Written Commentary
BONDS:
In retrospect, last week’s inflation data appeared to reduce or push back US rate cut timing again. However, some economists digging through the PCE report data suggests that the hot quarterly number was the result of conditions in January which in turn could mean inflation has stalled. Unfortunately for the bull camp, this week’s US treasury auction demand was seen as good but in the aftermath of each auction futures prices declined. Therefore, demand for ever-increasing US treasury supply remains tenuous at best. It seems as if the markets are shifting sentiment in favor of the bull camp, with Reuters suggesting last week’s US inflation readings were not concerning which allows for a slightly less hawkish expectation for this week’s FOMC meeting.
CURRENCIES:
With the dollar forging a very wide trading range last Friday as it rejected a 10 day low and closed higher, the charts have shifted from patently bearish to slightly positive. However, the bull camp in the dollar should be very discouraged with the inability to see the dollar surge following signs inflation remains sticky and the prospect of lower US rates continues to plummet. While it is possible that a portion of early weakness in the US dollar was a result of Bank of Japan intervention to support the Yen, intervention can attract vigilantes seeking to test the resolve of intervening central bankers.
Even though the euro might be benefiting from Bank of Japan dollar selling/Yen buying, the euro bulls might also benefit from win by default buying from expectations of a coming bounce in US Treasury prices. While the Canadian dollar also looks to be a leadership currency this week, we see gains more measured than in the pound.
STOCKS:
The equity markets managed to weave through potential disaster late last week in the form of evidence of sticky inflation largely because of stellar earnings from Google and Microsoft. In fact, Google announced a dividend for the first time ever and given proof of profitable AI technology, the has clearly NASDAQ regained its footing after nearly 30 days of weakness. Global equity markets at the start of the week were higher except for the markets in Russia and Spain which traded fractionally lower.
GOLD & SILVER:
While the net spec and fund long in gold (adjusted for the $30 rally into Friday’s high) suggest the market is heavily overbought, we suspect technical signals will take a backseat to classic flight to quality headline news flow. However, with the post COT report rally, the net spec and fund long in gold is likely the longest in two years, and therefore any sign of a cease-fire between Israel and Hamas could result in a massive correction. It goes without saying that the silver market will continue to follow gold price action which we think will remain mostly centered on flight to quality action and not on the dollar, inflation, or interest rates.
COPPER:
Apparently, seeing a decline in Chinese industrial profits in March had little if any impact on copper prices at the start of this week as the July contract managed another higher high for the move and in turn reached the highest level since April 18th. However, Chinese and Hong Kong equities managed gains and Chinese property shares rose off hope of stimulus from the Peoples Bank of China. With a very strong close last Friday (the highest since April 18th of 2022), it is not surprising that the net spec and fund long positioning in copper (adjusted for the post COT report rally of $0.16) is likely at the highest level since February 2021.
ENERGY COMPLEX:
With a range down probe at the start of this week mostly rejected, the trade has partially discounted cease-fire talks in Egypt. However, the crude oil market was presented with bearish news of a Petro China quarter over quarter production gain of 3.3 million barrels. While the energy markets are likely to see residual support from ongoing Israeli airstrikes against Hamas, the weekend presented several classic bearish supply and demand developments. First, Indian March crude oil imports dropped by 1.1% versus year ago levels, and strong demand from India has been a key component of the bull case.
With the gasoline market showing a return to a leadership role, the focus of the trade may be embracing positive seasonal demand hopes but we think gasoline will see negative headwinds from the diesel market. While the seasonal demand pattern points up, the gasoline supply in the US remains at a surplus to year ago levels. As indicated already, the diesel market looks to be a headwind for crude oil and gasoline with supply and demand discouraging buyers.
BEANS:
After opening steady at the start of this week, bean prices are slightly higher, and we give a slight edge to the bull camp after the significant open interest decline Friday across the complex. Beans, meal, and bean oil combined open interest Friday dropped nearly 65,000 contracts, much of which was liquidation of May contracts before 1st notice day tomorrow, relieving some of the bearish pressure on the market. Initial support may be coming from the strike due to start on Monday by the Argentine Oilseed Workers Union, which is set to last for 72 hours. This certainly will be the last strike this harvest season in Argentina.
