On one hand, the action in the treasury markets was disappointing to the bull camp late last week as a significant washout in equities should have provided a measure of flight to quality buying of bonds and notes. Furthermore, S&P global composite and services PMI readings came in soft, and the markets were presented with news that Russian objectives include the capture of southern Ukraine. Therefore, several ordinarily supportive fundamental forces were discounted, and prices held around unchanged. As we indicated last week, the treasury markets appear to have forged an intermediate/temporary bottom.
The dollar index extended its string of fresh contract highs today and managed that action despite to out of 3 S&P global PMI readings for the US coming in soft. However, the expectations for aggressive US rate hikes are thoroughly entrenched especially with two-year notes today reaching 3-year highs. On the other hand, UK growth fears combined with a lack of respect for ECB tightening promises leaves the dollar in an upward track.
The upward march in the dollar was extended early this week with the dollar seeing flight to quality buying off ideas that the global economy is faltering, and because the US Fed is seen as the best central bank to handle slowing.
With a fresh new low for the move and the failure to respect building support at 1.080, the Euro could see an extension down to the pandemic outbreak lows at 106.71. Certainly, euro zone construction output on a year-over-year basis provided support, but the euro bulls needed the ECB to promise quicker action on the rate hike front. However, the euro is caught between a rock and a hard place with the war slowing economic prospects and the markets looking for higher EU interest rates. The Commitments of Traders report for the week ending April 19th showed Euro Non-Commercial & Non-Reportable traders were net long 44,751 contracts after decreasing their long position by 10,770 contracts.
Like the euro zone, Japan is also stuck between a rock and a hard space with the Prime Minister suggesting the BOJ would be “clearly wrong” to raise rates in the current environment. Japanese economic news produced hotter than expected corporate services prices and a better-than-expected coincident index reading but also produced a soft leading economic indicator. While the Swiss franc is also plummeting on its charts, the magnitude of the range down action suggests the Swiss franc is facing slightly less bearishness as other non-dollar currencies. We see thin and unreliable support 30 ticks below the early lows this week.
Obviously, the Pound suffered significant technical damage early this week and given solid fundamentals for the dollar the next downside targeting in the Pound is derived from the weekly charts at the start of an old gap 180 points lower than the early trade today. As in other non-dollar currencies, to project the next key support in the Canadian dollar requires weekly charts and a price 65 points below the early lows this week. With the Bank of Canada promising aggressive rate action and Canadian producer prices last week leaping up on the charts the Canadian dollar had the best chance of non-dollar currencies to stand up to the dollar. Nonetheless, the Canadian is out-of-favor and destined for further declines.
Not surprisingly, the equity markets came under intense pressure late last week as the rising rate environment has spooked investors. While overall corporate earnings remain positive, there were some disappointing earnings and investors were unnerved by statements from a Russian general indicating their objective was to capture southern Ukraine! While US treasury rates did not breakout to the upside traders are expecting money to flow from stock funds to bond funds.
Despite a bloodbath in the Dow futures at the end of last week (into the low this morning prices are down 2047 points. Therefore, with the Dow futures already holding a net spec and fund short, the net spec and fund short is growing rapidly. The Commitments of Traders report for the week ending April 19th showed Dow Jones $5 Non-Commercial & Non-Reportable traders net bought 7,342 contracts and are now net short 16,228 contracts.
On one hand, the NASDAQ is approaching significant consolidation low support just above the 13,000 level and may be supported because of news that Elon Musk and Twitter are negotiating. However, we suspect favorable earnings of select mega cap stock will not support the NASDAQ. Fortunately for the bull camp the net spec and fund positioning in the NASDAQ was already short before the market declined 1,100 points in less than 3 trading sessions. The Commitments of Traders report for the week ending April 19th showed Nasdaq Mini Non-Commercial & Non-Reportable traders added 3,357 contracts to their already short position and are now net short 3,667.
