Clearly the safe haven appeal of treasuries was back in vogue late last week with some views in the marketplace thinking the crisis has already entered a dangerous second stage. Adding into the upward track in bond and note prices was the fact that US inflation readings came in softer than expected and indicated a surprise drop in demand at the producer level. However, prices have returned to the vicinity of the extreme levels seen in the initial shutdown window from March and Canada posted the largest jump in jobs ever and therefore there are some flies in the ointment for the bull camp.
While it appeared early in last Friday’s session that the dollar was poised to soar off a definitive expansion of safe haven anxiety from the US virus spread, the markets failed to flip into a definitive anxiety mode. Perhaps the dollar was undermined as a result of much softer than expected producer price index readings and also because of what was a very impressive Canadian employment report.
Apparently the surging infection count has not provided the Yen with safe haven lift early this week which probably means global equity markets are providing selling pressure in the Yen. In a slight additional negative the Yen was presented with a soft Japanese tertiary industry Index reading. In the near term as long as equities avoid anxiety action from the infections, we see solid resistance in the Yen at 93.72. We continue to be long-term bullish toward the Swiss but see the currency at a key juncture at some point this week. We continue to suggest buyers wait for a dip below 1.06, with initial support and a failure level seen at 1.0622.
The Pound charts are bearish with a quasi-triple high seen around 1.2669. In fact, despite higher global equities, we see the Pound threatened as a result of surging global virus counts especially with the UK government likely set to implement stricter face mask rules. In other words, UK officials are still concerned about the battle against the virus and we suspect that keeps Pound buyers off balance. We think the Canadian will most likely track within a range bound by 73.36 and 74.13 but pushed into the market we would favor a downward track. However, the Canadian should be supported by strong recent data flows and by reports of some progress on reopening in Ontario. However in the early action this week, the Canadian will have to determine if it can benefit from dollar weakness or it will fall in sync with the Greenback.
While it appeared as if equities were going to finish last week with aggressive selling, the market managed to shake fears of the coronavirus spread in the US and track back into positive territory after the opening of the NYSE. The markets did see some support from bank shares, American Airlines and Carnival Cruise Lines, but investors were obviously concerned about what the infection spread would bring from the weekend ahead. Global equity markets early this week were all higher with the exception the Russian stock market. Apparently global equity markets are not unnerved by yet another record day of coronavirus infections and they are also not undermined as a result of Chinese sanctions against two US Senators.
Despite negative big picture macroeconomic, geopolitical and soaring infection fears, the S&P has opened with a fresh high for the move and at the highest level since June 10th in a fashion that suggests the bull camp has extended its control. Apparently the bull camp continues to rely on 5 core stocks which are thought to thrive in ongoing social distancing and online sales. Even more surprising is the fact that the S&P has return to the vicinity of pre-Covid-19 awareness, and yet the positioning from the COT report managed to register a moderately large “net short”. While we see the near term trend to be pointing up we think the risk to fresh longs is escalating. E-Mini S&P positioning in the Commitments of Traders for the week ending July 7th showed Non-Commercial & Non-Reportable traders reduced their net short position by 8,028 contracts to a net short 123,350 contracts.
Not surprisingly the NASDAQ has continued to surge into new record high ground off the idea that the key core stocks will continue to lead the market higher but also because of the idea that the tech sector can continue to do business in the face of a 2nd wave of infections. As in other stock index futures the positioning in the NASDAQ continues to be surprising with the recent net-long a mere fraction of the record long despite prices being at record high levels! The Commitments of Traders report for the week ending July 7th showed Nasdaq Mini Non-Commercial & Non-Reportable traders were net long 44,106 contracts after increasing their already long position by 8 contracts.
GOLD, SILVER & PLATINUM:
While the gold market showed some corrective action at the end of last week, prices have started the new week out strong and we remain long-term bullish toward the market. In fact, with ETF investment continuing to flow in (Friday saw the 11th straight daily inflow), uncertainty from expanding second wave of infections and US treasuries last week returning to the vicinity of the “panic highs”, we leave the bull camp with an edge. Obviously residual strength in equities is siphoning off some buying interest from gold, but Goldman Sachs last week indicated that strength in Chinese equity markets should mean gold demand from China is set to improve.
