While the treasury bond market forged a 3 day high last Friday, the regularly scheduled US data was countervailing. Certainly, there were some hot inflation readings, but the ISM employment index was disappointing and that could have ramifications for next week’s payroll report. In fact, the soft ISM employment index reading follows 3 straight weeks of increased initial claims and that should lead some economists to expect a disappointing nonfarm payroll reading this Friday. In retrospect, macroeconomic news from inside and outside of the US has been indicative of a softening of global economy with the US and China posting concerning jobs and slack manufacturing information.
With the dollar attempting to return to last Thursday’s high and then recoiling aggressively, some traders feel a temporary top has been forged. However, economic data from the US last week was disappointing, leaving economic uncertainty in place and a flight to quality bid in the dollar trade. At this point, non-dollar currencies fail to have a strong fundamental bull case to stand up to residual dollar strength. From a technical perspective, the dollar index did reach a significant short-term overbought condition into last Thursday’s high, and a measure of corrective action is justified.
The feeble bounce in the euro from an extreme 3-day oversold condition suggest the bull camp is lacking interest and numbers. However, the “trend” in the dollar remains up and we suspect disappointing US data from the job sector will return buyers to the dollar and sellers to the euro. While not a significant influence on the track in the euro, a European Sentix Investor Confidence report for October registered a disappointing number. Euro positioning in the Commitments of Traders for the week ending September 28th showed Non-Commercial & Non-Reportable traders net sold 11,965 contracts and are now net long 30,429 contracts.
As in other non-dollar currencies, we see the Yen action this week as a mere technical balancing recovery and not a sign of a major low following last week’s recovery action. While there have been some favorable Japanese numbers recently, the action in the currency remains on the ebb and flow of dollar action. Obviously, the Swiss franc was extremely oversold from a technical perspective into last week’s low and the rally on Friday and the attempt to firm again this week appears to be almost fully the result of a minor corrective setback in the dollar. While Swiss domestic information has been a minimal influence on the currency, a 0% Swiss CPI month over month reading is negative to the Swiss.
While the shortage of fuel in UK is a negative for the Pound, that issue is a background item. As in other non-dollar currencies this week, the rally in the Pound appears to be a corrective balancing reaction and not a fundamental shift! The outlook for the Canadian is positive relative to other non-dollar currencies, as the currency has shown positive correlation with the dollar and Canada has seen upbeat economic data from the hospitality sector and from recent factory activity readings. From a technical perspective, the Canadian has also breached a 4-month-old downtrend channel resistance line three times since early September.
The equity markets initially forged a downside breakout extension last Friday before recovering back into positive territory. The markets were supported because of suggestions from General Motors that the chip shortage was moderating, but an even bigger bullish development was the major pharmaceutical breakthrough by Merck with a “pill” alternative to the Covid 19 vaccine. An issue that could serve to hold back equities this week came from ratings agency Fitch who warned of a possible debt rating warning if US debt ceiling negotiations put the US in turmoil at the end of this year. Global equity markets were mostly lower early this week as negative news from Evergrande and Facebook creates a negative bias to start. On a positive note, Johnson & Johnson plans to seek authorization of its booster shot this week.
While fundamental conditions remain bearish for the S&P into the new trading week (recent soft data and hawkish Fed views), we would note last Friday forged a classic Hightower Report bottom signal. Our classic bottoming signal in the S&P contract unfolds with a large range down new low for the move, with a reversal recovery in that session back above the midpoint of the washout range. The middle of the Friday washout range is 4312 and that looks to be a key pivot point early this week. However, for the bull camp to come away from this week’s action with definitive control will likely require a shift in tapering psychology from disappointing jobs reports throughout the week. E-Mini S&P positioning in the Commitments of Traders for the week ending September 28th showed Non-Commercial & Non-Reportable traders were net long 110,873 contracts after increasing their already long position by 1,700 contracts.
The Dow futures also forged a big range down reversal last week which partially shifts a very bearish technical condition temporarily toward the bull camp. However, the environment for Big Stocks remains suspect with the index monitoring the action in treasury prices closely. Therefore, we see the potential for a major shift in psychology this week, from growth to the potential for a delay in US tapering. However, at least in the early trade this week, sloppy US data could be a negative to Dow pricing. The Commitments of Traders report for the week ending September 28th showed Dow Jones $5 Non-Commercial & Non-Reportable traders were net short 1,978 contracts after decreasing their short position by 7,910 contracts.
