Written Commentary
BONDS:
With treasury prices holding near last Friday’s 12 day high and upside breakout, the trade appears to have rekindled June rate cut hopes from several global central banks. Therefore, looming economic data in the form of several global inflation readings and a US monthly jobs report at the end of the week is likely to entrench the bull case especially as US data has clearly softened. In fact, last Friday’s US PMI and University of Michigan survey of consumer sentiment depicted weakness thereby extending a developing pattern of weak US data which began two weeks ago.
CURRENCIES:
While there is an emerging view of global slowing, the trade seems to be penalizing the dollar the most perhaps from disappointment that US growth has obviously tapered off. In fact, a lack of significant bullish reaction in the dollar to positive US data two weeks ago, suggests the dollar is generally out-of-favor and could remain so unless US jobs news for February show some residual strength. The February 27th Commitments of Traders report showed Dollar Non-Commercial & Non-Reportable traders net bought 197 contracts and are now net long 3,314 contracts.
Apparently the trade remains fond of the euro as recent scheduled data from the euro zone has not prevented a resurgence of ECB rate cut hopes for June. The Pound remains out-of-favor with a pattern of lower highs and lower lows settling into place over the prior two weeks.
STOCKS:
Global equity markets were generally higher at the start of this week with weakness seen in Japan, Australia, and Paris. With a generally positive bias from last week (and particularly from the strong Friday close) the bulls should extend their control into another trading week. Clearly, the revival of global rate cuts has added to a bullish environment created by the undying expectations of massive global profits from AI. However, last week investors pursued value stocks off what appears to be a bargain hunting buying trend.
GOLD & SILVER:
Apparently, expectations for a June US interest rate cut have returned which in turn fueled the most significant gold and silver rallies since early December. However, the CME Fed Watch tool did not show a significant increase in the probability of a June rate cut from just below 50% early last week to only 52.8% after the close Friday. Therefore, the gold and silver markets are anticipating the continuation of soft US and international data which has already resulted in widespread talk of euro zone, Japanese, and Canadian rate cuts in June.
In a surprising development, May silver joined the gold rally Friday with the most significant rally since early December. For the bull camp, the net spec and fund long in silver sits near seven-month lows, leaving silver with residual buying capacity.
COPPER:
The bulls received good news at the end of last week with headlines that the world’s largest copper producer (Codelco) indicating their 2023 output was the lowest in 25-years. Keep in mind, the major bull argument of the October through early December rally was expectations of ongoing tightening of aboveground global supply! However, the bull camp was dealt a significant blow by a veritable explosion in Shanghai copper warehouse stocks over the last two weeks. Fortunately for the bull camp, general sentiment toward China has improved, thereby helping the copper trade discount headwinds from building Chinese domestic supplies.
ENERGY COMPLEX:
While bullish fundamentals in crude oil have been somewhat mixed, the bulls have clearly extended their late February control. In our opinion, it feels like hope is being built in for a wave of global central bank rate cuts which seem to have sparked improved demand for physical commodities. On the other hand, news that OPEC+ will extend production restraint, hope for a massive Chinese stimulus package announcement tomorrow, residual signs of dollar weakness, indications US refinery activity will begin to recover from extended maintenance, and reports of increased global diesel demand provides the bull camp with classic fundamental fuel today. According to Bloomberg, except for a disruption of US refinery activity from a winter storm in 2021, US refinery activity is at the lowest level on a seasonal basis since 2011. It is also likely that a portion of recent gains were long-term value buying with the net spec and fund long positioning in crude oil remaining near the lowest levels of the last decade.
As indicated already, the prolonged period of very low US refinery activity has failed to bring down US product stocks in a material fashion. While EIA gasoline stocks have fallen in four of the last five weeks, inventories remain 5 million barrels above year ago levels and implied gasoline demand has been below last year and five-year average levels in five of the last six weeks.
BEANS:
Last week’s weekly reversal higher has given technical buyers some ammunition to start the week. Brazil port premiums are rising but the US is still not competitive. The March USDA supply and demand report will be out Friday and that will keep the focus on large supplies later this week. The March report is when USDA is more likely to be more aggressive in adjusting South American production and we expect them to shave 3 to 4 million tonnes off their Brazil estimate. An independent research firm updated their Brazil production number to 143.92 million tonnes, down 5.5 million from their previous estimate. Mato Grosso harvest is 85% complete. There were 225 bean deliveries over the weekend, and once again commercial grain firm, Bunge, stopped the majority.