However, some components of the gold trade are worried that gold could suffer a more significant demand destruction correction as was seen at several key junctures since the covert outbreak earlier in the year. Given that gold has returned above eight year highs and given that the net spec and fund long is building, traders should not discount the potential for more significant two-sided swings in prices. However, the net spec and fund long position in gold remains well below the 2020 highs, and in our opinion it would appear as if the bull case continues to strengthen and there is residual buying fuel.
While silver could be subjected to aggressive physical selling in the event of a worldwide economic letdown from surging infections, its charts remain very bullish. Furthermore, on Friday silver ETF’s saw a massive single day inflow of 9.5 million ounces bringing this year’s year to date purchases up to 211.3 million ounces! Silver is also attractive relative to gold and palladium with silver relative cheaper versus its historical highs. Furthermore, the net spec and fund long and silver is still more than 50,000 contracts below this year’s high. Silver has already forged a new contract high in the early trade today, and the market could be on its way to a quick test of $20.00. The Commitments of Traders report for the week ending July 7th showed Silver Managed Money traders net bought 674 contracts and are now net long 36,405 contracts. Non-Commercial & Non-Reportable traders added 1,778 contracts to their already long position and are now net long 52,659.
Despite the extension of consecutive days of new record global infections, Chinese sanctions against two US senators and a short-term overbought condition from a 3-day 17 cent rally, the bull camp retains control over copper. Apparently a number of supply-side developments have shifted the focus of the copper market away from demand fears with infections threatening production in Chile, a potential labor action at Antofagasta and ongoing very notable declines in daily LME copper warehouse stocks. A slight limiting force for copper is flooding in China which is potentially set to backup copper concentrate flows inside the country.
While the crude oil market managed to reject damage on its charts at the end of last week, we think the bull camp is escaping liquidation because of unrelenting strength in equities. In fact, we continue to see a negative shift in the fundamental condition with demand fears creeping back into the equation off the ongoing spread-surge of infections throughout the world. Over the weekend, the World Health Organization reported another record daily increase in coronavirus infections of 230,000. Fortunately for the bull camp, global equity markets (particularly the Chinese market) continue to show very positive leadership which in turn is helping to support global economic psychology.
Furthermore, US scheduled data in particular from the job sector, has been another psychological cushion, but we suspect that cushion will ultimately fail to support energy prices this week. Certainly the market is drafting some support from last week’s Baker Hughes oil rig count which declined by four to stand at only 181 rigs. That count is a new low for the move and is only two rigs above the 2009 low. Also from the bull side of the equation, the Libyan oil industry has been thrown back into turmoil from the Civil War front after seeing some movement of oil last week. However, last week at least two different sources predicted a low in US oil production might have been seen already, which is a shift away from the bull’s argument.
Like the crude oil market, the gasoline market forged a four-day low last Friday and rejected the washout and recovered by six cents in a fashion that helped balance the charts. However, gasoline should be held back by reports that the Port Arthur refinery is now operating at full capacity and that news will be made more important if there is deteriorating demand from the US infection front. However, in the near term the northern hemisphere continues to see a strengthening of seasonal gasoline demand as areas opening up are still more than offsetting the closures. On the other hand the threat of a return to widespread shut-down of portions of the US will remain a major threat to the bull case this week.
Last week’s implied gasoline demand reading remained disappointing considering what the trade had been expecting, and at the same time the US refinery operating rate increased which should mean even more record high gasoline stocks levels will be seen.
The July 7th Commitments of Traders report showed Natural Gas Managed Money traders net bought 27,949 contracts which moved them from a net short to a net long position of 21,842 contracts. Non-Commercial & Non-Reportable traders net bought 9,504 contracts and are now net short 32,231 contracts. While the natural gas market has a net spec and fund short position (that short is probably understated due to the slide after the report was measured), we think the market retains selling capacity. In fact, unless US hot temperatures are extended through the end of the month and remain “much above normal”, it could be difficult for August natural gas to respect last week’s low at $1.73.
