The reaction in treasury prices last Friday was nothing short of astounding as the US nonfarm payroll count was less than half of what was expected. However, limiting the ability to rally in bonds and notes was the fact that the two prior month’s nonfarm payroll readings were revised upward and more importantly the US unemployment rate dropped by 0.2%. On the other hand, the soft nonfarm payroll report certainly reduces the potential the Fed will begin to taper next month. Early week action in treasury prices was likely to be very limited given the closure of the cash markets Monday due to the Columbus Day holiday at US banks.
Despite the holiday thinned trade, the treasury bond market extended down and has reached the lowest level since June 17th. Apparently, the treasury market has managed to massage or shape the nonfarm payroll report reading into a reading that will not put the Fed off from their intentions to taper before the end of the year. In our mind, the debate in the marketplace is currently rotating between a November and December tapering with the long-term ramifications of the beginning of the tapering probably insignificant. On the other hand, it is possible that the downside breakaway action is a long-term readjustment from artificially low interest rates.
Like many other financial markets, the dollar index last Friday failed to exhibit “as expected” action following a disappointing US nonfarm payroll report. Apparently, the trade thinks the US economy is progressing enough that the increasingly inflation nervous Fed will taper before the end of the year. Certainly, previous monthly nonfarm payroll readings were revised upward, and there are views that suggest the unwillingness to work is raising wages and the October payroll report will show a significant jump. While the dollar remained within Friday’s large two-sided trading range, the currency index has stayed near contract highs and has seemingly built a strong shelf of support at 94.00.
The euro managed to respect last week’s low despite seeing the dollar hold near its contract highs over the past 4 trading sessions. On the other hand, the euro should see some pressure from disappointing Italian industrial output readings for August and will see several ECB speeches early this week. In the near term, we see the euro restrained within a trading range bound by 1.16005 and 1.1555. The Commitments of Traders report for the week ending October 5th showed Euro Non-Commercial & Non-Reportable traders reduced their net long position by 21,996 contracts to a net long 8,433 contracts.
The Yen ranged down sharply at the start of this week without a definitive move in either the dollar or the euro, which in turn suggests internal/domestic negative sentiment. While we doubt the significant slide in a Japanese machine-tool orders report for September was a primary force behind the sharp range down extension, that news is playing a role in the bear case. Obviously, the Swiss franc was undermined because of the US nonfarm payroll disappointment as that discourages investment in recovery currencies like the Swiss franc, Euro, and Pound. However, the Swiss franc has shown the ability to stand up to the recent US dollar strength and that could increase the durability of consolidation low support.
Surprisingly, the British pound was showing strength and temporarily managed a 9-day high at the start of this week. However, the Pound seemed to recoil from the underside of the July through mid-September consolidation zone at 1.3668. At present, we are hesitant to suggest the current rally in the Pound is fundamentally justified. Unlike other currency markets, Canadian dollar gains were justified by a very robust jobs gain in the month of September. In fact, the Canadian jobless rate reached a 1 1/2 year low and employment readings have returned to pre-pandemic levels. Therefore, the bias is up in the Canadian dollar.
The equity markets exhibited significant two-sided volatility last Friday through what in the end was judged to be a disappointing US jobs report. Some bulls hoped that a soft nonfarm payroll result would result in a noted equity market rally off ideas that a November Fed tapering was unlikely. Other analysts are concerned that a lack of forward momentum in the US economy will make the next round of earnings reports soft.
Global equity markets at the start of this week were mixed with those markets trading higher generally located within Asia. Declines in most markets were less than 0.5% while the strongest index posted a gain of 1.7%. While the equity markets will have a thin trading session Monday due to a bank holiday, volatility is likely to remain in place with the markets waffling between tapering and no tapering for the month of November.
Like the rest of the markets, the NASDAQ started out the new trading week out on a back foot with a 3-day low and the appearance of a market headed back into last week’s range which had consolidation lows down around 14,410. Nasdaq Mini positioning in the Commitments of Traders for the week ending October 5th showed Non-Commercial & Non-Reportable traders are net short 6,414 contracts after net buying 313 contracts. In the bull’s defense, both the Dow Jones and NASDAQ futures are holding net spec and fund “short” and that could reduce the amount of selling in the marketplace.
