The Treasury markets were unable to hold onto early strength and closed last Friday’s trading session with moderate losses. The prospect of US fiscal stimulus measures weighed on Treasuries even as a new package was yet to be approved late this week. With no major US data points to digest, the increasing prospect of a US government shutdown also was a source of pressure on Bonds and Notes going into the weekend. Not surprisingly, the bond market has bounced off last week’s consolidation low zone off the sudden revival of global slowing fears from the mutation of the coronavirus. However, gains in bonds and notes are being limited by news that Congress reached a relief deal of $900 billion.
The Dollar was able to put some brakes on late week’s downdraft as it rebounded from a new multi-year low to finish Friday’s trading session with a moderate gain. Ongoing uncertainty with Brexit negotiations and passing a new US fiscal stimulus package provided the Dollar with safe-haven support. With no major US data to digest, the Dollar also benefited from end-of-week short-covering. A lower than expected reading for Canadian retail sales led to end-of-week profit taking in the Canadian Dollar, while the British Pound and Eurocurrency were both pressure by negative Brexit vibes.
Global equity markets started out with a mildly positive tone, but then took a negative shift late in last Friday’s trading session. Progress with rolling out COVID vaccines provided early support. Following better than expected results for UK retail sales and the German IFO survey, the latest reading on Canadian retail sales came in below estimates. A lack of progress on Brexit negotiations and a cyber-attack on US government websites also weighed on market sentiment going into the weekend. Global equity markets at the start of this week were lower with declines reaching nearly 3% in Spain.
GOLD, SILVER & PLATINUM:
While it would appear as if the US is closing in on a fiscal stimulus agreement, news that Brexit talks have hit a roadblock and that the UK is experiencing a mutation of the virus (which appears to be more contagious) has slammed gold, silver, and most physical markets to start the new trading week. However, there is hope that the new vaccines will work against the new strain. Unfortunately for the bull camp, gold and silver prices were short-term overbought from last week’s rallies, thereby leaving the markets susceptible to greater long liquidation selling. In fact, gold and silver prices were initially higher off the perceived progress on the US stimulus package with gold prices in Hong Kong closing higher. As if the bull camp needed additional worries the US dollar has literally exploded on the upside, thereby reversing a supportive influence from last week into a distinctly undermining impact.
While Chinese equity markets managed gains early this week and iron ore prices continued to surge above $170 a tonne, positive Chinese demand hopes are temporarily shunted to the sidelines by the latest twist in the virus saga. However, copper prices should be somewhat supported by news that the People’s Bank of China injected money in open market operations. On the other hand, given that the net spec and fund long positioning has forged a lengthening string of new all-time high readings and there appears to be a broad reversal in global sentiment leaving both technical and fundamental forces pointing to a sharp setback in copper prices. In fact, throughout modern/recent history the record spec and fund long in copper was sturdy around 67,894 contracts.
While the net spec and fund long in crude oil in the most recent report remained well below the 2020 high of 616,630 contracts, gains after the report should have added another layer of spec-longs. With demand destruction fears back in a front and center standing at the start of this week, it is clear that the energy markets are in for a combination of technical and fundamental liquidation. In fact, February crude oil on the month had forged a low to high rally of $5.30 and on many occasions the market seemed to charge higher despite confirmation of slack EIA demand readings, unrelenting record US daily infections and in the face of disappointing US scheduled data. While it is unclear if the new virus strain will provide a wave of fresh global lockdowns or if the new vaccines will work against the strain, the bias in the near term is down.
Fears that a new strain of the virus in Europe could cause the global economy to contract, plus the collapse in energy prices and strength in the dollar helped to spark the selloff from the highs. With some dryness in Argentina and the potential for tightening Argentina oil and meal supply, the uptrend looks to continue. January soybeans closed sharply higher on the session Friday and the buying drove the market to new 6 1/2 year highs. Argentina oilseed workers and grain inspectors continue a more than one week old strike which is tightening the soybean meal supply and slowing exports and there is still no sign that a wage deal is close at hand.
While Brazil looks to receive plenty of rain this week, Argentina looks dry in the market is in a position where stocks will tighten significantly if there are any issues down in South America. March corn closed sharply higher on the session Friday and the market experienced a contract high close. A continued strong demand tone plus talk of dryness issues for Argentina helped to provide support. Outside market forces were mostly negative, but the continued advance in energy prices helped corn. March corn closed 14 cents higher for the week or up 3.3%. Traders are nervous with current crop conditions in Argentina, and the demand for US corn has remained very strong. Ethanol margins are weak, but the rally in gasoline prices helped to support the market last week.