With heat in the forecast and some rain, there remains plenty of uncertainty on crop conditions and this should help support the soybean market on weather weakness in the short term. In other words, the short-term weather news is negative, but not bearish enough to spark aggressive selling. The market closed lower and pushed down to a six-session low on Friday as scattered thunderstorms continue to provide selling pressures as warm and wet conditions in July seen as bearish. US soybean ending stocks for the 2020/2021 season came in at 425 million bushels as compared with trade expectations for 416 million bushels (355-572 million range), and compared with 395 million bushels in June. Exports were left unchanged from last month and crush was revised up by 15 million bushels.
The Commitments of Traders report for the week ending July 7th showed soybeans managed money traders net bought 31,407 contracts and are now net long 99,243 contracts. Non-Commercial & Non-Reportable traders added 28,575 contracts to their already long position and are now net long 130,244. For soyoil, managed money traders added 18,571 contracts to their already long position and are now net long 19,418. For meal, managed Money traders net bought 30,587 contracts for the week and are now net short 21,910 contracts. CIT traders added 4,617 contracts to their already long position and are now net long 70,933.
The corn market looks to remain volatile as the more active storms this week plus above normal precipitation in the 6-10 and 8-14 day models have the market under pressure to start the week. There are frequent thunderstorms which could leave most key growing areas with enough moisture this week. There is still uncertainty, so traders will continue to monitor the weather very closely. China was an aggressive buyer of US corn on Friday, booking 1.365 million tonnes with 765,000 tonnes of the total for old crop. This comes at a time of plenty of trade friction with China over the phase 1 deal and increase problems in Hong Kong. This was the second highest one-day purchase of US corn by China on record.
China also raised its flood response alert on Sunday to the second highest level as heavy rain is hitting regions along the Yangtze River. It is estimated that 8.72 million acres have been impacted by the flooding. The market closed sharply lower on the day Friday as the weather is still holding a mixed outlook with heat, but moisture and the USDA supply/demand report did not offer any significant surprises as demand was revised lower. Ending stocks came in at 2.648 billion bushels as compared with expectations near 2.683 billion bushels (2.4-3.01 billion range), and compared with 3.323 billion bushels from June.
World ending stocks were pegged at 315 million tonnes from expectations for stocks near 324.8 million tonnes (310-339 million range), and compared with 337.87 million tonnes in June. The July 7th Commitments of Traders report showed managed money traders reduced their net short position by 59,907 contracts to a net short of 141,741 contracts. CIT traders were net long 307,655 contracts after increasing their already long position by 8,705 contracts. Non-Commercial & Non-Reportable traders net bought 53,836 contracts and are now net short 115,217 contracts.
Without a lot more help from the weather, the upside for wheat still looks limited given the outlook for record world ending stocks and plenty of competition for the coming year for exports. Wheat production came in below expectations, and this provided some support. However, short covering appeared to be a key positive force. The report news was mostly neutral, but Chicago wheat closed up and KC wheat down on the day. The USDA pegged all wheat production at 1.824 billion bushels as compared with trade expectations for 1.848 billion bushels (1.816-1.885 billion range), and compared with 1.877 billion bushels from June. Winter wheat production came in at 1.22 billion from expectations for 1.247 billion bushels and from 1.266 billion in June. US ending stocks came in at 942 million bushels vs expectations for 948 million bushels (0.825-1.006 billion range) and compared with 925 million in June. Soft red winter wheat ending stocks were pegged at a 13-year low of 103 million bushels which was down just 2 million from last year.
On the other hand, hard red winter ending stocks felt to just 423 million bushels, down sharply from 521 million bushels last year and a six year low. On top of the sharp drop in hard red winter ending stocks, China bought 130,000 tons of hard red winter wheat from the US on Friday and China bought 190,000 tons of hard red spring wheat from the US. World ending stocks came in at 314.84 million tonnes from trade expectation for 315.9 million tonnes (311.8-318.5 million range), and compared with 316.09 million tonnes in June. Ending stocks were 297.12, 279.8 and 284.11 million the last 3 years. Wheat positioning in the Commitments of Traders for the week ending July 7th showed managed money traders are net short 33,529 contracts after net buying 5,283 contracts for the week. Non-Commercial & Non-Reportable traders are net short 39,960 contracts after net buying 3,532 contracts. For KC wheat, managed money traders reduced their net short position by 4,044 contracts to a net short 32,672 contracts.