With the NASDAQ the laggard among the key traded stock index futures and in the cash markets, economic data looks to favor the bear camp, especially with the whistleblower problem at Facebook. Like other measures of the market, soft US data initially favors the bear camp before that type news suddenly becomes positive for equities after Friday’s nonfarm payroll report. The September 28th Commitments of Traders report showed Nasdaq Mini Non-Commercial & Non-Reportable traders went from a net long to a net short position of 6,727 contracts after net selling 14,390 contracts.
GOLD, SILVER & PLATINUM:
While December gold did manage a 7-day high early this week, the market was unable to hold those gains and fell back to the psychological support level of $1,750. It is likely that the initial pulse up move was the result of weakness in the dollar index and fresh concern toward Evergrande, but the dollar does not appear to be poised to fully reverse the September and early October rally. On the other hand, in the event the dollar index falls below a key pivot point of 93.78, that would put the currency index back in the June through mid-September sideways consolidation and squelch a large measure of bearish sentiment flowing toward gold from the currency markets. Fortunately for the bull camp, the dollar seems to have stalled below the 94.50 level, but the trend remains up and therefore problematic for the longs in gold.
From a bigger picture perspective, the downtrend in the gold market that began in August 2020 remains in control). Given the significant range down action in December silver last week, we suspect the net spec and fund long in silver has reached the lowest level since June 2019. The September 28th Commitments of Traders report showed Silver Managed Money traders are net long 3,518 contracts after net buying 2,618 contracts. Non-Commercial & Non-Reportable traders were net long 27,876 contracts after increasing their already long position by 1,257 contracts. In other words, weak handed longs have probably been largely liquidated in silver thereby increasing the potential for respecting value and support at $22.
While the palladium market garnered some support from General Motors comments suggesting that the chip shortage was leveling out and that 4th quarter car production would be steady, demand expectations are not being embraced in the marketplace. However, the most recent COT positioning report showed a fresh record “net spec and fund short” in palladium. The September 28th Commitments of Traders report showed Palladium Managed Money traders hit a new extreme short of 2,357 contracts. Managed Money traders net sold 659 contracts and are now net short 2,357 contracts.
Palladium Non-Commercial & Non-Reportable traders hit a new extreme short of 3,672 contracts. Non-Commercial & Non-Reportable traders were net short 3,672 contracts after increasing their already short position by 577 contracts. While the platinum net spec and fund long is nearing the lowest levels since February 2019, the market lacks bullish fundamental forces and supply news has been thin. Platinum positioning in the Commitments of Traders for the week ending September 28th showed Managed Money traders are net short 7,142 contracts after net buying 6,348 contracts. Non-Commercial & Non-Reportable traders are net long 10,840 contracts after net buying 3,424 contracts.
In retrospect, both the US and China have disappointed the copper market with slack economic data and with an ongoing holiday in China, the copper market might lack buying interest. However, US daily infections are on the decline, and we suspect the Chinese are stimulating their economy in the background. From the demand front it is a positive that Japanese smelter Mitsubishi announced it expects second half output to increase by 14.5%. However, last week’s slide below $4.25 suggests the new range directly ahead might be $4.25 and $4.00.
With global economic views suspect over the past 2 weeks and floating storage of crude oil increased by 15 weeks, the energy markets instead appear to be confident in a persistent pattern of recovery of energy demand. In fact, the entire energy complex ranged up sharply in forged new contract highs at the end of last week. More impressively, the markets forged recent gains in the face of chatter of rising OPEC output! In fact, the trade is likely facing an increase in overall OPEC production partly because OPEC+ last week hinted at raising production by more than their current production return deal had scheduled.
Apparently, the markets were not fearful that OPEC+ would follow through on a greater than prescribed increase in output, perhaps because of other reports noting that the oil cartels have consistently over complied with production limits. According to a weekend report, the trade now sees US shale to fall short of meeting a return to normal global energy demand. Therefore, it is not surprising for the market to have discounted news that US drillers increased activity for the 4th week in a row. This week the Baker Hughes oil rig operating count posted 7 additional drilling rigs in the US with 3 offshore rigs returned to service last week.
In addition to leading the complex with the least supportive US inventory data, the gasoline market also continues to hold a surprisingly modest net spec and fund long! In fact, the net spec and fund long is near the lowest levels in 4 years! The September 28th Commitments of Traders report showed Gas (RBOB) Managed Money traders are net long 52,310 contracts after net buying 3,277 contracts. Non-Commercial & Non-Reportable traders are net long 49,616 contracts after net buying 5,537 contracts. As indicated already, expectations of demand improvement are apparently lifting prices even though standard demand readings like EIA weekly implied gasoline demand have not shown consistent improvement.
