Written Commentary
BONDS:
With the US adding nearly 3 million jobs since the beginning of October and the last 2 months posting significantly stronger than expected readings (despite omicron) and treasury bonds at times following the jobs report up 3 points, it is clear flight to quality forces are trumping classic economic fundamentals. We also note that treasuries rallied aggressively in the face of inflationary signals from the energy markets. While treasury bonds forged an upside breakout at the start of this week, prices have fallen back from that high as if waiting for additional news from the Ukraine. Certainly, a significant risk off vibe flowing from equities provides treasuries with initial flight to quality lift.
CURRENCIES:
From a classic fundamental perspective, the dollar index should have strengthened off the better-than-expected US nonfarm payroll report, especially with flight to quality buyers off the Ukraine carnage adding to the buying. Not surprisingly, the euro remains the most vulnerable currency with the war strapped onto the back of the European economy. With the war in Ukraine expected to continue with wave after wave of reports of carnage of civilians and widespread destruction of infrastructure the dollar should be considered in an entrenched flight to quality rally.
While the US Federal Reserve Chairman recently tamped down a 50-basis point rate hike in next week’s meeting, the payrolls last week were very strong and exploding inflationary pressures from commodities might result in a surprise 50 basis point hike. However, the dollar index is becoming significantly overbought with the latest net spec and fund long position near 40,000 contracts and the market since the report gaining another 200 points. The March 1st Commitments of Traders report showed Dollar Non-Commercial & Non-Reportable traders net sold 1,950 contracts and are now net long 39,376 contracts.
The euro broke to the downside and appears on a direct path to return to the 2020 lows. Economic data for the euro zone was split with German factory orders and retail sales readings positive and a European investor confidence reading falling dramatically from the prior month. Obviously, Europe is facing spillover economic headwinds from the Ukraine situation and is further hindered by surging LNG prices.
With a new contract low in the Pound, the currency failed to benefit from a stronger than expected Halifax house price reading for February perhaps because the month over month gain in home prices was disappointing. Nonetheless, the Pound is a recovery currency (which needs global growth to strengthen) and looking forward there is massive uncertainty building against global growth! The Canadian dollar remains “caught in the middle” with surging oil and commodity prices and some spillover lift from the dollar providing support The Canadian might be drafting lift from hawkish Bank of Canada dialogue and from a very strong Canadian economic activity PMI reading last Friday.
STOCKS:
Obviously, hyper volatility remains in the equity markets with the situation in the Ukraine offering massive uncertainty and the potential for many very disconcerting outcomes. In fact, we suspect mass casualties and general carnage in the Ukrainian capital will greet equities early this week. It should be noted that a growing list of companies have shut down operations While others have refused to sell goods and services to the Russians and that will likely result in a loss of international sales.
Global equity markets early this week were all lower with the largest declines in the French market which had a decline of 4.1%. With a wave of companies announcing they have severed ties and halted sales to Russia, ongoing concern of Ukrainian inspired global economic headwinds, surging inflation and the prospect of higher interest rates gives the bear camp a full quiver today. Furthermore, there are several reports surfacing about sharply raising prices of food, industrial materials, retail fuel, and all-time highs in some precious metal markets and that is also undermining investor sentiment.
GOLD, SILVER & PLATINUM:
With gap up new high in April gold, strength in physical commodities, ongoing fighting in Ukraine and a 5th straight day of gold ETF inflows (last week gold ETF holdings increased by 1.3 million ounces) and finally many traders expecting only a 25-basis point rate hike from the US, the bull camp has solid control. In fact, gold ETF holdings are now 3.8% higher on the year and we suspect surging prices will bring on even more consistent inflows into gold ETF holdings. Like the energy complex, the bull camp retains control and should continue to retain control with the Ukrainian situation remaining at a boil. Another bullish demand item released came from China where their gold reserves were reported to have increased by 6.4% on a month over month basis which in turn brings the year-over-year gain to 9.6%.
The rally in palladium prices has become so significant that the platinum market is now being “pulled up” by palladium. While the substitution of platinum for palladium has been anticipated for the last 2 years, we suspect speculative futures buying will have a greater near-term impact than increased substitution demand. Furthermore, the net spec and fund long in platinum also remain small relative to recent history.