The USDA pork cutout released after the close Friday came in at $68.82, up $1.69 from Thursday and up from $66.46 the previous week. This was the highest the cutout had been since June 12. The cutout is on the verge of breaking out above a sideways pattern that it has been confined to for the last month. The CME lean index as of July 7 was 45.18, down from 45.35 the previous session but up from 45.02 a week before. August hogs closed moderately lower on the session Friday with an inside trading day as the market gave back some of Thursday’s strong gains. Traders see the strong gains in pork product prices over the last couple of days, led by the ham market, as a factor which can help support better packer profit margins and this helped support futures. Traders see good export demand from China and the recent jump in prices in China may support strong exports. China’s national average spot pig price today was up 3.89% from Friday.
For the month, prices are up 6.8%, and up 13.5% year to date. China will sell 20,000 tonnes of pork from state reserves and they have sold near 400,000 tonnes so far this year. Friday’s Commitments of Traders report showed managed money buyers were net buyers of 1,937 contracts of lean hogs for the week ending July 7, increasing their net long to 6,635. Non-commercial & non-reportable traders were net buyers of 1,257, increasing their net long to 11,482. The USDA estimated hog slaughter came in at 466,000 head Friday and 283,000 head for Saturday. This brought the total for last week to 2.606 million head, up from 2.043 million the previous week and up from 2.419 million a year ago. Pork production for the week was up 9.7% from last year.
On Friday, cash live cattle traded mostly steady with earlier in the week. In Kansas 999 head traded at 94-95 and an average price of 94.97. In Nebraska 490 head traded at 96. As of Friday afternoon, the 5-day, 5-area average price was 95.73, up from 94.88 a week ago. This leaves August cattle near $4.25 premium to the cash market compared to a $3.60 discount last year. October is trading near a $9.00 premium as compared with the 5-year average showing a discount of $2.95. August cattle closed moderately higher on the session Friday with an inside trading session. Ideas that the beef market is vulnerable to a bounce plus hopes of a strong economic recovery are factors which have helped support. Friday’s Commitments of Traders report showed managed money traders were net buyers of 5,287 contracts of live cattle for the week ending July 7, increasing their net long to 22,908.
Non-commercial & non-reportable traders were net buyers of 3,675 contracts, increasing their net long to 28,817. The USDA estimated cattle slaughter came in at 119,000 head Friday and 71,000 head for Saturday. This brought the total for last week to 664,000 head, up from 593,000 the previous week and up 0.9% from a year ago. Beef production for the week was up 4.25%. The USDA boxed beef cutout was up $1.17 at mid-session Friday and closed 91 cents higher at $204.50. This was down from $205.44 the previous week and $212.80 a year ago. On Thursday the cutout fell to its lowest level since October 2018.
In front of critical demand-side data, cocoa may be able to extend this recovery move. For the week, September cocoa finished with a loss of 19 points which was a fifth negative weekly result over the past 6 weeks. Stronger equity markets in Europe and the US built on last Thursday’s positive Barry Callebaut guidance to help improve cocoa’s demand outlook. There will be key data points on global demand on Thursday, with the second quarter European grindings total released before the opening while the second quarter North American grindings total released after the close.
Weather issues for recently harvested West African mid-crop cocoa beans were also a source of support. There is rainfall in the forecast for West African growing areas on most days through the middle of next week that should benefit the region’s upcoming 2020/21 main crop production. However, consistent rainfall will result in problems with drying beans and with transporting beans to port facilities which could lead to near-term supply bottlenecks.
The July 7th Commitments of Traders report showed managed money traders are net short 21,086 contracts after net selling 9,914 contracts. Non-Commercial No CIT traders were net short 23,745 contracts after increasing their already short position by 8,723 contracts for the week. Non-Commercial & Non-Reportable traders net sold 9,785 contracts which moved them from a net long to a net short position of 6,158 contracts.