The soybean market is in a short-term downtrend and probing for some type of support. Beginning stocks for the new crop season came in well above trade expectations last week as there was an upward revision in production for 2020, and also a significant slowdown in demand during July and August. In addition, harvest is just accelerating in the US and yields continue to come in above trade expectations. Traders will monitor the weather situation in Brazil closely, but it is likely too early to be concerned with the lack of moisture in some areas of Mato Grosso. Palm oil prices surged to new highs last week with a pickup and demand from China and India.
The corn market remains in a short-term uptrend since the September 10th USDA report. December corn closed moderately higher on the session Friday and experienced the highest close since late August. The market managed to close 14 3/4 cents higher for the week. The market found strength from sharply higher wheat prices, a firm tone to cash markets and positive technical action. Continued talk that yield is not coming in as high as producers expected has provided underlying support. On top of strength from the wheat market, December oats rallied to 5.95, the highest since 2014 as tight supply from Canada continues to support. Brazil exported 2.855 million tonnes of corn in September, down from 4.349 million in August and down from 6.371 million tonnes last year.
The technical action in the wheat market is bullish and the close above 744 1/2 for December wheat leaves the market in a position for a resumption of the major uptrend. The buying Friday pushed the market up to the highest level since August 17. Another new contract high for milling wheat futures in Paris plus weakness in the US dollar and a positive tilt to outside market forces were all seen as positive factors. For the week, December wheat closed up 31 1/2 cents. Fears of inflation has sparked more active buying from key world importers.
While we can’t rule out more buying from fund traders, the hog market seems to have priced-in much of the sharp reduction in supply versus trade expectations for the September USDA hogs and pigs report. Short-term, the market looks a bit overbought and if pork values turned down, cash markets could drift lower as supply increases in the next month. December hogs were quiet on Friday as traders are absorbing the massive increase in price with a gain of 812 points for the week, up 10.5%. China was a good buyer in the weekly export sales report, but traders are hesitant to believe that they will continue to be an aggressive buyer given the collapse in China pork prices so far this year.
The cattle market is still probing for some type of near term low, but the continued weakness in the beef market and the cash cattle market, plus the premium structure of futures above cash are factors which have led to lower trade for December cattle for the sixth session in a row on Friday. The COT report shows a long liquidation selling trend and technical indicators are not at an extreme as of yet. December cattle closed down 295 points for the week last week. The technical action remains weak and the beef market remains in a steep downtrend in recent weeks.
For much of the 2020/21 season which ended on September 30, cocoa prices felt pressure from the supply and demand sides of the market. Cocoa saw a sharp turnaround last week, climbing more than 170 points (+6.7%) after putting in a four-week low on Tuesday as the 2021/22 season will begins with a notable change in tone on the production side. December cocoa continued to see upside follow-through from Tuesday’s positive daily reversal as it shook off early pressure and reached a new 2021 high before finishing Friday’s trading session with a sizable gain.
Coffee prices started October and the fourth quarter by breaking out of their near-term consolidation zone as bullish supply factors in Brazil and an improving global demand outlook are providing underlying support to the market. With both likely to continue through the end of this year, coffee should be heading for a retest of its 2021 high from late July over the next few weeks. After a subdued start, December coffee drove sharply to the upside and reached a new 2-month high before finishing Friday’s outside-day trading session with a very large gain.
December Cotton rallied 21% in nine trading sessions, and it posted new contract highs for five straight sessions. If global economic concerns emerge, buyers could back away and sellers could turn more active. The recent rally made sense when the two of the world’s largest exporters (US and India) were seeing excessive rainfall right into harvest and the world’s largest importer (China) was aggressively buying on the world market. There are reports that China has had crop issues as well. While global stocks are tightening and US ending stocks look lower, there seems to be plenty of cotton around to reach near-term demand. World ending stocks for the 2021/22 season are forecast at 86.68 million bales, which represents 70% of a year’s consumption.
Sugar continues to see coiling price action at the start of the fourth quarter, but has been unable to break out of a consolidation zone that it has held in since early last month. With key outside markets and Brazilian supply issues working in its favor, however, sugar could turn back to the upside early this week. March sugar kept within a fairly tight range, but could not follow-through on Thursday’s outside-day higher as it finished Friday’s inside-day session with a moderate loss. For the week, March sugar finished with a gain of 13 ticks (up 0.7%) which was a third positive weekly result in a row.
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