COPPER:
While we are still suspect with the copper market’s fundamental justification for the ongoing upside explosion, there are supply concerns and the most significant inflationary environment in 50 years. Certainly, reduced Chilean and Russian supply creates a powerful classic bull condition on its own, but the inflation kicker is apparently very powerful on its own. The copper market was unconcerned about another weekly Shanghai copper stocks build last week, and the market also has not had a significant focus on China which posted softer than expected trade data.
ENERGY COMPLEX:
Crude oil prices bolted higher and surged above $130 per barrel in the April contract, with part of the sharp range up extension seen from House of Representatives leadership indicating they were considering oil sanctions. A minimal addition to the bull case was seen from a 2.3% decline in global floating crude oil supply. On the other hand, a sign of bullish froth was seen from a bulge in low-cost call option strategies centered around $200 per barrel. While not a widespread belief in the market, an economist has suggested the global economy can “get by just fine” with $129 oil, but the question becomes what the Fed will think of $129 oil. Surprisingly, the nonreportable, managed money, and noncommercial (speculative categories) do not show excessively high long positions compared to recent action.
Like the crude oil market, the gasoline market gapped higher and forged a fresh contract high. For now, the RBOB market does not appear to be held back yet by talk of demand destruction from ultrahigh retail prices. In fact, in certain portions of the US, retail gasoline prices are likely to hit record highs when adjusted for this week’s rally. However, Europe’s largest refinery said it will continue to buy Russian crude and will donate profits to a fund for the Ukrainian people. Therefore, a key supply source for European fuel will continue to operate until sanctions include oil. However, Europe and particularly Germany will suffer significant increased costs and severe shortages if they shut off Russian feedstocks before temperatures warm up. Like the crude oil market, the net spec and fund long positions in gasoline have not reached excessively long levels yet, and even though the COT positioning is dramatically understated by a post report rally of $0.43 we assume the market retains significant speculative buying capacity.
Even though the natural gas market has seriously lagged the petroleum complex, the bull case is equally if not more powerful. However, key consumers of Russian gas have been unable to aggressively shut off purchases as alternative supply is not at critical mass yet. On the other hand, Europe remains in the critical heating season and embargoing Russian gas completely would put already record European and Asian cash prices through the roof. While the US is spooling up its natural gas exports shipping supply is nearly impossible to meet pipeline flow levels in the near-term. Certainly, natural gas is drafting support from colder European and US weather and like petroleum the uncertainty from the Ukraine situation keeps overriding demand concerns.
BEANS:
It will likely take government actions or a cease-fire that sticks in order to expect a near term top is in place. May soybeans closed moderately lower on the session last Friday after choppy and two-sided trade. The market managed to close about 75 cents higher on the week. Soybean oil experienced follow-through selling from Thursday’s key reversal which helps confirm a short-term peak. World food prices hit a record high in February led by the surge in vegetable oils and dairy products to post a 20.7% increase from one year ago, according to the United Nations Food and agriculture organization. Exporters announced the sale of 106,000 tonnes of US soybeans to China. There was also 125,000 tonnes of US soybeans to unknown destination, and 108,860 tonnes of US soybeans sold to Mexico.
With palm oil closing down 7.8% on the day, traders are trying to determine if this was just a technical correction, or if it may signify that the current price rally is unsustainable. A week ago, the market sensed that the inability to export sunoil and wheat and corn was a serious issue and would tighten the short-term supply on the world market significantly. Now, traders are more concerned that with Ukraine ravaged with war that new crop plantings and production could be disrupted. Availability of pesticides and seeds and fuel for agriculture are all big concerns. Ukraine usually starts spring planting in late February or March. For now, it appears that lower yields are likely but if crops are not planted, and producers miss the window of opportunity. Losses will be significant.
CORN:
There is still no sign of a near-term top, but the historical high price for all grains leaves the corn market vulnerable to government actions which might shift the longer-term supply set-up. May corn managed to close higher on the session Friday but 28 1/2 cents off of the contract high of 782 3/4. This was the fourth day in a row of contract highs and the market managed to trade as much as $1.27 higher for the week. The Rosario Grains Exchange sees Argentine corn production down to 48 million tonnes, which is down from 54 million from the USDA in the February update. Continued uncertainty on available supply from the Black Sea region, plus continued positive demand news in spite of the high price helped to support.