GOLD, SILVER & PLATINUM:
The gold market remains vulnerable to further liquidation after last Friday’s noted failed rally attempt and because of a 3-day low on the charts early today. Surprisingly, the gold market has not drafted support from news that Indian gold imports reached 93.5 tonnes in September compared to a dramatic pandemic influenced 8.4 tonnes of imports last year! Certainly, some buying in September is seasonally related and could be a one-off event, seeing Indian gold imports reach 100 tonnes per month puts their total imports back on a “near normal” standing. While some traders suggested that the failed rally last week was the result of increased economic uncertainty from the non-farm disappointment, others indicated that the failure was the result of dollar strength.
We continue to expect silver to diverge consistently with the gold market as it tracks classic industrial commodities and equities and gold tracks more esoteric themes. Chart action in silver is upbeat with the big range up attempt Friday not wholly rejected and given a positive close. The October 5th Commitments of Traders report showed Silver Managed Money traders added 1,112 contracts to their already long position and are now net long 4,630. Non-Commercial & Non-Reportable traders net sold 945 contracts and are now net long 26,931 contracts.
Unlike the gold market, the palladium market continued to range sharply higher and reached the highest level since September 10th. While the palladium market did not post another record net spec and fund short in the recent positioning report, the market remained net spec and fund short a moderate amount given the relatively low trading volume in the market. Therefore, part of palladium’s gains is likely attributable to short covering. In fact, with a decline in open interest and increased trading volume during the rally, that highlights short covering in our book. Palladium positioning in the Commitments of Traders for the week ending October 5th showed Palladium Managed Money traders hit a new extreme short of 2,539 contracts. Managed Money traders net sold 182 contracts and are now net short 2,539 contracts. Non-Commercial & Non-Reportable traders are net short 3,560 contracts after net buying 112 contracts.
Not to be left out, the platinum market surged higher along with palladium in a move that some traders are labeling as an investment allocation reaction. Fortunately for the bull camp, the upside extension last Friday in platinum was accompanied by a significant jump in trading volume. However, platinum should be held back by news of a very substantial outflow of ETF holdings last Friday of 10,505 ounces which in turn put the year-to-date change at a contraction of 3%.
Surprisingly, the copper market managed to rally through disappointing US Jobs data last Friday and prices have continued higher early this week despite lower global equity market action. However, like the equity markets, the copper trade was presented with a disappointing headline nonfarm payroll reading but that news was partially countervailed by a reduction in the unemployment rate. On the other hand, China’s economy will return to normal after a protracted holiday but the news from the Chinese real estate front is negative with fears rising again in the lead up to another key bond payment from Evergrande.
With the punch out above $80 in November crude oil on Friday and a very significant upside thrust to start early this week, the bull camp has extended control into a new trading week. In fact, it is very impressive for energy prices to have held firm in the face of a decidedly slack US nonfarm payroll result last Friday. However, seeing an energy crisis of sorts inside China has provided the bull camp with another theme besides the idea that recovering demand is outstripping recovering supply. Clearly, demand hope is the result of anticipation of gradual improvement in the global economy and given disappointing economic numbers from the US and China over the past month there is a measure of suspicion of the upside pulse.
Like the crude oil market, the gasoline market also forged a new contract high early this week and has breached the next critical psychological resistance point of $2.40. At least at the end of last week, the gasoline market continued to see a flurry of increased traffic and congestion signals from high-frequency data. Therefore, strong demand hope present in the crude oil market is also present in RBOB. Unfortunately for the bull camp, the latest EIA inventory data shows what appears to be an ongoing repair of the tightness seen throughout most of the last 13 months.
The diesel market temporarily faltered perhaps because of negative flow of news of soft jet fuel demand that has surfaced over the past several weeks. Certainly, the diesel market has tighter classic fundamentals relative to gasoline and crude oil, but airline consumption is expected to flat line at current levels and perhaps contract. However, reports of significant trucking backups on both coasts could begin to unravel and flow could pick up along with the demand for diesel fuel.
Fortunately for the bull camp, the latest positioning report shows natural gas to have remained net spec and fund short, which in turn could cushion the market against what appears to be a coming correction. Natural Gas positioning in the Commitments of Traders for the week ending October 5th showed Managed Money traders net bought 2,015 contracts and are now net long 32,755 contracts. Non-Commercial & Non-Reportable traders were net short 94,736 contracts after decreasing their short position by 9,426 contracts. It is the shoulder season and without a fresh wave of bullish demand news from Europe or China, prices are vulnerable to normal corrective action.
