In retrospect, we see the rally in bonds over the prior 2 weeks as a corrective bounce in a bear market. Certainly, 8 days of disappointing US scheduled data added to the pulse up in treasury prices, as did a veritable avalanche of dovish US Federal Reserve dialogue. On the other hand, with last Thursday’s high in bonds prices return to a very steep downtrend channel resistance line, and in the event US infections due to post a lower low and the lowest infections since the beginning of October, that could result in new contract lows in bonds and notes.
With the dollar falling back in the face of disappointing US personal income and personal spending data, the argument that the dollar rally is the result of more attractive yielding opportunities in the US than in other areas was given added credence. However, this week could be a significant test of the dollar bulls resolve if US daily infections extend the pattern seen since late January with a downside breakout in the daily infection rate to the lowest level since October 4th.
While the US stock market appeared to have made a turn back in favor of the bull camp late last week, for some the rate of gain was disappointing. Nonetheless, the market has seen extreme daily threats of rising interest rates moderate and has also been presented with a 100 day/200 million vaccination target by the Biden Administration. In other words, the accumulation of 135 million vaccinations should begin to drop the daily infection rate at a brisker pace and that should provide a euphoria extension for US stocks in the coming week.
GOLD, SILVER & PLATINUM:
While the US dollar has not forged an upside breakout early this week, it came within ticks of a fresh high, and gold and silver have likely seen a portion of their selling off that situation. While the initial weakness is probably part of a risk off/fear of renewed slowing (from jumps in various global infection readings), investors have continued to pull back from both gold and silver ETF’s. Last week gold ETFs reduced their holdings by 893,283 ounces, with silver holdings reduced by 9.7 million ounces. In fact, the outflow from ETF instruments has begun to spark frequent press coverage touting even more significant outflows ahead.
The charts in palladium market finished last week extremely bullish but embracing the bull case is difficult with classic longer-term fundamentals supporting the bull case still fuzzy and short term influences this morning bearish. In fact, without labor or Covid interrupted mine production event, the key force behind the rally in palladium appears to be the hope for improvement in global auto sales and therefore increased global auto catalyst input material in the 2nd half of this year.
The platinum market continues to be the “black sheep” of the PGM complex with a series of lower lows and lower highs forged directly in the face of strong palladium prices. While it is a very difficult undertaking to substitute auto manufacturing inputs, other industrial uses for platinum should begin to pull demand from palladium. However, we get the sense that some traders are using platinum as a hedge against long palladium positions and obviously the demand story for platinum is significantly less impressive given its primary demand source diesel engines.
In retrospect, the action in the copper market over the last 45 days is clearly justified by the events from both scheduled data and from the global virus situation. From a 10,000-foot overhead view, it-is-clear that Chinese growth moderated or plateaued or temporarily paused around their New Year’s holiday.
While we have been skeptical of the bull case in crude oil for the last 2 weeks, it is difficult to argue against the market’s ability to stand up to negative outside market forces. In fact, the May crude oil contract forged a 5-day high despite financial market problems and a lot of infection surge worries. Even more impressive is the fact that oil prices were showing a positive track in the face of fresh hopes that the Suez Canal blockage will be ended with a high tide later on Monday. However, the real supportive force for prices was news that Russia will support a rollover of OPEC plus output levels into the month of May. Tempering that supportive stance from Russia is their desire for a small production increase for themselves. Traders should be aware that the OPEC plus ministers will meet April 1st and it is likely all parties will posture in the press in the coming days thereby stoking volatility.
Traders remain nervous with active harvest in South America and with feeding demand in China. May soybeans closed sharply lower on the session last Friday as the limit down action for soybean oil help pull futures lower. Palm oil was down more than 4% and this helped drag the market lower. May soybeans closed 15 3/4 cents lower on the week. December meal closed just slightly lower on the week and December soybean oil traded down to the lowest level since March 4. South America weather looks favorable for increased harvest activity over the near term and this may have added to the bearish tone.