Coffee was unable to bounce back from last Monday’s selloff. The coffee market continues to be pressured by a bearish global supply outlook, but there are some positive demand signs. For the week, September coffee finished with a loss of 5.80 cents that broke a 2-week winning streak. The Brazilian currency posted a mild gain on Friday that provided coffee prices with carryover support. While the Brazilian government agency IGBE forecast their 2020/21 production at 59 million bags, expectations for a record-sized Brazilian coffee crop continue to pressure the market with many trade forecasts coming in at 66 million bags or higher. Warmer and mostly drier weather over the key south Minas Gerais Arabica-growing region have reduced the chances for frost issues this year, but there were extensive period of dry weather earlier in 2020 that could still have a negative impact on coffee production.
Concerns that global demand will remain subdued with the flare-up of coronavirus infections also weighed on the coffee market, as they reduce the chances for restaurant and retail shop demand to significantly improve during the third quarter. ICE exchange coffee stocks fell by a sizable 16,318 bags on Friday. This was a second large daily decline over the past 3 sessions as they are now over 31,000 bags lower for the month for July, have fallen to their lowest level since August 2017 and are on-track for a fifteenth monthly decline over the past 16 months. The Commitments of Traders report for the week ending July 7th showed managed money traders net bought 2,617 contracts and are now net short 22,796 contracts. Non-Commercial & Non-Reportable traders net bought 2,141 contracts and are now net short 7,151 contracts.
The 6-10 and 8-14 day forecasts continue to call for above average temperatures and below normal rainfall in the non-irrigated regions of Texas, and the 5-day forecast calls for no rain in that region with surging temperatures. This should continue to support the uptrend. As expected, the USDA lowered 2020/21 US planted area to 12.19 million acres in Friday’s supply/demand report, but they also lowered yield to 820 pounds per acre versus 825 in the June report. This brought production down to 17.5 million bales from 19.5 million estimated in June and 19.91 million in 2019/20.
However, the USDA also lowered exports to 15.0 million bales from 16.0 million previously. This brought ending stocks to 6.8 million bales, down from 8.0 million estimated in June and 7.1 million for 2019/20, and it put the stocks/use ratio to 38%, down from 43% in June and 40% for 2019/20. However, this still leaves ending stocks and stock/use at their second highest levels since 2007/08. World ending stocks came in at 102.77 million bales, down from 104.67 million estimated in June but up from 100.92 in 2019/20.
The stocks/use ratio fell to 90% from 92% in June and 99% in 2019/20. This still leaves stock/use at its second highest level since 2013/14. Friday’s Commitments of Traders report showed managed money traders were net buyers of 12,664 contracts of cotton for the week ending July 7, increasing their net long to 21,520. Non-commercial & non-reportable traders combined were net buyers of 15,489, increasing their net long to 37,238. ICE certified warehouse stocks totaled 38,149 bales on July 9, up from 37,261 the previous session.
Sugar has failed twice to retest their 4-month high from early June. Unless they can find additional carryover support from key outside markets, a bearish global supply outlook may help to drive sugar prices lower. For the week, October sugar finished with a loss of 48 ticks. A rebound in energy prices helped to keep further losses in check, while a mild rebound in the Brazilian currency provided sugar prices with additional support. Prospects for sharp production increases in Brazil and India continue to weigh on the sugar market as they point towards a sizable 2020/21 global production surplus.
Brazil’s Center-South sugar production during the second quarter came in at 13.30 million tonnes which was over 48% ahead of last year’s pace and a record high for that timeframe. Although there has been a sizable rebound in crude oil prices since their April lows, sugar’s share of second quarter crushing was 46.4% which was nearly 12% above the comparable period last year. India’s monsoon rainfall this year is currently 13% ahead of the long-term average, and there are heavy showers forecast for their top-sugar producing state of Uttar Pradesh this week.
The USDA’s latest supply/demand report showed an increase in US 2020/21 sugar stocks/usage from 12.0 to 13.5, and for 2019/20 stocks usage from 13.4 to 14.5, which is due in part to an increase in tariff rate quota (TRQ) imports in both seasons and a more than 13% increase in US domestic sugar production during the 2020/21 season. Sugar positioning in the Commitments of Traders for the week ending July 7th showed managed money traders added 21,893 contracts to their already long position and are now net long 80,242. Non-Commercial & Non-Reportable traders added 26,207 contracts to their already long position and are now net long 149,766.
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