While December bonds range down sharply into new contract lows last Friday, the market rejected those lows and recovered aggressively with prices at times trading a full point above the early low. Not surprisingly, the treasury markets saw a slightly weaker than expected Michigan consumer sentiment index reading as supportive even though the reading was above the prior month. In a complicated explanation of the current environment in the treasury trade, Reuters indicated the combination of FedEx warnings of significant slowing ahead the Federal Reserve could become more confident that future rate hikes will reverse inflation.
However, last week’s set of August US CPI and US PPI readings reflect ongoing high inflation levels that are keeping the Fed in a hawkish stance and have strengthened the case for a 75 basis point hike on Wednesday. Last Friday’s US data included a private survey of US consumer sentiment with a smaller than expected increase, while the July TIC report showed the first net increase in Chinese Treasury holdings since November.
Not surprisingly, the currency markets showed significant two-sided volatility last Friday with an initial dollar rally rejected into midsession. We suspect the retest and failure of the 110.00 level in the dollar index and the test of several key support levels by non-dollar currencies prompted traders to bank profits ahead of the weekend. In the end, economic concerns for the euro zone continue to surface and the trade expects the US Federal Reserve to present a hawkish case both of which should fuel the dollar to contract highs. The Dollar is finding moderate strength early this week, but continues to hold within a tight consolidation zone just below the 20-year high from earlier this month. The “risk off” mood in global markets have driven safe-haven flows towards the Dollar, which remains well supported in front of Wednesday’s FOMC meeting.
The Euro was unable to follow-through on last Friday’s outside-day higher close as it found moderate pressure at the start of this week. While the surge in Euro zone inflation has shifted the ECB into a hawkish policy stance, an uncertain energy situation going into winter continues to weigh on the Euro. The Yen extended its tight coiling price action into this week’s trading as it remains inside of last Tuesday’s wide-sweeping price range. Although Japanese officials have talked up the threat of intervention, their lack of action weighed on the Yen early this week and has kept safe-haven flows heading towards the Dollar. The Pound remained on the defensive early this week and is back to within striking distance of a new 37-year low. Last Friday’s sluggish UK retail sales results may give the BOE some pause for thought with the size of their rate hike at Thursday’s MPC meeting, which combined with slumping global risk sentiment has weighed heavily on the Pound which needs to see stronger UK economic data to put some brakes on its selloff.
Obviously, very disappointing news/economic forecasts from FedEx was the primary force driving prices down late last week. In fact, the weakness in FedEx shares was mirrored by weakness in other transportation orientated companies. Other sectors negatively impacted by the FedEx debacle were global cargo companies and the travel and entertainment sectors. However, traders should keep in mind that the net spec and fund short in the S&P is likely reaching the largest short (most bearish sentiment) since the financial crisis in 2008. Global markets have a moderately negative tone at the start of this week’s trading.
Traders remain fearful that the Fed will go too far and drive the global economy into recession. Energy markets are down again and this may help ease inflationary concerns if the short term downtrend continues. Looking forward to this week’s FOMC meeting, traders should remember the length and intensity of the constant “selling of the rumor” of rising rates as prices could bounce significantly from “buying of the fact” Wednesday. Worsening tensions between Taiwan and China, and Russia/Ukraine situations remain a potential bearish influence.
GOLD, SILVER & PLATINUM:
Gold was weaker at the start of this week, and the market seemed to be willing to press Friday’s lows coming into this week’s action. With the path of least resistance in interest rates and the dollar pointing upward, the path of least resistance in gold and silver remains down. The fear of a jumbo (75-basis point) US interest rate hike on Wednesday has been factored consistently since the previous FOMC meeting, and we suspect the trade is pricing in expectations of the Fed opening the door to the next rate hike. Last Friday’s COT report showed a minimal decline in the fund net long position, but since the report was measured, gold has declined $50, which suggest net short may have grown to its largest since mid-2019.
