiss franc signals the currency’s capacity to become one of the primary flight-to-quality markets into the debt ceiling end game this week. The Pound appears to have built a shelf of technical support at 1.24 but is likely to remain pinned to that level because of global economic uncertainty flowing from the US debt ceiling deadline. Like the Pound, the Canadian dollar looks to build consolidation around the 74.00 level this week, with possible retest of the key double low support level seen periodically.
STOCKS:
With another new high for the move and the highest trade since early February in the S&P, the highest trade in the NASDAQ since last August and favorable Deere & Company earnings the bull camp certainly ended last week with several bullish arguments. However, a portion of the trade thinks money flowing to big tech has been a defensive reaction and it is possible that a solution to the US debt ceiling conundrum could result in long profit-taking in equities. On the other hand, given the magnitude of the gains so far this month, a breakdown in talks (even if temporary) could result in a thousand point down day in the Dow on Monday. Global equity markets at the start of this week were generally higher except for Australian, Spanish, German, and French markets posting minimal losses. We see the Dow Jones vulnerable to the uncertainty of debt ceiling negotiations and to the prospects of further gains in US interest rates. Like the S&P, the Dow Jones futures are significantly net spec and fund short with positioning hovering at the largest levels since the beginning of the pandemic.
GOLD, SILVER & PLATINUM:
The charts favor the bear camp in gold and silver to start the new trading week. While a portion of the bull camp is hopeful of flight to quality buying interest following debt ceiling negotiations at the White House, we think the markets are at risk of faltering from fears of recession if talks break down. Last week gold ETF holdings declined by 154,592 ounces while silver ETF holdings saw a decline of 2.02 million ounces. With the dollar early this week drifting below last Friday’s low, the bull camp in gold is hopeful the May rally is losing momentum. With the trade generally remaining positive about US debt ceiling negotiations, it is possible that optimism will spill over into this week thereby allowing gold and silver to consolidate above last week’s low.
Fortunately for the bull camp in silver the market saw a correction last week and the beginning of a possible consolidation low support level building around the $23.56 level. However, the latest COT positioning report remains near the upper level of the range of its long positioning of the last 12 months.
As opposed to gold and silver, the platinum market last Friday managed to respect the $1,055 level to form a double low which becomes a bull/bear line early this week. While the physical demand outlook for platinum could improve with a US debt ceiling deal, Chinese data continues to be lackluster which has discouraged would be buyers since the April highs.
COPPER:
In retrospect, the copper market remains caught in a sideways consolidation range bound by $2.7790 and $3.6570. If it were not for lackluster Chinese economic data, we would see the current consolidation lows as value. However, the bull camp should also be emboldened by a large net spec and fund short in copper which in the latest report was the largest net short since March 2020! In other words, the copper futures have factored in a bearish environment with the downside extension in May.
ENERGY COMPLEX:
In the days ahead, the energy markets are likely to be hyper focused on demand signals primarily arising from the ebb and flow of the US debt ceiling negotiations. In fact, at times last week, the trade saw broad-based big picture physical commodity market selling despite market buzz of a possible US debt deal. Certainly, the market continues to draft minimal support from headlines touting ongoing OPEC+ production cuts. Over the weekend, the Iraqi oil minister apparently reaffirmed the country’s commitment to the Russian oil minister via telephone that the country would stick to the agreement to discourage oversupply. The Russian president over the weekend indicated oil production cuts need to be enforced to support prices.
While the Russian president also indicated his country has been cutting production and was at the agreed-upon level, signs of Russian export from storage has kept India and China well supplied. However, while Chinese apparent demand for April increased by 25% over year ago levels and reached a fresh record at 15.09 million barrels per day, Indian April crude oil imports declined 8.3% versus year ago levels. It should be noted that OPEC will be meeting on June 4th! In a very positive longer-term development, the weekly Baker Hughes rig operating count fell 11 rigs, reaching the lowest level since June 2022 and perhaps more importantly posting the first year-over-year decline since April 2021.
As indicated already, US gasoline stocks remain tight into the strongest seasonal demand period of the year. While the US deficit is not significant on a year over basis at 1.8 million barrels, it should be noted that gasoline stocks have been below a year ago and well below the five-year average every week in 2023. It should also be noted that ARA gasoline stocks declined again last week mostly because of strong exports to the US. Total European gasoline in storage dropped 3% on the week!
BEANS:
Soybeans experienced another steep decline on Friday, with the July contract trading to its lowest level since July 2022, and the November contract to its lowest level since December 2021. July beans were down 82 3/4 cents for the week. The market was also put off by reports that US House members and the representatives of the Biden Administration has paused their talks regarding the debt ceiling limit. Brazilian soybean production in 2022/23 is expected to total 155.66 tonnes, up 21.1% over the previous season’s harvest, according to Safras & Mercado. If confirmed, it will be the biggest harvest in history.
CORN:
While December corn managed some follow-through buying from the hook reversal on Thursday, July corn closed lower for the fourth session in a row on Friday and was down 31 3/4 cents on the week. A weaker dollar and a better risk mood lent some temporary support on Friday, and the market avoided making a new low after a steep, two-day selloff. The corn market is reeling from the two-month extension of the Black Sea shipping deal, the previous week’s bearish USDA supply/demand report, and the timely start to US plantings. While the 5-day forecast models for the Midwest showed no rain, the 6-10 day and 8-14 day forecast models show above normal temperatures but also above normal precipitation; the greenhouse effect.
