Written Commentary
BONDS:
With an empty US scheduled report at the end of last week, the treasury markets focused their attention on the aftermath of the attack on Iranian facilities. Since the treasury markets saw very modest flight to quality lift from the potential explosion in conflict, the temporary decline of Middle East anxiety did not result in a letdown in treasury prices. Furthermore, the markets probably found modest resistance from comments from the Fed’s Goolsbee (typically a dovish member) suggesting stalled progress on inflation justifies the Fed to remain on hold. We think the US economy is in a waffling mode, with the economy fighting to maintain minimal forward motion, and inflation steady or minimally declining.
CURRENCIES:
In retrospect, the action in the dollar last week should have discouraged the bull camp as a major flight to quality incident, less dovish US Federal Reserve dialogue and rising prospects of a European rate cut in June failed to lift the currency index. With geopolitical and market uncertainties remaining widespread, we suspect the dollar will remain underpinned even if it is unable to rally aggressively. While the decision to hold rates steady in China adds minimal headwinds for the dollar to start this week, the ability of Washington legislators to strike a compromise could be seen as supportive of the dollar and surprising to US citizens. The April 16th Commitments of Traders report showed Dollar Non-Commercial & Non-Reportable traders are net long 1,286 contracts after net buying 871 contracts.
The dollar is not showing definitive direction this week and that probably means the euro will also settle in a range with outer edges of 1.07155 and 1.06285. However, the euro could remain under pressure given a lack of confidence in the European economy and ultimately from the rising potential for Russia to win the war because of a lack of tangible support from European countries. With the aggressive range down action early this week following aggressive range down action Friday, the Pound has hit an air pocket on the charts and is likely headed below 1.230. In retrospect, the Canadian dollar appears to have made a solid technical bottom with last week’s low especially with short-term technical indicators tremendously oversold and shifting into a buy mode in the second half of last week.
STOCKS:
While anxiety over the Middle East situation has moderated, equities did not show much in the way of a relief rally at the end of last week. In fact, a failure to hold last week’s low this week could easily rekindle fresh selling. The market should have been supported from a favorable Procter and Gamble forecast, Netflix earnings and an upward revision in the outlook for airlines from improving business travel. Global equity markets at the start of this week were mostly higher with exceptions in China, and Russia.
While the NASDAQ did not confirm a key bottom like the Dow and S&P on Friday, with a large range down and significant recovery (back above the middle of the range) it is possible the rate of declines will slow. However, US political rancor, the decision by the Peoples Bank of China to leave interest rates unchanged and unending bearish corporate news flow from Tesla and reports that Western financial firms are exiting China because of adverse conditions should mitigate short covering buying and fresh buying.
GOLD, SILVER & PLATINUM:
The vibe in the Middle East seems to suggest that the “tit-for-tat” fighting between Israel and Iran will pause, and that has obviously punctured bullish sentiment in gold and silver. Therefore, the focus of gold and silver is likely to shift back to action in the dollar and US treasury yields. While silver ETF holdings continue to decline very rapidly, gold ETF holdings declines are less significant. Last week gold ETF holdings declined by 478,713 ounces, while silver ETF holdings declined by 22.8 million! Even though we suspect the Chinese central bank will continue to add to reserves (following 17 straight months of purchases) we suspect lower prices will have only a marginal impact on the size of Chinese Central Bank purchases. However, we suspect China’s desire to diversify away from US dollar instruments will entrench consistent buying out of China.
COPPER:
The beat goes on with copper forging another higher high early this week and managing the upside action without the Chinese Central Bank supporting the Chinese economy with a reduction in interest rates overnight. While we are surprised with the copper market’s capacity to rally, a prediction from the Antofagasta CEO of increased demand in the “Americas” and a 2024 deficit in a range of 200,000 to 300,000 tonnes that provides badly needed fundamental support for the bull case. However, the copper market is significantly overbought from short-term technical measures and from the net spec and fund long as measured by the COT report.
ENERGY COMPLEX:
With Friday’s major range up move, and very poor close, combined with a downside breakout and a new low for the month of April, the bear camp has confirmed it controls the crude oil market to start the new trading week. Apparently, the Israeli retaliation was seemingly absorbed by Iran and with Israel seemingly temporarily satiated with their attacks, fear of a disruption of Middle East supply looks to abate temporarily. In fact, with Friday’s sharp range up and definitive reversal that could usher in a temporary extension of downside volatility. However, the markets should not rule out a Middle East reaction to the US passage of a $95 billion of an aid package to Ukraine and Israel as that could prompt a backlash from those supporting the Palestinians. Looking to the internal fundamental setup in oil this week, the markets carry over residual energy demand concerns and longer-term bearishness from an increase in the US rig operating count.
Even though weekly injections to EIA gasoline inventories have not been notable over the prior two weeks reports of heavy European gasoline imports to the US, rising seasonal US refinery activity and a lack of early seasonal demand improvement could present clearly negative US supply news this week. We see the natural gas market in a sideways to lower track with US supplies likely to build and demand likely to remain extremely low. In retrospect, America has clearly entered the injection season and without a series of small injections and consistent near-capacity exports, we see little chance of a reversal to the upside.
