Written Commentary
BONDS:
In general, the treasury markets were locked within a trading range late last week as scheduled data was supportive while rumors of favorable peace talk developments applied pressure. While Michigan sentiment was softer than expected, Canada posted a very significant drop in its unemployment rate. However, the bear camp should enter the new trading week with confidence considering next week’s CPI report and the FOMC meeting.
CURRENCIES:
In retrospect, the dollar had fundamental and technical favor from the Ukraine war over the past several weeks. Therefore, any sign of favorable talks and/or a cease-fire could pressure the dollar and in turn spark significant short covering in oversold currencies like the Pound and Yen. On the other hand, the dollar should be underpinned given hot inflation readings last week, expectations for a hot CPI reading and most importantly because of the high likelihood of a US rate hike this week.
While the dollar forged a 4-day high early this week, the index recoiled sharply from that high as if the 99.00 level is expensive for now.
We are highly suspicious of the higher trade in the euro early this week, as the situation in Eastern Europe remains negative and the euro should see weakness because of the looming US rate hike. However, a 1-month low in the Chinese currency and the potential for further declines in the Russian currency might provide the euro with indirect support. The March 8th Commitments of Traders report showed Euro Non-Commercial & Non-Reportable traders reduced their net long position by 10,939 contracts to a net long 87,052 contracts.
With the Yen extending last week’s large washout and in the process, reaching the lowest levels since 2017, the trade is rushing to factor in the Bank of Japan’s inability to raise rates in the face of international rate hikes. Like the Yen, the Swiss franc extended its downside breakout from last week and to determine downside targeting requires weekly charts. Obviously, the Swiss franc is viewed negatively because of its proximity to Europe and to the negative economic impact from the war front.
With the Pound returning to significant consolidation low pricing from October 2020, the recovery currency (the Pound behaves like an equity market instrument) looks to be pinned down to the 1.30 area later this week. While the Canadian dollar started out lower this week and is likely overbought from the previous three day’s gains, last week’s Canadian jobs report should underpin the currency. In fact, the jobless rate in Canada reached the lowest level since 2019 and like the dollar the Canadian dollar should benefit from uncertainty from Ukraine.
STOCKS:
All things considered, the volatility in the equity markets late last week was somewhat low considering rumors that Russian/Ukraine talks might be posting some progress. Apparently, the stock market initially was not buying into the prospect of fruitful talks as that should have launched prices significantly higher. Beyond the hope for talks the market saw lift from a buyback by Applied Materials, strength in semiconductor shares and simple relief that the situation in the Ukraine did not deteriorate as much as was feared earlier in the week.
The Dow has started out on a positive track this week with a rejection of 33,000 and signs that the worsening of the war has become less important to the US equity markets. Dow Jones $5 positioning in the Commitments of Traders for the week ending March 8th showed Non-Commercial & Non-Reportable traders were net short 13,542 contracts after decreasing their short position by 1,643 contracts.
GOLD, SILVER & PLATINUM:
The gold and silver markets started off under moderate pressure this week in a risk off commodity session tempered only by initial strength in US equities. Clearly, there will be no compromise short of a complete takeover of the Ukraine. Apparently, the Russian military machine will grind through the capitol city with bombardment likely to leave the city unrecognizable. Therefore, uncertainty and volatility in gold and silver is likely to mirror the action seen last week which posted a gold range of $118. Countervailing flight to quality bullishness from the war will be fear of a surging US dollar and a US hike in interest rates later this week. In fact, the dollar index looks to return to parity (100.00) and the most recent COT positioning report showed the gold market with the longest net spec and fund long since March 2020.
We see the palladium market as the physical commodity market most impacted by the war, and therefore this week should produce volatility on the order seen last week (a $720 trading range). Obviously, seeing 40% of the world supply of palladium held inside Russia for an extended period will result in significant supply chain disruptions for the global automotive industry and that could propel palladium prices to surprising levels. However, over the weekend Russia’s Nornickel indicated they have found “alternative routes for the export of their palladium supplies”. In short, June Palladium is unlikely to finish the coming week near $2,800 with the potential for a sub $2500 price and new record highs above $3,425. With the most recent COT positioning report still showing a net spec and fund long of only 569 contracts stop loss selling could be modest. In fact, the June palladium market last week finished $172 below the level where the COT report was measured, and therefore palladium probably enters this week with a net spec and fund short again.
COPPER:
Unfortunately for the bull camp, copper is not a flight to quality instrument and this week’s geopolitical developments are likely to undermine copper prices and copper demand expectations. Other negatives include word late last week that Peru is likely to see significant year-over-year growth in copper production this year, ongoing moderate daily LME copper warehouse stock builds (with 3,800 tonnes added on Monday), the potential for trade sanctions against China and obviously what is widely expected to be the beginning of a trend of higher interest rates.
ENERGY COMPLEX:
Despite a Russian missile attack of a Ukrainian training facility close to the Polish border over the weekend the market forged a 3-day low and looks destined to probe under $100. Apparently, the trade is concerned there could be “progress in the talks” today but we seriously doubt that outcome. However, there are reports that Russian oil companies are offering very favorable terms like financing and discounted prices with the Chinese potentially helping the Russians with purchases. While the energy markets have adopted supply-side fears from the ongoing prospect of more boycotts of Russian oil, the trade might be walking a thin line with respect to “energy demand destruction” from high pricing and from fears of a global recession from the war.