WHEAT:
The wheat markets sold off sharply last Friday as prices fell under pressure after the postponement of talks between House members and the Biden Administration regarding a deal on the debt limit. This was a sharp turnaround from earlier in the day when markets were encouraged by word of progress. This news came on top of the extension of the Black Sea shipping agreement earlier in the week which had also sent wheat prices on a downward track. The 5-day forecast models show almost no rain for Kansas except for the far Western and southern region. The 6-10 day forecast models show above normal temperatures and above normal precipitation while the 8-14 day forecast models show above normal temperatures and above normal precipitation for the Western half of Kansas.
With a weak demand tone, the real question is if the recent rains, and rains in the forecast will help improve the Kansas crop much. US farmers may only harvest 67% of their winter wheat crop this year, which would be the lowest since 1917, according to the USDA. The Wheat Quality Council’s annual crop tour of Kansas fields wrapped Thursday, and the tour estimated wheat yield potential in Kansas at 30 bushels per acre, the lowest since 2000. The five-year average yield is 45.62. Global weather remains a concern with the potential for extreme heat in India and the possibility of El Nino bringing drought to Australia and India. Even a minor reduction in a major world exporter’s production could have a significant impact on global wheat prices.
HOGS:
June hogs were lower again Friday and closed near contract lows. Producers may be current with marketings, but June hogs are trading roughly 8.00 higher than the cash market, which leaves the futures vulnerable to heavy selling if cash prices slip. The CME Lean Hog Index as of May 17 was 78.42, up from 77.80 the previous session and 75.40 the previous week. The USDA pork cutout released after the close Friday came in at $82.47, up 34 cents from Thursday and up from $82.29 the previous week. The USDA estimated hog slaughter came in at 469,000 head Friday and 69,000 head for Saturday.
CATTLE:
June cattle approached the contract high last Friday but failed to punch through that level. Traders appeared reluctant to push the market too hard ahead of the Cattle on Feed report. The market has been on a bullish trend lately, and the discount of June futures to the cash market has provided underlying support. The USDA Cattle on Feed Report showed placements for the month of April at 95.8% of last year versus an average trade expectation of 96.2%. April marketings came in at 89.9% of last year versus an average expectation of 90%. On feed supply as of May 1 came in at 96.6% of last year versus 96.5% expected (range 95.5% to 97.2%). The report was not very exciting, as the numbers generally came near expectations. The placements number was a little bit supportive for the deferred contracts. The USDA boxed beef cutout was up $2.88 at mid-session Friday and closed $2.79 higher at $301.10. This was down from $304.61 the previous week. Cash cattle firmed a bit last week.
COCOA:
Cocoa prices were able to regain and sustain upside momentum going into the weekend. While prices at multi-year highs leave the market vulnerable to profit-taking, cocoa continues to receive bullish supply/demand developments that are fueling this month’s upside move. For the week, July cocoa finished with a gain of 82 points (up 2.7%) which was a second positive weekly result in a row. A slower than expected start to the region’s mid-crop harvest has led to tight near-term West African supplies which have underpinned cocoa prices this month. Many of those newly-harvested mid-crop beans are too small and are not of sufficient quality to be acceptable for exporters, and that has further tightened West African exportable supply.
COFFEE:
The coffee market experienced an impressive break-out up on Friday and looks poised for more buying. While Brazil appears to be heading for larger production this season, a rebound in coffee’s demand outlook can help the market maintain upside momentum. For the week, July coffee finished with a gain of 9.15 cents (up 5.0%) which was a second positive weekly result over the past 3 weeks. ICE exchange coffee stocks were unchanged on Friday, but they remain at their lowest level since December. It has been more than a month since any coffee went through the exchange grading process, which indicates a further decline in stocks that has underpinned coffee prices over the past few weeks. In addition, tight global supplies of Robusta coffee have provided carryover support to the New York coffee market.
COTTON:
July cotton closed moderately higher on the session Friday but well off the highs of the day. Earlier in the session the market had traded to its highest level since February 7. The market closed 6.19 higher for the week. The market drew some support from a weaker dollar and stronger equity and energy markets earlier in the session, but that support faded when it was learned that members of the House and representatives of the Biden Administration had paused their talks regarding a debt limit deal on Friday. The market seemed to defy indications of gradually improving soil moisture conditions in west Texas last week, with the weekly Drought Monitor showing areas moving from “extreme” to “severe” drought.
SUGAR:
While sugar was able to put the brakes on a potential downside breakout move, the market will start this week well below its multi-year high from late April. Unless it can find fresh support from key outside markets, sugar may resume at least a downside correction. For the week, July sugar finished with a loss of 44 ticks (down 1.7%) which was a third negative weekly result in a row. An early rebound in energy prices provided carryover support as that would provide a boost to ethanol demand following the Petrobras gasoline pricing change last week. In addition, weather over Brazil’s major cane-growing region should help to speed up this year’s harvesting and crushing operations.
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