The silver market on the other hand has recently posted a spec and fund net short position and has shown periodic divergence with gold. With silver falling 50 cents since the COT data was collected, it likely enters the week with a spec and fund short net short. However, fear of recession, negative spillover from gold price action, and a higher dollar leave the bears with significant ammunition. The COT report showed managed money traders were net sellers of 17,173 contracts on the week, increasing their net short to 7,459. Non-commercial & non-reportable traders were net buyers of 8,360, which moved them from a net short to a net long of 4,051 contracts.
With a range down failure at the end of last week, the palladium market appears to be drifting back toward consolidation low support, which begins at $2,050 and becomes very critical at $2,000. Like gold and silver, palladium lacks classic bullish fundamentals, with global slowing/recession fears likely to hang around the headlines through the interest rate decision on Wednesday. Unless the Fed makes a confidence-building statement on the US economy or gives hope of slowing the jumbo rate hikes, periodic failures below $2,000 are likely in the week ahead.
The copper market was lower at the start of this week and in a precarious position, especially with critical economic news scheduled on Wednesday. While it is folly to predict Covid patterns in China, that nation has moved very quickly to minimal case count readings, and that could serve to keep further restrictions at bay. Last week’s news suggested a slight moderation of restrictions was allowed in a single city. The trade has generally been expecting yet another stimulus program, too. With the Friday’s Commitments of Traders report showing a moderate spec and fund net short and copper having declined $0.13 since the data was collected, weak-handed longs should have been pushed to the sidelines.
Crude oil has started the week with move to a new 1 1/2 week low. There are reports that the OPEC Plus nations missed their August production target by more than 3.5 million barrels per day, but that has provided little support. We see the near-term bias pointing down, with the macro condition keeping demand fears front and center. While the actual daily world oil supply balance is nearly impossible to estimate (due to the typical delay in measuring global demand), a report last week predicting a 1.8 million barrel per day surplus should keep the bull camp on the back foot to start the week. There are signs of more consistent flow from Libya, and it is possibly that China has achieved an acceptable strategic supply level. Predictions China will see its 2022 energy demand fall below 2021 gives the bear camp significant confidence. The trade attributed last week’s price slide to the avoidance of a US rail strike, and the direction this week is likely to shift back to demand and economic psychology from global equity market action.
Both product markets found early pressure this week and we give the edge to the bear camp in RBOB, primarily because of widespread knowledge of a significant jump in Chinese gasoline/fuel exports last month. A recent request for additional crude oil import quotas indicates refineries there are likely to export even more gasoline ahead. Some reports last week suggested the crude import and gasoline export requests were part of an effort by the government to support their economy. Since it appears that expectations for surging Chinese domestic gasoline demand are dashed by the activity restrictions across several China cities and given the prospect of more subsidized refinery output and strong exports, a return to last week’s lows in gasoline is likely. Unfortunately for the bull camp, the spec and fund net long shows a market vulnerable to significant liquidation.
November soybeans traded more than 17 cents higher at the start of this week, but a bearish tilt to the economic outlook and demand concerns helped to pressure. The market closed lower for the fourth session in a row last Friday but managed to bounce off of key support which was a 50% correction of the June 9 to July 22 break. Bearish outside market forces plus a sharp break in the meal market helped to pressure. In addition, the weather forecast looks favorable for a good start to the US harvest. Argentine farmers sold 8.4 million tonnes of soybeans through Sept. 15 after the government temporarily devalued the peso for them on Sept. 5th. This could boost shipments of soyoil and meal from Argentina.
The USDA report was extremely bullish for soybeans, but there was no follow-through move to the upside on the day after the report. Instead, it closed lower for four days in a row. The market recovered a bit on Friday, but to expect upside follow-through, it will likely need to see evidence that the current 50.5 bushel/acre yield estimate is high.
