Apparently the treasury market was capable of looking beyond the large washout in equities as a safe-haven threat, and instead focused on a series of better-than-expected US schedule data points. In addition to a number of very strong GDP readings from inside and outside of the US this week, US initial claims declined, US personal income and consumption increased, Chicago purchasing managers was stronger-than-expected and Michigan consumer sentiment was better than expected, and therefore classic fundamentals justified weakness in treasuries. Treasury prices remain pinned down to very critical consolidation low support from 3 major prior visits to these levels taking place since the lockdown panic in March. The location of prices near the bottom of the last 7 months range, into the face of what could be historic economic and political conditions in the US is very surprising.
All things considered, the action in the currency markets was fairly-benign given the potential consequences of the current historically incendiary environment. However, the recovery currencies of the euro, Swiss and Pound have corrected aggressively over the last 2 weeks and might have some of the recovery premium extracted from the large March through September rallies. Nonetheless, the recovery currencies will likely be under significant pressure if infection rates worsen over the weekend. While the Dollar failed to hold a range up move early this week, it remains near the highest levels since late September and has extended a pattern of higher highs and higher lows into a new trading week.
Clearly, the equity market moved to factor in another layer of uncertainty and anxiety with the weakness at the end of last week. However, it is also likely that some investors decided to liquidate longs and move to the sidelines off fear that infection counts would escalate with the markets closed over the weekend and thereby cause financial pain on the opening Monday. Global equity markets at the start of this week were higher with gains near 1% and the lone exception to the bullish trend the Russian RTS index which closed fractionally lower. Economic news included Chinese manufacturing PMI which came in stronger than the prior month and above expectations. However, we doubt favorable Chinese news will be supportive against global developments with the powder keg of the US election reaching very tense levels in the coming 72 hours. Unfortunately for the bull camp, big tech sector stocks got hammered last week and the market saw the biggest weekly loss since the initial lockdown panic in the US and therefore investors enter the new week skittish. In the coming sessions, we doubt scheduled data or earnings will be of little impact.
GOLD, SILVER & PLATINUM:
With gold and silver prices adding to Friday’s strength, it would appear as if some flight to quality buying is moving into the market ahead of the US election. Clearly, the unending infection spread in Europe is hovering over the precious metal markets and a deflationary wave of selling could be seen at any time if the US joins Europe in a wave of lockdowns. However, it should be noted that gold and silver prices are climbing against strength in the dollar for a 2nd straight session indicating a slight change of market focus. It goes without saying that this coming week is likely to offer massive two-sided volatility, with big-picture issues pivoting without notice. Certainly, the combination of what will likely be a very contentious, violent results-delayed election, combined with the accelerating spread of the virus spread increases the chances of 180-degree price turns throughout this week.
The charts also point down in the platinum market and the last 5 days action clearly suggests demand fears from slumping equities and rising infection counts has buyers uninterested in picking a bottom yet. In fact, even the sellers were not aggressive last week as trading volume on the large slide fell consistently. Cushioning the platinum market is the likelihood that last week’s declines (after the COT report was measured) puts the net spec and fund long down to the lowest level since June 2019. The Commitments of Traders report for the week ending October 27th showed Platinum Managed Money traders net bought 2,906 contracts which moved them from a net short to a net long position of 681 contracts. Non-Commercial & Non-Reportable traders added 2,029 contracts to their already long position and are now net long 15,943.
The copper market last week failed to benefit from a series of very positive long-term infrastructure spending goals released from the Chinese national leadership planning council and the market this morning hasn’t benefited definitively from better than expected Chinese manufacturing PMI readings for October. In fact, the Chinese PMI reading was the strongest reading since January of 2011! However, the copper market failed to benefit from a series of positive US scheduled data points last week probably because big picture election/infection issues continue to threaten near term physical demand views. In fact, fresh lockdowns in Europe and fears of similar lockdowns in the US loom in the background to start the new trading week.
About the most positive thing that can be said about crude oil prices is that the market managed to reject a large portion of the spike down washout. Certainly, favorable Chinese PMI data, news of a decline of 11.5% in Russian October oil production and a 20% increase in Chinese non-state 2021 oil import quotas provides some support against near term demand destruction fears. Obviously, fresh mobility restrictions in Europe and similar threats of restrictions in the US adds to the demand destruction threat. Furthermore, traders should begin to monitor the supply situations in both diesel and jet fuel, as signs are mounting that capacity or “tank top” could be seen in those products ahead. The importance of hitting storage capacity in jet fuel or diesel should not be understated with respect to crude oil prices, as a similar “tank top” situation in crude oil in April resulted in “negative” crude oil prices!