GOLD, SILVER & PLATINUM:
As in many markets, the unrelenting buzz of higher interest rates has finally unnerved equity markets, which in turn tempers economic hopes and deflates inflationary expectations. As if rising rates were not enough for the bear camp to seize control, persistent contract highs in the dollar index adds another element of selling pressure to gold and silver. While the markets have been presented with many rate hike predictions by Fed members for several months, seeing the US Federal Reserve chairman indicate a 50-basis point rate hike was on the table for the next meeting pulled the rug out from under markets that were already sliding. Even the flight to quality angle has been lost with a top Russian general indicating Russia’s objective was to capture southern Ukraine and for some that reduces the scope of uncertainty.
While the palladium market attempted to delink with the rest of the precious metal markets last Friday, a clean sweep of negative outside market influences has put the market on the defensive again early this week. Adding into the selling mentality in palladium is a worsening infection situation in China (fears of lockdown in Beijing) and that is exaggerated by the shift into a global tightening environment. Seeing Russia define its objective (to capture southern Ukraine) suggests the fighting will continue, thereby keeping a measure of supply side support in play. Unfortunately for the bull camp, palladium ETF holdings have generally eroded with holdings year to date down by 0.2%. Fortunately for the bull camp, the net spec and fund positioning in palladium is “short” which should moderate stop loss selling by longs. The Commitments of Traders report for the week ending April 19th showed Palladium Managed Money traders were net short 562 contracts after increasing their already short position by 180 contracts.
Like many other physical commodities, the copper market is obviously feeling pressure from a very hawkish US Federal Reserve presence. With the copper market last Friday undermined by a series of headline lockdown stories from China, the outlook for copper demand is certainly deteriorating. In fact, this morning the trade is concerned that an outbreak of infections in the Chinese capitol city could result in a heavy-handed lockdown of the city! Surprisingly, the copper market was not supported following three separate lower production reports from major world copper producers last week and that highlights the markets prevailing bearish attitude.
It has become clear that energy prices are under assault from deteriorating global demand views. Apparently, the trade does not see Europe implementing a Russian energy embargo anytime soon and like several other physical commodities, economic headwinds are surfacing from news that Russian objectives are to capture southern Ukraine. It goes without saying that demand headwinds are also being stoked by a chorus of rising rate projections from many central banks. In an even bigger demand threat, headlines continue to surface about the prospect of a lockdown in Beijing. In retrospect, favorable earnings from 3 major oil field services companies (indicating increased oilfield activity) fosters hope for rising US production.
In addition to downside momentum, the natural gas market is disappointed with last week’s bigger than expected EIA injection into storage. In fact, in addition to a larger than expected weekly injection, the storage deficit versus the 5-year average narrowed. In another negative, the Russian national gas company Gazprom continued to export gas to Europe as of Sunday, April 24th. Unfortunately for the bull camp supportive temperatures in the US are now dissipating and the idea that near capacity US LNG exports are failing to tighten supply in the US gives a green light to the bear camp. In other words, US export activity will remain robust, but might not expand due to capacity limitations on both sides of the Atlantic (US terminals, European offload terminals).
Indonesian government officials told palm oil companies on Monday that an export ban announced late last week would cover shipments of refined, bleached, deodorized (RBD) palm olein but not crude palm oil, according to two industry sources who talked to Reuters. Malaysian crude palm futures fell 2.09% after the news after a jump of nearly 7% to the highest in six weeks. May soybean oil traded up to 84.57 early this week but the market turned sharply lower and pushed below Friday’s low.
July soybeans closed sharply lower on the session Friday and experienced a sweeping outside day down after taking out the ranges of the previous three trading sessions. The early rally Friday tested the contract high from February 24. This is bearish technical action and suggests a significant top may be in place. July meal closed sharply lower on the day and experienced the lowest close since April 4th. Exporters announced the sale of 48,000 tonnes of US soybeans sold to Mexico, and also 96,000 tonnes of US soybeans sold to Mexico for the new crop season.