CORN:
The technical recovery is likely to continue this week into Friday’s USDA supply and demand report and we give the edge to the bull camp. China has been on a feed grain buying spree over the last 10 days as they follow the directions of their National Development and Reform Commission’s request to import more feed grains to stabilize supply. Rumors of Chinese purchases of US corn remain unconfirmed, but prices are competitive off the Pacific Northwest Coast. Mato Grosso Safrinha planting is 90% done. The 6 to 10 day forecast shows more above normal temperatures for most of the Midwest. The Eastern corn belt has chances for rain in the next 10 days. The daily and weekly upside reversals last week will likely mean buyers will be looking to go long on a break. The question is, how far can we rally now without a US weather problem yet?
WHEAT:
Chicago May wheat made a new contract low at the start of this week and the bear camp is strengthening its grip as US prices have been unable to fight off the weakness in world wheat values. There were 318 SRW deliveries. Poland said they are considering asking the EU to ban Russian and Belarus farm products. Ukraine’s Ag Minister says he is worried that the recruitment of additional soldiers may leave farmers shorthanded as the spring planting season starts. In a bit of positive news, ABARES estimated Australian wheat production for 2023/24 at 26 million tonnes down 36% from the previous year.
HOGS:
An outside day higher close on Friday will start April hogs off in a positive technical stance this week, poised to test the nine-month highs. The USDA pork cutout was sharply higher on Friday, coming in at $92.63, up $3.35 from Thursday and up from $90.06 the previous week. This was the highest it had been since October 9. Bellies led the move higher with a gain of $25.97. The CME Lean Hog Index as of February 28 was 80.15, up from 79.91 the previous session and 78.78 the previous week. The USDA estimated hog slaughter came in at 484,000 head Friday and 106,000 head for Saturday. This brought the total for last week to 2.549 million head, down from 2.578 million the previous week but up from 2.523 million a year ago.
CATTLE:
April cattle have continued their nearly month-long consolidation. US beef and live cattle prices are firm, and beef production continues to lag year ago levels, at that provides underlying support to the futures. The USDA boxed beef cutout came in at $305.28 on Friday, up $1.08 from on Thursday and up from $300.61 the previous week. This was the highest it had been since October 30. Cash live cattle were around 50 cents higher last week. As of Friday afternoon, the five-day, five-area weighted average price was $183.12, up from $182.91 the previous week. The USDA estimated cattle slaughter came in at 100,000 head Friday and 4,000 head for Saturday.
COCOA:
May cocoa gapped higher overnight and appeared to be on its way to test the contract high from February 26. The market has become more volatile each time it has reached another new all-time high, and demand concerns have tended to reemerge on the moves. The International Cocoa Organization (ICCO) last week forecast a global production deficit of 374,000 tonnes for 2023/24. This was their first official forecast for the marketing year, but it was not a big surprise. This would be the third straight deficit and the largest since records began in 1960. Chocolate maker Barry Callebaut projected an even larger deficit of 500,000 tonnes and another deficit for 2024/25 of 150,000. The trade is awaiting the start of the west African mid-crop production, which usually begins in April.
COFFEE:
May coffee was higher early this week as it continued to consolidate inside a range defined by the December high and the January low. Recent rainfall over Brazil’s major Arabica growing regions has weighed on coffee prices after their extended dry period earlier this year, but this is offset by ongoing tightness in global robusta supplies. The main growing region of Minas Gerais, Brazil has a greater than 50% probability of rain Tuesday and Wednesday, but chances drop off for the rest of the week. ICE exchange coffee stocks rose by 6,941 bags on Friday to reach a new high for the year. Honduran coffee exporters shipped 26% more beans in February than they did a year earlier, but this was due to delays in January that pushed more exports into the next month, according to the Honduran coffee institute, IHCAFE. October-February shipments totaled 1.363 million bags versus 1.377 million a year ago.
COTTON:
May cotton extended its recent collapse from contract highs at the start of this week as specs continued to bail out of bullish positions. The fund net long had reached its highest level over two years ahead of last week’s selloff, which left the market vulnerable to heavy selling. Friday’s Commitments of Traders report showed managed money traders were net buyers of 7,959 contracts for the week ending February 27, the day before the market peaked. In just five weeks, they had increased their net long to 94,038 from a net short of 2,016.
SUGAR:
May sugar broke below key technical support levels last week, and it could be heading for a test of the December low. The market has been pressured by a larger than expected delivery against the March contract, which was the second largest delivery for March on record. Brazil’s record sugar production has filled-in a large portion of the global export shortfall, and they were the origin for all the deliveries. Recent rainfall over Brazilian cane growing regions is viewed as beneficial for their upcoming (2024/25) crop, and the forecast shows regular rains in five of the next seven days.
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