The technical action turned more positive with the outside-day higher close on Friday. However, increasing virus cases around the world and good weather for South America helped to negate Friday’s positive action and leaves the market looking like we could see a more significant corrective break. Argentina’s oilseed crushers and exporting firms are set to meet again in order to come to a deal which will avoid further strikes like last week’s 24-hour shutdown. On top of the potential supply difficulties from Argentina, tightness of soybean supply in Brazil could lead to further importing of food staples including soybeans, the Brazilian president indicated in a video posted on social media. He did not mention volumes involved, but with internal soybean prices near four year highs and the harvest still a few months away, there is already talk of US soybean cargoes headed to Brazil.
Breaks look like buying opportunities as the export market continues to heat up. Weekly export sales came in at 2.24 million tonnes which was well above estimates for 700,000-1.5 million tonnes. The surge up in the US dollar over the past few days is seen as a negative force and helped to limit the advance. The market also sees good weather in Brazil as a negative factor. South Korea bought near 131,000 tonnes of corn from the US in a private deal. More talk that US corn is the cheapest in the world has help provide underlying support. The aggressive expansion in livestock production around the world could cause a significant surge in feed grain usage.
There is no rain in the forecast for the next five days for the Plains, but the 6 to 10 and 8 to 14 day forecast models call for above normal precipitation. Winter wheat crops are rated 41% good/excellent as compared with 56% one year ago. December wheat closed moderately lower on the session Friday and the selling pushed the market down to the lowest level since October 14th. Drier and warmer weather moving into the Plains is seen as a factor which might help improve crop conditions ahead of dormancy. The rally in the US dollar is also seen as a negative force.
Demand fears helped to limit the rally on Friday and December hogs closed down 152 points for the week. The large discount of futures to the cash market plus a bounce in pork cutout values over the last few days may have helped support the rally. The USDA pork cutout released after the close Friday came in at $83.04, down $3.75 from $86.79 on Thursday and down from $91.53 the previous week. This was the lowest the cutout had been since September 16th. The CME lean index as of Oct 27 was 76.27, down from 77.47 the previous session and down from 78.69 a week before. This leaves December holding a stiff discount to the cash and may provide some support.
December cattle closed slightly higher on the session Friday and this left the market closing up 472 points for the week. It was a small range as traders attempt to absorb the surge higher in prices from Thursday. There is uncertainty as to the supply impact of the surge in new cases of the virus. Some traders believe that the market may need to absorb the threat that the surge in new virus cases will slow the slaughter pace and pinch supply. Increase virus cases are likely to lead to slower demand, as the industry is now better equipped to handle the spreading of the virus without major disruptions to production.
The cocoa market saw its late October recovery derailed by the flare-up in European COVID-19 shutdowns. While global demand remains a concern, cocoa prices have fallen back to bargain levels which could provide a new opportunity to approach the long side of the market. December cocoa remained squarely on the defensive as it reached a new 3-month low before finishing Friday’s trading session with a sizable loss. For the week, December cocoa finished with a hefty loss of 186 points (down 7.5%), a fifth negative weekly result over the past 6 weeks and a negative weekly reversal from Monday’s 4-week high.
With increasing COVID-19 cases, the lack of progress on fiscal stimulus, and next week’s election, it is little surprise that sentiment for commodities has been on the wane. One commodity that has been on the defensive since the end of third quarter is coffee, and it may be one selloff away from putting in a long-term low that may be an opportunity to approach the long side of the market. December coffee continued its coiling action as it stayed in a relatively tight range before finishing Friday’s session with a modest loss. For the week, December coffee finished with a loss of 1.00 cent (down 0.9%) and a fourth negative weekly result over the past 5 weeks.
The sharp selloff on Friday helps to confirm that expectations for major hurricane damage to the cotton crop may have been overblown. December cotton closed sharply lower on Friday for the fourth day in a row. There is no rain in the five day forecast, but the 6-10 day forecast still calls for above average precipitation in the Georgia, eastern Alabama and the Carolinas. Traders are concerned that increasing coronavirus infections in the US and around the world will affect cotton consumption. They are also tentative going into the US election this week, particularly if there is no clear winner on Tuesday, and the election is contested. The dollar was stronger and the stocks market weaker, which added to the pressure.
Sugar’s late comeback on Friday lifted prices back into their late October consolidation zone, but it will start November with a net spec long position near multi-year high while its key outside markets are near 5-month lows. Unless global risk sentiment can regain a positive tone, sugar may be vulnerable to additional long liquidation early this week. March sugar was able to bounce back from sizable early losses and a new 2 1/2 week low, but could not climb up into positive territory as they finished Friday’s trading session with a modest loss. For the week, March sugar finished with a loss of 41 ticks (down 2.7%) which broke a 6-week winning streak as well as a negative weekly reversal from Tuesday’s 8-month high.
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