With US scheduled data last Friday better than expected and import-export pricing showing signs of inflation, the slide in treasury prices was fundamentally justified. It is also possible that the rally last Thursday data and with the better US economic signals last Friday ignited sellers off the idea that the Fed might pause next week. The interest rate markets enter a key central bank decision later this week with expectations of a Bank of England rate hike (widely thought to be the last in the cycle) and expectations the US Fed will pause. Monday’s CME Fed Watch tool has the odds the Fed will pause at 99% which is a little suspicious given the debatable US CPI and PPI results last week. Keep in mind, the Fed chairman indicated the Fed wants inflation to come “down” not just slow its rate of climb.
While the dollar did not post a new high for the move following last Friday’s US scheduled data, the index held near this week’s highs despite a 3-month low in Michigan Consumer Sentiment. On the other hand, the dollar bulls were cheered by the fact that the New York Empire State manufacturing index, capacity utilization, and industrial production readings for August were all better than expected! Either the currency markets think the US Fed will hike rates against market expectations or the pause by the US Fed has already been heavily accepted by traders.
In our opinion, the equity markets suffered a noted bout of long profit-taking last Friday after US scheduled data firmed, and in the process caused a slight boost in US Fed rate hike prospects. However, the UAW strike certainly casts a cloud over US economy and that combined with weakness in micro chipmaker shares added to the reversal of bullish psychology largely in place since September 7th. Global equity markets at the start of the week were lower except Russian and Chinese markets which posted decent gains. With the aggressive reversal range down action last Friday, the result of rising rates and or the UAW strike, economic and investor sentiment remains on edge. In fact, at the current juncture we are having difficulty isolating a credible reason to be long given the potential risks ahead. While the headlines this morning are not rife with government, regulatory, and or legal challenges for big tech, that very important sector of the market will remain under siege.
GOLD, SILVER & PLATINUM:
While the dollar has not made a fresh high for the move since last Thursday (which was a 6 month high), the currency index remains near upside breakout territory, suggesting potential for a resumption of upside follow-through early this week. With treasury yields also breaking out to the highest level since August 22nd and Treasury prices sitting within one point of contract lows, renewed strength in the dollar should not be discounted. In short, outside market forces continue to favor the bear camp in gold and silver with internal bullish fundamentals incapable supporting prices or are simply completely absent.
We see the copper market becoming overvalued from both fundamental and technical perspectives. In fact, with LME copper warehouse stocks continuing to post daily inflows (4,200 tonnes on Monday) and Shanghai weekly copper stocks last Friday jumping by 18.5% (10,191 tonnes), the tight supply theme continues to erode. In another bearish development, Codelco has apparently ended its long-term contract to sell copper concentrate to Chinese clients in 2025.
Another day, another new contract high in November crude oil on Monday. Not surprisingly, the focus of the bull camp remains squarely on tight supply with speculative buying from tight supply fueled by an 8.9% drop in global floating storage, a forecast from Citi that both Russian and Saudi Arabia might increase cutbacks in the 3rd and 4th quarters, and news that Cushing, Oklahoma oil stocks continue to plummet with only 24.965 million barrels remaining. The magnitude of the Cushing inventory slide is very significant as there were 42.844 million barrels at the storage facility at the end of June.
With very poor chart action to end last week and follow through down early this week, the technical bias clearly favors the bear camp. It should also be noted that funds turned aggressive sellers on Friday with 12,000 contracts sold. The trend of liquidation by money managers continued into September 12th with a 10.9% week over week reduction in their net long. It should also be noted that soybean oil money managers cut their net long position by 25.9% on a week over week basis. Other bearish developments are softening bids for US soybeans in the Midwest given anticipation of incoming harvest supply and from a slight backup of beans from slower River transport.
Leaving the weather aside, the latest NOPA crush report clearly pointed to lower demand as the crush was lower than most estimates with “Crush Traders” predicting the shortfall with the brunt of the trade widely missing the mark.