BEANS:
A technical reversal higher last Friday may take the focus off bearish US weather for the short-term and we give the slight edge to the bull camp today. The weekend was mostly dry across the Midwest and this week will feature mostly dry conditions until Friday, when rains are forecast through the central Midwest. Above normal temperatures will be centered in the southeast US but a warm-up across the Midwest will occur this week as well. Also, USDA announced a morning flash sale of 121,500 tonnes of beans to Unknown. 13,500 tonnes were for old crop and 108,000 tonnes for new crop.
CORN:
July corn prices have moved back into the recent trading range after falling below the lower boundary last week, which keeps the technicals neutral and gives some hope to the bull camp that last week’s 0.618 retracement low will hold. A mostly dry week for the Midwest will be conducive to planting until showers begin Friday, extending through next week. USDA says 8 states have confirmed avian flu in dairy cattle and they confirmed cow to cow transmission. This may revive feed demand fears, but USDA seems to want to avoid any drastic action like culling of herds. Cash corn basis, especially in the Western corn belt, is steady to strong as farmers are busy with planting preparation.
WHEAT:
Rains in the southern Plains late this upcoming weekend and early next week once again looks to miss most of the Southwest HRW areas with only light precipitation expected there and that is expected to underpin prices early this week. In addition, Russia struck grain storage facilities in the Ukraine’s Odessa region port of Pivdennyi Friday and Ukraine struck another Russian oil refinery. The halt on deliveries to the Chornomorsk port has been lifted after repairs to the railway. The US Congress passed a large weapons package for Ukraine over the weekend, which now goes to the Senate for a vote.
HOGS:
The hog market appears to have moved into a consolidation mode after its quick selloff from contract highs at 111.25 on April 10, but it also found support last week at the 0.382 retracement of the rally from the contract low on January 2 to that contract high. A report Friday that China’s sow herd at the end of March was down 7.3% from a year ago provided a bit of bullish fundamental news. The CME Lean Hog Index as of April 17 was 91.46, up from 91.36 the previous session and 89.84 the previous week. The USDA estimated hog slaughter came in at 2.487 million head last week, up from 2.485 million the previous week and 2.453 million a year ago.
CATTLE:
Friday’s Cattle on Feed Report showed placements for the month of March at 87.7% of last year versus an average trade expectation of 92.3% and a range of estimates from 89.3% to 94.7%. Marketings came in at 86.3% versus 88.6% expected (range 86.5%-91.3%). On feed supply as of April 1 came in at 101.5% of last year versus 102.0% expected (range 101.6%-102.5%). Placements coming in below the lower end of pre-report estimates put a bullish spin on the report. However, a report after the close on Friday that the USDA had confirmed cow-to-cow transmission in the spread of bird flu virus in dairy herds could undermine support. The USDA also confirmed that the virus has been detected in dairy cattle in 8 states and that the virus is still spreading. The USDA has not imposed any quarantines. USDA estimated cattle slaughter totaled 620,000 head last week, up from 603,000 the previous week but down from 625,000 a year ago.
COCOA:
The cocoa market has found relief from demand concerns as the three major processing regions had first quarter grinding results above market forecasts. As focus shifts back to ongoing supply issues, cocoa prices should extend their longer-term uptrend further into new high ground. July cocoa was able to rebound from early pressure and climbed up to a new contract high before finishing Friday’s trading with a very large gain. For the week, July cocoa finished with a gain of 986 points (up 9.4%) and a ninth positive weekly result in a row.
COFFEE:
Coffee prices avoided significant downside follow-through from last Thursday’s wide-sweeping key reversal, and they will start today’s action with a 23% gain for the month of April. Vietnam’s supply issues continue to underpin prices, but an improving outlook for South American producers leaves the market vulnerable to a near-term pullback. July coffee fell back from early highs but was able to find their footing late in the day as they finished Friday’s trading session with a mild gain. For the week, July coffee finished with a gain of 11.40 cents (up 5.2%) which was a fifth weekly gain in a row.
COTTON:
Last Friday’s Commitments of Traders report showed managed money traders were net sellers of 25,890 contracts of cotton for the week ending April 16, reducing their net long to 36,142. As recently as March 5 these traders were next long 93,361. July cotton prices fell 20.15 (20%) during that timeframe, and a substantial portion of the selling appears to be fund liquidation. The steady rise in the dollar over the past several months undermines US export prospects at a time when competition is expected from Brazil and Australia as their crops come in.
SUGAR:
Sugar prices remain near the bottom end of their April selloff, but they were able to finish last week clear of Wednesday’s 1-year low. With the market receiving bullish supply news going into the weekend, sugar may be able to regain and sustain upside momentum early this week. July sugar was unable to hold onto early gains as it finished Friday’s trading session with a moderate loss. For the week, July sugar finished with a loss of 0.63 cent (down 3.1%) which was a third negative weekly result in a row. Forecasts for India to have above average monsoon rainfall this year that should benefit their upcoming cane crop put pressure on sugar prices late last week.
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