The continued strong advance in global vegetable oil prices, plus news of another new all-time high for palm oil, plus talk that China may be a more active buyer of US soybeans coming off their holiday helped to support higher trade on Friday. The buying pushed November soybeans up to the highest level since September 30. The surge in open interest on the recent break in meal would suggest that fund traders are building a larger net short position. The same can be said for November soybeans.
The Commitments of Traders report for the week ending October 5th showed soybeans managed money traders reduced their net long position by 9,858 contracts to a net long 49,453 contracts. The long liquidation selling trend is a short-term negative force. Non-Commercial & Non-Reportable traders were net long 16,166 contracts after decreasing their long position by 14,978 contracts.
Heavy rains across northern China this past week have delayed their corn harvest and have raised concerns about the crop’s quality. Mexico officials see 2021 corn imports may likely exceed 19 million tonnes which would be a new all-time high for corn imports and compares with near 16 million tonnes last year. A mixed weather forecast with some areas of the Midwest getting enough rain to slow harvest activities helping to keep selling pressures somewhat at bay. The 6-10 day is dry and could boost harvest. Strength in the energy complex plus weakness in the US dollar are seen as positive outside market influences.
Weakness in wheat has been offset by strength in the soybean complex. For the USDA supply/demand update this week, the average trade expectation for US 2021/22 corn ending stocks is 1.432 billion bushels (estimates range from 1.238-1.568 billion), up from 1.408 billion in the September report. Corn production is expected to come in near 14.973 billion bushels (14.788-15.188 billion range), down from 14.996 billion in September. Yield is expected to come in near 176 bushels per acre (174-178.5 range), down from 176.3 in the September update.
High fertilizer prices may also encourage US producers to plant more soybeans, cotton, and wheat at the expense of corn. For the USDA report, world corn ending stocks are expected to come in around 298.76 million tonnes (295-303 million range), down from 297.63 million in the September update. The October 5th Commitments of Traders report showed managed money traders added 5,855 contracts to their already long position and are now net long 250,596. Non-Commercial & Non-Reportable traders were net long 252,167 contracts after increasing their already long position by 20,257 contracts.
The selling Friday pushed the market down to the lowest level since October 1. December Minneapolis wheat posted a new contract high for the third session in a row, and closed higher on the day. Rain in the short term forecast for the eastern half of Kansas is seen as beneficial to recently planted crops, and traders see European Union plantings with expectations that the crop area will be steady to slightly larger than last year. Egypt indicated that they have strategic reserves for nearly 5.5 months of consumption. Southern hemisphere wheat crops are a mixed bag, with expectations for a large crop out of Australia but dryness continuing to be a concern for Argentina’s crop.
For the USDA supply/demand update, the average trade expectation for US 2021/22 wheat ending stocks is 576 million bushels (estimates range from 470-615 million), down from 615 million in the September report. This would be the lowest US ending stocks figure since 2007/08. US wheat production is the lowest in 19 years, and September 1 stocks were the lowest in 14 years. World wheat ending stocks are expected to come in near 280.82 million tonnes (278-284.5 million range), down from 283.22 million tonnes estimated in September.
December hogs closed lower on the session last Friday and experienced the lowest close since September 24th. The early bounce pushed the market up to the highest level since October 5th before pulling back. Export news remains sluggish and slaughter supplies should continue to increase over the next 4 to 5 weeks. Cash markets are likely to trend lower but futures already hold a larger than normal discount to the cash market. The CME Lean Hog Index as of October 6 was 92.59 down from 93.51 the previous session but up from 92.90 a week before.
Friday’s Commitments of Traders report showed managed money traders were net buyers of 9,513 contracts of lean hogs for the week ending October 5, increasing their net long to 75,146. Non-commercial, no CIT traders were net buyers of 8,616, increasing their net long to 51,738. China’s national average spot pig price as of October 11 was up 3.2% from the previous day. Dalian live hog futures as of October 11 were up 5.2% from the previous day. For the month, prices are up 6.89%.
December cattle closed slightly higher on the session last Friday with a small range but the market gained 4% for the week last week. The buying pushed the market up to the highest level since September 7. Traders remain hopeful that beef prices turn higher and that the cash market trends higher in the weeks just ahead. Producers seem current with marketings, but futures are trading at a stiff premium to the cash market. The USDA boxed beef cutout was down $1.25 at mid-session Friday and closed $2.03 lower at $283.27. This was down from $292.36 the previous week and was the lowest the cutout had been since August 2.