The USDA supply/demand report came in close to expectations and did not show as tight a situation as would have been expected from a lower production number because exports and feed use projections were lowered as well. Corn usage for ethanol was lowered too, as ethanol profit margins never increased with the price of gasoline. With harvesting in the US upon farmers, warm weather has become beneficial for those hoping to soon get out into their fields. Traders are concerned with the demand side of the equation going forward, with the threat of a global recession, lower livestock numbers in Europe, and fears that the US may issue trade sanctions against China due to the Taiwan situation. Unless traders start to sense that actual US yields are coming in well below expectations, we may find that December Corn has put in a short-term top with the USDA report. December corn closed lower for the fourth session in a row on Friday but nearly 10 cents off of the lows of the day. Traders remain concerned with the sluggish tone for demand factors.
A strong US dollar and weakness in the stock market plus talk of continued weak demand for US wheat helped to pressure. A record Russia crop is seen as a negative. December wheat closed moderately higher on the session last Friday as the early selloff to a five session low failed to attract new selling interest. Fears that Russia may disrupt Ukraine exports from the Black Sea region due to escalating war maneuvers helped to support the bounce. With the US dollar near a 20 year high, traders remain concerned with the slow pace of US exports.
With a positive tilt to the pork product market over the past week and a lower trend for the cash market, a jump in packer profit margins is seen as a positive force. December hogs experienced volatile and two-sided trade on Friday, but they ended strong and had their highest close since August 17. It has been difficult to find aggressive sellers with the market correcting a wider than normal basis. The USDA pork cutout, released after the close Friday, came in at $105.07, up $1.05 from Thursday and up from $101.90 the previous week. This was the highest the cutout had been since August 22. China imported 140,000 tonnes of pork in August, a 50% decline from a year ago. Year to date imports have reached 1.07 million tonnes, down a whopping 63.6% from last year.
December cattle closed lower last Friday after a quiet, inside trading day. The sharp break in beef prices last week, to their lowest level since April 2021, has traders holding a bearish attitude toward cash markets this week. The USDA estimated cattle slaughter came in at 118,000 head Friday and 45,000 for Saturday. This brought the total for last week to 667,000, up from 604,000 the previous week (a holiday week) and up 2.6% from a year ago. The estimated average dressed cattle weight last week was 823 pounds, up from 821 the previous week but down from 829 a year ago. The 5-year average weight for that week is 830 pounds. Estimated beef production last week was 546.5 million pounds, up 1.7% from a year ago.
The cocoa market continues to face concern over near-term demand prospects due to high inflation and sluggish risk sentiment around the globe. Cocoa prices continue to hold their ground above their 2-year low from mid-July, however, and continue to find support from West African supply developments. December cocoa finished the week with choppy action as it was unable to sustain upside momentum and finished Friday’s trading session with a moderate loss. For the week, however, December cocoa finished unchanged which barely missed a positive weekly reversal from Wednesday’s 2-month low.
Coffee prices have been pressured by demand concerns which have fueled a sizable loss of value since late August. The coffee market continues to have a bullish supply outlook, however, and that can help prices find a short-term low this week. December coffee came under significant early pressure to reach a new 3 1/2 week low, and in spite of a sizable rebound late in the day finished Friday’s trading session with a moderate loss. For the week, December coffee finished with a loss of 13.40 cents (down 5.9%) which was a third negative weekly result in a row.
December cotton sold off sharply on Friday and traded to the lowest level since August 10. The trade continues to worry about a global recession with expectations that the US Fed will hike rates 75 basis points or more in this week’s FOMC meeting, other central bankers raising rates as well to combat inflation, and ongoing concerns about the Chinese economy due to their Covid lockdowns. The dollar was sharply higher early Friday and was threatening to take out the previous week’s 20-year high, but it did close slightly lower on the day. The strong dollar can hurt US export prospects.
Sugar prices have received bullish supply developments from Brazil, the EU and China, but they have not been enough to offset sizable production levels from India and Thailand. Unless the market sees more indications of improving ethanol demand, sugar is likely to remain on the defensive early this week. March sugar could not hold onto mild early strength as it dropped down to a 6 1/2 week low before finishing Friday’s trading session with a sizable loss. For the week, March sugar finished with a loss of 27 ticks (down 1.5%) which was a third negative weekly result in a row.
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