With food security issues and inflationary concerns as a backdrop, many agricultural markets are showing some signs of correcting from their extreme overbought condition of the recent weeks. But as some markets see corrective breaks, a focus on spring weather in the US and planting conditions for Ukraine could be key factors to watch. Talk of more profit taking selling into the weekend helped to spark long liquidation selling and a lower close for the corn market Friday. A sharp break in crude oil and the stock market plus a strong rally in the US dollar were seen as negative forces as well and the sharp drop in open interest on Friday is a bearish development.
Active exports from Russia, talk of progress in getting the Ukraine spring wheat crop planted, and slow US export sales were all seen as short-term negative forces for the wheat market this past week. A surge in the US dollar and a bearish tilt to outside markets also put pressure on wheat prices. But as the market corrects its overbought condition, the 1-5 day forecast models show very little rain for the winter wheat belt. However, the 6-10 day models shifts to above normal precipitation and the 8-14 day model shows above normal to normal precipitation. On the other hand, the US seasonal drought outlook from NOAA also shows a continuation of the drought tendency in the months ahead.
A continued advance in pork cutout values last week has helped to provide some underlying support in the hog market, and traders continue to believe that eventually the high price for corn will cause weights to drop and production to come in smaller than expected. However, weights are high currently and export news remains slow. The USDA pork cutout, released after the close Friday, came in at $109.44, up from $108.44 on Thursday and $108.17 the previous week. This was the highest the cutout had been since February 28.
The USDA Cattle on Feed report released after the close Friday was bearish and showed placements for March at 99.6% of last year versus an average trade expectation of 92.2% and a range of expectations from 87% to 96%. This is bearish and above the range of expectations. Marketings came in at 98% versus expectations of 98.2% (range 97.7% to 98.7%). Cattle-on-feed supply as of April 1 came in at 101.7% of last year versus expectations for 100.4% and a range of 99.5% to 101%. The April 1 On-Feed supply came in above the high-end of the range of estimates which is a bearish development. Placements were also well above expectations and outside of the range of estimates. June cattle closed sharply lower on the session Friday as the move above Thursday’s high failed to attract new buying interest. Strong gains in the cash market in the past two weeks have helped support the run up to Thursday’s high, but talk of the overbought condition of the market might be seen as a reason to expect some back and fill type action.
With near-term demand concerns a front-and-center issue, back-to-back disappointing quarterly grindings put the cocoa market on the defensive. Unless global risk sentiment shows clear signs of improvement, cocoa may see downside follow-through early this week. July cocoa started out under pressure and reached a 5-week low, and in spite of a late rebound finished Friday’s trading session with a sizable loss. For the week, July cocoa finished with a loss of 82 points (down 3.1%) for a second negative weekly result in a row.
While coffee was unable to extend its recovery move into the weekend, it will start this week well above its recent lows as well as its 200-day moving average. With the market continuing to find support from production issues, coffee should be able to regain and sustain upside momentum early this week. July coffee shook off early pressure and reached a 1-week high, but lost strength late in the day to finish Friday’s trading session with a moderate loss. For the week, however, July coffee finished with a gain of 3.40 cents (up 1.5%). This was a fourth positive weekly result over the past 5 weeks and was a positive weekly reversal from last Thursday’s 3-week low.
July cotton closed lower again on Friday and the selling early this week has pushed the market down to the lowest level since April 12. The market was pressured by concerns about reduced demand, China’s economy, and a stronger dollar. The dollar was sharply higher, with the June Dollar Index trading to a new contract high and the nearby chart reaching its highest level since March 2020. This makes US cotton exports more expensive on the world market.
After finding its footing on Thursday, sugar fell back on the defensive as it continues to be pressured by key outside markets. With bearish supply news from Asia also weighing on prices, sugar could see a retest of its 50-day moving average this week. July sugar came under initial pressure and then held within a tight range before a sharp midsession selloff as it finished Friday’s trading session with a heavy loss. For the week, July sugar finished with a loss of 82 ticks (down 4.1%) for a second negative weekly result in a row. Crude oil and RBOB gasoline prices finished the week on a downbeat note, which weighed on the sugar market as that could diminish near-term ethanol demand in both Brazil and India.
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