The continued weakness in China corn plus the outlook for US weather are seen as short-term negative forces. The market seems to have the demand fundamentals to see a resumption of the uptrend, but the US weather looks favorable for an early start to fieldwork, and this could spark further long liquidation selling as speculators still hold a hefty net long position. Weakness in the Brazilian currency, a sharp run-up in the US dollar and further collapse in crude oil prices this week were all seen as bearish forces. For the USDA Acreage report, traders see 93.1 million acres (92.0-94.5 million range) as compared with 90.8 million acres last year. The weekly export sales report showed the third highest weekly current year net sales on record at 4.481 million tonnes. Cumulative sales have reached 98.4% of the USDA forecast for the 2020/2021 marketing year versus a 5 year average of 73.7%. Given the cumulative export sales data, it would be easy to increase the export estimate for 2020/21 by 150-400 million bushels which would decrease ending stocks the same amount.
July Kansas City wheat traded down to the lowest level since December 21st and this negated the reversal action on Friday. Even with the bounce Friday, the market closed down 16 3/4 cents for the week. The market seems to have priced-in much of the bearish short-term demand forces, and the outlook for good crop conditions for most of the Northern Hemisphere growing areas coming out of dormancy. However, the two week outlook for the Plains has very little rain and warmer than normal temperatures and this may help provide some underlying support. Chicago wheat closed higher on the session Friday, but lower for the fourth week in a row.
April hogs gaped higher and posted new contract highs for the fourth session in a row on Friday, and for the 8th of the last 9 trading sessions. The market closed up 650 points (6.9%) for the week. The market is extremely overbought technically but open interest also remains in a steady uptrend as fund traders build a net long position. June hogs also traded sharply higher on the day. The USDA hogs and pigs report showed that hog supply is down about 2% from trade expectations and this supported the strong gains. The supply was below the low end expectation which helped to drive the market higher. The CME Lean Hog Index as of March 24th was 94.59 up from 93.85 the previous session and up from 91.24 the previous week. This leaves April hogs holding a large premium to the cash market. The USDA pork cutout, released after the close Friday, came in at $106.45, down from $108.03 on Thursday but up from $101.82 the previous week.
April cattle closed 55 points higher on the session last Friday and experienced the highest close since February 25th. The market gained 170 points for the week. June cattle pushed up to the highest level since March 18. The short-term demand outlook remains very strong and with the rally in beef prices, cash markets look higher again this week. The USDA boxed beef cutout was up $1.95 at mid-session Friday and closed $1.21 higher at $237.66. This was up from $229.99 the previous week and was the highest the cutout had been since March 1. Cash live cattle traded in light volume on Friday at $116-117, about $1-2 higher than the previous week. The 5-day, 5-area weighted average as of Friday was $115.49, up from $114.21 the previous week.
Cocoa prices have been weighed down by near-term demand concerns for several weeks, but they finished last week’s trading with two positive daily results in a row as they climbed back above their 200-day moving average. Unless global risk sentiment can end the second quarter on an upbeat note, cocoa may have trouble extending its recovery move. May cocoa found early support and was able to bounce back from midsession pressure as it finished Friday’s trading session with a minimal gain. For the week, however, May cocoa finished with a loss of 35 points which was a third negative weekly result over the past 4 weeks.
Several commodities have been negatively impacted by the prospect of lower near-term demand, one of which is coffee. While those demand issues are unlikely to be resolved soon, coffee continues to have a bullish supply outlook. May coffee was able to overcome a new 2-week low in the Brazilian currency as it finished Friday’s trading session with a sizable gain. For the week, May coffee finished with a loss of 0.50 cent as the market just missed out on a positive weekly reversal from a 5-week low but was a third negative weekly result in the past 4 weeks.
May cotton turned higher after breaking key support at 78.30, which is a 50% correction of the July 24-February 25 rally. The market turn higher from an extreme oversold technical condition and the turn higher in the US stock market, some weakness in the US dollar and a sharp rally in crude oil were all seen as positive forces. May cotton closed 194 points higher on the session Friday and this left the market down 430 points for the week, or down 5%. Talk of commercial buying on the break helped to provide some support. Traders see improving demand over the near term as the global economy re-opens. Export sales are running well ahead of the pace to reach the current USDA projection, but traders remain nervous that shipments to China could be disrupted if political uncertainty persists and there are issues with forced labor.
Since reaching a multi-year high in mid-February, sugar prices have lost nearly 13% in value as they continue to be pressured by weakness in key outside markets. This has led to the sugar market falling into oversold price levels, which could set the stage for additional short-covering over the final sessions of the first quarter. May sugar held within a fairly tight inside-day range before finishing Friday’s trading session with a moderate gain. For the week, however, May sugar finished with a loss of 57 ticks which was a fifth negative weekly result in a row.
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