With political pressure mounting on the US administration from surging retail gasoline prices, we suspect the Biden Administration and Congressional Democrats will begin to discuss a pause in gasoline/road taxes. However, slashing the price from historic highs to slightly less than historic highs might not result in gasoline prices continuing last week’s washout. With the most recent COT positioning report showing gasoline to be holding the lowest net long since December and the gasoline market from the COT report mark off to the low this morning sitting $0.57 below the level where the COT report was calculated the net spec and fund long should be overstated.
The natural gas market appears to be shifting bearish after missing the significant rallies seen in petroleum markets from the Western embargo of Russian energy supplies. Adding into the negative bias this morning are reports that Russian gas continues to flow on the Yamal-Europe pipeline, and we suspect that flow will continue if payment is received. In retrospect, the Yamal pipeline was shut down for 2 months with supplies from that pipeline system ultimately destined for Germany which is heavily dependent on Russia gas.
BEANS:
Like many physical commodities, soybeans are likely to see significant volatility this week as the situation in Ukraine serves to drive wheat and corn prices into wild gyrations. In fact, the United Nations Food Agency on Friday warned of a 20% jump in global food prices because of the war. Certainly, Wheat and corn price gyrations will spill over into soybeans this week especially with the corn and wheat planting window in Ukraine looming and ideas that planting will not take place. However, the soybean market has its own bull case with global buyers concerned about availability between the South American harvest and the new crop in the US. In the most recent weekly report, the US sold 165 million bushels (4.3 million tonnes) of old crop corn and soybean supply and saw near record movement! Apparently, China bought 1 million tonnes while unknown buyers purchased 575,000 tonnes. It should be noted that the USDA increased its 2021-2022 exports up by 400 million bushels (56.9 million tons).
CORN:
While the Ukrainian president is pushing for farmers to plant, the United Nations predicts that 30% of corn and sunflower fields will not be planted this year. In our opinion, projecting 70% will be planted is highly suspect. In fact, we think the biggest impediment to Ukraine corn production will be the absence of “farmers” anywhere near their fields. In other words, new crop corn could have $1.00 or more to gain on old crop as the world’s 4th largest exporter is basically erased for this year’s output. Those who think Ukraine acres will be planted, must think the Russians will take the entire country before the end of April, or that Ukrainian resistance will hold Russian forces back and Ukrainian farmers near the warfront will plant with explosions in the background.
WHEAT:
May wheat was lower at the start of this week, possibly rattled by the negative tone across equity and some commodity markets off news of new lockdown measures in China. The market is seeing extreme volatility, but with the interruption of exports from the Black Sea region, increasing concerns about a poor crop in China, and extremely dry conditions for the central and southern US Plains, the market found some support last week after a three-day break. Friday’s Commitments of Traders report showed managed money traders were net buyers of 27,244 contracts of Chicago wheat for the week ending March 8, which moved them from a net short position to a net long of 20,208.
HOGS:
April hogs closed sharply higher on Friday, above Thursday’s high and near the upper end of last week’s range, as talk of a seasonal decline in the slaughter pace into the spring lent support. There was also talk of the short-term oversold condition of the market, with the possibility that the market had already priced-in an expected decline in consumer demand that would result from higher food and energy costs. The USDA pork cutout, released after the close Friday, came in at $100.79, down $1.75 from Thursday and down from $102.44 the previous week. This was the lowest the cutout had been since February 10. The USDA estimated hog slaughter came in at 476,000 head Friday and 97,000 head for Saturday.
CATTLE:
April cattle closed sharply higher on Friday, taking back most of the losses of the previous session. Ideas that the long liquidation selling pressures on the market could subside soon lent support. Traders see the inflationary tone of the market as an offset to concerns about a drop in consumer demand due to a reduction consumer disposable income that would result from high food and energy costs. However, news of further lockdowns in China could raise concerns about US beef export demand, as China has become a major buyer over the past couple of years. The beef market showed some resilience on Friday, with the USDA cutout up 77 cents on the day at $254.71. This was up from $254.33 the previous week and was the highest it had been since March 2.
COCOA:
Cocoa prices barely avoided a negative weekly reversal, but they have fallen 90 points (down 3.3%) from last Thursday’s 3-week high. Although near-term demand prospects remain an area of concern, cocoa should find support from a bullish West African supply outlook. May cocoa started out on the defensive and remained under pressure all day as they finished Friday’s trading session with a sizable loss. For the week, May cocoa finished unchanged.
COFFEE:
Coffee prices continue to have trouble sustaining upside momentum as they have not put together 3 positive daily results in a row since early February. Six of the past 7 sessions have posted daily lows within a 2.30 cent range, however, so a potential breakout below that area may produce one final downside leg for coffee’s February/March pullback. May coffee was unable to shake off early pressure, but continued to hold its ground above the early March lows as it finished Friday’s trading session with a moderate loss. For the week, May coffee finished with a loss of 2.30 cents which was a fourth negative weekly result in a row.
COTTON:
May cotton gave back a good portion of Friday’s gains as several commodity and equity markets were down off news of Shenzhen, China being in lockdown due to Covid. This is their “Silicon Valley,” and Chinese tech stocks were down sharply. Cotton closed sharply higher on Friday after trading to its highest price level since March 2, encouraged by hopes for more Chinese buying, so the lockdown news is concerning.
SUGAR:
After starting out March with a sizable rally, sugar prices saw choppy and volatile action last week as they took direction from the turbulence in key outside markets. With the start of the 2022/23 Center-South season in a few weeks, bullish developments from Brazil can help sugar prices see upside follow-through early this week. May sugar was able to bounce back from a 1-week low to finish Friday’s trading session with a moderate gain. For the week, however, May sugar finished with a 1oss of 11 ticks (down 0.6%) and a negative weekly reversal from Monday’s 3 1/2 month high.
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