CORN:
July corn has had an $0.08 trading range since the close of Monday a week ago and prices Friday closed only a couple cents lower despite open interest dropping nearly 40,000 contracts. Corn is expected to benefit from good export demand and the possibility of some corn acres switching to beans if wet weather continues across the Midwest. It was a wet weekend in many areas of the Midwest, and the heaviest rains this week will be across Iowa, Eastern Kansas and northern Missouri. The far western corn belt and the Southwest Plains are least favored for precipitation but temperatures across the entire Midwest will be warming to above normal. Bird flu was detected in Colorado, adding to the list of infected states.
WHEAT:
Wheat is starting this week with a weaker tone after hitting longer-term moving average resistance Friday and technical indicators reaching overbought levels. Southern Russian and eastern Ukraine dryness and Southwest US Plains moisture shortages were the catalyst for the rally last week and while there are few chances for rain in Southwest Kansas over the next 10 days, there are some chances for southern Russia late this week, which may take away part of the bullish weather story. Wheat prices are in the timeframe where weather is expected to create additional volatility, but we think wheat’s days of being the consistent “weak link” of the grains are over for now.
HOGS:
June hogs fell to their lowest level since April 18 on Friday after a failure to even test the April 10 contract high last week reinforced the dominance of the reversal top signal. Friday’s Commitments of Traders report showed managed money traders were net buyers of 5,742 contracts of lean hogs for the week ending April 23, increasing their net long to 92,387. The is close to a record, which leaves the market vulnerable to heavy selling if support levels are taken out.
CATTLE:
June live cattle could test the 200-day moving average Monday, but upside potential looks limited with heavy cattle weights boosting beef production and a seasonal tendency for more cattle to become available. We are approaching a strong seasonal period for beef demand as well, but strong production provides an offset. The USDA estimated cattle slaughter came in at 613,000 head last week, down from 620,000 the previous week and 627,000 a year ago. The estimated average dressed cattle weight was 848 pounds, up from 847 the previous week and 816 a year ago. The 5-year average weight for that week is 817 pounds. Estimated beef production last week was 518.6 million pounds, up from 510.4 million a year ago.
COCOA:
The cocoa market has seen two weeks in a row with wide-sweeping price action and massive daily trading ranges, but they spent all of last week below the mid-April high for the move. Although there has been little change to a very bullish supply outlook, cocoa prices remain vulnerable to further downside price action this week. July cocoa gave up early gains as it went on to post a sizable loss for Friday’s trading session. For the week, July cocoa finished with a loss of 867 points (down 7.6%) which broke a nine-week winning streak.
COFFEE:
The coffee market will finish April with a sizable price gain as it continues to find support from supply issues in Vietnam and Indonesia. With a 2-day recovery move running out of steam on Friday, however, coffee prices are likely to finish the month on a downbeat note. July coffee pivoted back to the downside after a midsession rebound as they finished Friday’s trading session with a sizable loss. For the week, July coffee finished with a loss of 7.85 cents (down 3.4%) which broke a 5-week winning streak. Brazil and Colombia are both expected to see increased Arabica production later this year, and that continued to be a source of pressure on coffee prices late last week.
COTTON:
July cotton has traded in a relatively narrow range over the past few sessions and has managed to hold the April 18 five-month low. Supportive fundamentals are few, except that the market may be interested in building some sort of weather premium heading into the US growing season, even if soil moisture conditions are good. Last week’s drought monitor showed 9% of US cotton production was in an area experiencing drought versus 39% a year ago and 55% two years ago.
SUGAR:
While last Thursday and Friday saw volatile wide-sweeping price action, the sugar market will start this week at the bottom end of its April downtrend. Until the market receives fresh bullish supply news, sugar prices may have trouble sustaining upside momentum this week. July sugar held within an inside-day range despite whipsaw intra-day action as it could not hold onto early strength and finished Friday’s session with a mild loss. For the week, July sugar finished with a loss of 0.41 cent (down 2.1%) and a fourth negative weekly result in a row. The Brazilian trade group Unica released their Center-South supply report for the first half of April which is also the first report for the new 2024/25 season.
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