WHEAT:
When it rains, it pours. On top of the Black Sea issues, the hard red winter crop in the southern US Plains is suffering from drought conditions, and China officials are indicating China’s winter wheat crop could be the worst in history, according to the agriculture minister. Rare, heavy rainfall last year delayed the planting of about one third of the normal wheat acreage. China is the world’s biggest consumer of wheat. China sold 526,254 tonnes of wheat or 100% of its total offer in an auction of state reserves yesterday. March wheat managed to close sharply higher on Friday with a very wide range of $12.01 1/2 to $13.48. This left the market with a gain of $5.05 for the week or up 60% last week. May wheat traded at the 75 cent limit up price of $12.09 and that was the only priced traded on the day. European milling wheat futures climbed as much as 11% and closed 1.5% higher, which was up 28% for the week.
HOGS:
April hogs closed sharply lower on the session last Friday and the selling pushed the market down to the lowest level since February 7. The USDA confirmed the presence of highly pathogenic avian flu in a flock of commercial broiler chickens in Missouri. This adds to cases on commercial farms in Indiana, Kentucky and Delaware. This has triggered significant export restrictions for US poultry products which will add to the short-term supply which US consumers will need to absorb. As a result, it may be difficult for pork values to hold up as high as they have recently.
CATTLE:
April cattle closed sharply lower on the session last Friday but near the middle of the range. The market is technically oversold, and the selling pushed the market down to the lowest level since September 13. This also pushed the market down to a significant discount to the cash market which may have brought in some bargain hunters. Cash live cattle traded lower on Friday in moderate to light volume. There were 1,923 head reported across the five regions with a weighted average price of 138.95. This was down from averages of 141.61 on Thursday and 140.45 on Wednesday.
COCOA:
While global risk sentiment remains volatile, one consistent impact of Russia’s invasion of Ukraine has diminished near-term demand prospects for cocoa. Although the market has risen nearly 150 points (up 6.0%) from last Tuesday’s low, the cocoa market has strong long-term demand prospects and a bullish supply outlook which leaves prices still looking cheap at current levels. May cocoa was able to maintain upside momentum in spite of a new 21-month low in the Eurocurrency as it reached a 1-week high before finishing Friday’s trading session with a sizable gain and a third positive daily result in a row. For the week, May cocoa finished with a gain of 6 points (up 0.2%) which broke a 2-week losing streak and was a positive weekly reversal from last Tuesday’s 2-month low.
COFFEE:
Europe accounts for roughly a third of global domestic coffee consumption, so the ongoing Russian invasion will continue to cast a shadow over restaurant and retail shop demand in the region. However, a 40.00 cent decline from a mid-February high to Friday’s low (down 15.4%) has left the coffee market in a stronger position to maintain upside momentum this week. May coffee found early pressure and reached a new 3 1/2 month low, but were able to regain strength late in the day to finish Friday’s trading session with a mild gain and a positive daily reversal. For the week, however, May coffee finished with a loss of 14.40 cents (down 6.0%) and a third negative weekly result in a row.
COTTON:
Fears that the Russia/Ukraine war will drag out and help reduce global demand for cotton seems to be the key bearish factor short-term. The market priced in very strong demand, and with a surge in planted area in the US this year, it will take continued very strong demand to expect US exports to increase for the coming year. May cotton sold off sharply on Friday, trading to its lowest level since February 25 and closing at its lowest level since January 14. The market is close to taking out its February 25 low, which would confirm that a short-term downtrend is occurring.
SUGAR:
Sugar’s abrupt turnaround last week was fueled in large part by strength in key outside markets that has overshadowed an improving global demand outlook. While there is likely to be volatile price action this week, sugar should remain fairly well supported on any near-term pullbacks. May sugar maintained strong upside momentum as it reached a new 3-month high before finishing Friday’s trading session with a sizable gain and a fifth positive daily result in a row. For the week, May sugar finished with a gain of 1.75 cents (up 9.9%) which broke a 2-week losing streak. Energy prices rallied sharply and are close to their highest levels since 2008, which provided carryover support to the sugar market.
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