The USDA estimated cattle slaughter came in at 116,000 head Friday and 58,000 head for Saturday. This brought the total for last week to 657,000 head, up from 637,000 the previous week and 637,000 a year ago. Friday’s Commitments of Traders report showed managed money traders were net sellers of 3,613 contracts of live cattle for the week ending October 5, reducing their net long to 25,157 which is a long liquidation selling trend. Non-commercial & non-reportable traders combined were net sellers of 3,344, reducing their net long to 37,816.
While cocoa saw coiling price action last week, this resulted in the market starting this week’s action only 43 points away from climbing above Monday’s multi-year high. Although it may continue to have a bumpy ride due to the ebb and flow of global risk sentiment, cocoa’s bullish supply/demand outlook can help the market reach new high ground over the next few weeks. December cocoa was able to build on early strength as it finished Friday’s trading session with a sizable gain. For the week, December cocoa finished with a gain of 40 points (up 1.5%) and a second positive weekly result in a row.
The Commitments of Traders report for the week ending October 5th showed Cocoa Managed Money traders added 21,409 contracts to their already long position and are now net long 30,897. CIT traders added 4,421 contracts to their already long position and are now net long 33,919. Non-Commercial No CIT traders net bought 13,878 contracts which moved them from a net short to a net long position of 10,784 contracts. Non-Commercial & Non-Reportable traders added 20,242 contracts to their already long position and are now net long 40,600.
Severe frost events in Brazil’s Arabica growing areas sent coffee prices on a 66-cent rally (+44%) between July 6 and July 26. The market then fell 43 cents in one week. It has since formed a coiling pattern, with higher peaks and higher valleys. It has recovered more than 27 cents from early August and may be setting up for a sharp upside move. December coffee extended its recovery move as it finished Friday’s trading session with a moderate gain. For the week, however, December coffee finished with a loss of 2.70 cents (down 1.3%) which broke a 2-week winning streak and was a negative weekly reversal from Monday’s 2-month high.
ICE exchange coffee stocks rose by 4.873 bags on Friday, but remain more than 146,000 bags below their September month-end total. Coffee positioning in the Commitments of Traders for the week ending October 5th showed Managed Money traders net bought 2,603 contracts and are now net long 45,642 contracts. CIT traders added 67 contracts to their already long position and are now net long 54,680. Non-Commercial No CIT traders are net long 43,940 contracts after net buying 2,428 contracts. Non-Commercial & Non-Reportable traders net bought 1,822 contracts and are now net long 64,488 contracts.
December cotton closed lower last Friday after trading to yet another contract high and follow through selling early this week helped to confirm the peak. The key reversal is a technical sign of a potential near-term top. The buying pushed the market up to the highest level since July 2011. The market peaked and sold off about a half-hour after the release of the disappointing US September jobs data. Perhaps traders saw little if any bullish demand factor on the horizon and began to take profits.
For Tuesday’s USDA supply/demand report, the average trade expectation for US 2021/22 cotton production is 18.37 million bales with expectations ranging from 17.90 to 18.60 million. This would be down from 18.51 million in the September report. US exports are expected to come in around 15.61 million (15.00-16.00 million range), up from 15.50 million in September. Ending stocks are expected to come in at 3.44 million bales (3.16-3.75 million range), down from 3.70 million.
World production is expected at 119.22 million bales, down from 119.59 million in September, and world ending stocks are expected at 86.50 million versus 86.68 million previously. Friday’s Commitments of Traders Report showed managed money traders were net buyers of 2,144 contracts of cotton for the week ending October 5, increasing their net long to 96,743. Non-commercial & non-reportable traders were net buyers of 9,214, increasing their net long to 139,287.
Sugar prices have been in a coiling price pattern for over a month, but they continue to hold their ground above their mid-September lows. With a bullish supply outlook continuing to provide support, sugar could build on last week’s strength and rally back above the key 20.00 cent level. March sugar continued to build onto early strength as it finished Friday’s trading session with a sizable gain. For the week, March sugar finished with a gain of 23 ticks and a fourth positive weekly result in a row.
The Commitments of Traders report for the week ending October 5th showed Sugar Managed Money traders were net long 222,509 contracts after decreasing their long position by 4,186 contracts. CIT traders net sold 3,388 contracts and are now net long 188,874 contracts. Non-Commercial No CIT traders were net long 162,845 contracts after decreasing their long position by 453 contracts. Non-Commercial & Non-Reportable traders added 485 contracts to their already long position and are now net long 291,317.
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