Another low volume trade as the start of this week as the market awaits Monday afternoon’s harvest progress and conditions report. Good harvest weather is expected this week and hedge pressure will be a headwind for prices. 6-10-day forecasts have above normal precipitation for the Midwest which could create some harvest delays. Pressure overnight may be from EU crop consultancy, Strategie Grains, upping their corn crop estimate 1 million tonnes to 59.6 million tonnes.
Along with the key reversals up on the DEC daily chart midweek last week, prices also formed a key weekly reversal up with Friday’s strong close. While the Commitment of Traders report showed an increase of nearly 5,900 contracts of speculative shorts, that data does not include the action the last half of last week where undoubtedly speculators covered some of those shorts. Either way, more short covering could be triggered if DEC prices move above 6.16.
December hogs traded right up to near the top of a trading range that extends back to July last week and backed off when they failed to penetrate it. The market is in a seasonally weak period and may have difficulty moving through those highs this week. The CME Lean Hog Index as of September 13 was 86.94, up from 86.48 the previous session and 86.19 the previous week. The USDA pork cutout, released after the close Friday, came in at $97.56, down 51 cents from Thursday but up from $96.85 the previous week.
Cattle supplies are tight and are likely to continue to be that way for a while. December cattle traded to a new contract (and all-time) high for the second day in a row on Friday. The next window to the US supply situation will be the monthly Cattle on Feed report on Friday. Cash live cattle were higher last week as well. As of Friday afternoon, the five-day, five area weighted average price was $183.84, up from $182.12 the previous week. The USDA estimated cattle slaughter came in at 121,000 head Friday and 9,000 head for Saturday. This brought the total for last week to 632,000 head, down from 673,000 a year ago. The estimated average dressed cattle weight last week was 824 pounds, up from 823 the previous week but down from 832 a year ago.
Cocoa prices posted a new 44-year high for three sessions in a row as West African supply problems continue to be the front-and-center issue for the market. Until there are signs that global production can improve, cocoa prices will continue to climb further to the upside. December cocoa shook off mild early pressure and held within a tight range for a second day in a row before finishing Friday’s trading session with a moderate gain. For the week, December cocoa finished with a gain of 103 points (up 2.8%) and a fifth positive weekly result in a row.
Since reaching a 2023 high in mid-April, coffee prices have been in an extended downtrend and have been unable to sustain four recovery moves during the third quarter. However, December coffee retested its low from mid-August with an outside-day higher close on Monday and followed that with another outside-day higher close on Thursday and a rally to its highest price level in five weeks before finishing Friday’s trading session with a sizable gain. For the week, December coffee finished with a gain of 10.50 cents (up 7.1%) which broke a 2-week losing streak and was a positive weekly reversal from Monday’s 4-week low.
The cotton market is in a consolidation mode, caught between a poor US crop and uncertain demand. The USDA supply/demand report last week put US 2023/24 ending stocks at 3.00 million bales, down from 4.25 million last year and the lowest since 2016/17, when they fell to 2.75 million. The stock/usage ratio is forecast at 20.8%, down from 28.7% last year and the lowest since 2016/17 as well, when it fell to 15.1%. Both numbers are the second lowest since 2013/14. However, the world numbers were not nearly as tight, with ending stocks for 2023/24 forecast at 89.96 million bales, down from 93.18 in 2022/23 but above the 84.50 million from 2021/22. The stocks/use ratio was forecast at 77.6%, down from 84% last year but up from 72.9% the year before that.
For the second Friday in a row, sugar prices saw a negative key reversal from a new 12 1/2 year high. While the south Asian supply situation remains bullish, recent developments in the region suggest that sugar has a stronger chance of seeing downside follow-through early this week. March sugar was able to build onto early support through midsession, and then lost strength late in the day to finish Friday’s trading session with a mild loss. For the week, however, March sugar finished with a gain of 56 ticks (up 2.1%) and a fourth positive weekly result in a row. El Nino is forecast to last through the first quarter of 2024, and that should have a negative impact on cane production in India and Thailand that continues to be a source of strength for the sugar market early this this week.
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