Wheat has been following the other grains so it will take a turn back up in the grain markets or KC wheat looks especially vulnerable to some long liquidation selling brought on by too many uncertainties over a new virus strain. Managed money traders are net long 52,613 contracts from Friday’s COT. The market has consolidated in recent days but with the sharp decline in the US dollar and strength in the other grains, the market found plenty of support. Ukraine grain exports so far this season (since July) have reached 23.87 million tons which is down 15.9% from last year. Exports are expected to decline to near 44.8 million tonnes for the 2020/21 season. March wheat opened higher on Friday and traded near 6 cents higher on the session before closing lower on the day. For the week, March wheat closed 6 1/4 cents lower. March Kansas City wheat also close lower after bouncing to a 4-day peak and the market closed 12 cents lower on the week. Some concerns for spring crops in Russia and the US have been offset by excess short-term supply.
While traders seem to be hopeful of some consumer hording ahead, the big supply and the continued collapse in pork values leaves the market vulnerable to increased selling ahead. The USDA pork cutout released after the close Friday came in at $70.41, down $1.62 from $72.03 on Thursday and $78.63 the previous week. This was the lowest the cutout had been since August 11. The market opened lower on Friday but rallied to close 40 higher on the session and up 267 for the week (+4.2%). The sharp break in pork values last week leaves the market vulnerable to increased selling. While the vaccines will help provide better demand base into February, the short-term demand tone remains weak, and traders remain fearful of too much meat domestically if exports were to slow.
There is plenty of uncertainty early this week with a new strain of the virus in the UK which could bring about more shortage concerns and might provide some temporary support. In the end, there appears to be plenty of short-term supply for the market and the recent rally leaves the market overbought. The Cattle on Feed Report was considered very neutral. Placements for the month of November came in at 91.1% from trade expectations for 91.4% of last year (85.5%-95.2% range). Marketing’s during November came in at 98.3% of last year as compared with expectations near 98.4% of last year (97.6%-102.3%). As a result, the December 1 On-Feed supply came in at 100.0% of last year from expectations for 100% of a year ago with a range of 99.1%-100.8%. The report should have little or no impact on the market.
The shutdown of travel out of the UK and news of another strain of COVID are enough to keep the demand tone very bearish and the market in a long liquidation selling mode. Demand concerns continue to weigh on the cocoa market as they have kept the supply pipeline full going into year-end. For the week, March cocoa finished with a loss of 116 points (down 4.4%) which was a third negative weekly result in a row. Concern over global demand continues to be a front and center issue for the cocoa market as several European nations have reinstituted new COVID shutdown measures. Although COVID vaccines are expected to be in widespread use by the end of the first quarter, cocoa demand may not pick up until the second quarter of 2021. Negative vibes over Brexit negotiations led to near-term pullbacks in the British Pound and Eurocurrency put carryover pressure on cocoa prices, and this could continue to weigh on cocoa prices as there were few signs of progress over the weekend.
The coffee market was trading sharply lower at the start of this week as outside market forces turned negative. Next year should bring improved global demand and a sizable decline in Brazilian production, both of which will help coffee to extend its November/December uptrend. For last week, March coffee finished with a gain of 3.65 cents (up 3.0%) which was a sixth positive weekly result over the past 7 weeks. A sizable pullback in the Brazilian currency weighed on coffee prices as it encourages Brazil’s farmers to market their remaining 2020/21 supply to foreign customers.
With the overbought condition of the market and the new virus news overnight, cotton looks vulnerable to a significant downside correction over the near term. While ending stocks, both world and US, have been tightening, they are long way from being called tight. March cotton closed near unchanged last Friday after spending the day in the upper reaches of Thursday’s breakout range up. The stock market traded to a new all-time high, but the dollar backed off Thursday’s two-year, eight-month low, so outside market signals were mixed. Official data from China has put their cotton output for 2020 at 5.91 million tonnes (27.1 million 480-pound bales), up 0.4% from last year. The December USDA report put China’s production for 2020/21 at 27.5 million bales, up from 27.25 million last year.
The collapse in crude oil prices at the start of this week has helped to spark some long liquidation selling. Keep in mind that managed money fund traders net sold 16,816 contracts for the week and are now net long 198,423 contracts. This leaves the market vulnerable to increased selling if support levels are violated. For the week, March sugar finished with a gain of 1 tick which nonetheless resulted in a positive weekly reversal from a 7-week low and also broke a 3-week losing streak. Stronger energy prices provided a source of early carryover support as they may encourage a shift in Brazilian crushing from sugar production over to ethanol production.
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