Written Commentary
BONDS:
The bullish resiliency of the bond market won out again last Friday as the ultimate takeaway from the US employment situation report should have been bearish to prices. However, a significant washout in equities at midsession rekindled flight to quality interest in treasuries despite an extremely hot ISM services prices paid reading for November. The ISM services prices paid increase is an inflationary threat that should have undermined bonds and notes. We are surprised to see March bond prices falling off last week’s spike high given the number of concerning Covid omicron infections being reported around the globe. However, treasury bonds were significantly overbought from a 7-day low to high rally of seven points and a certain measure of technical balancing in the form of “chop” is likely.
CURRENCIES:
The action in the currency markets last Friday was surprising as the dollar was strong while the euro, Swiss franc, and Yen were strong. However, a measure of flight to quality interest in the dollar from the headline under shoot nonfarm payroll reading combined with saber rattling by Russia toward Ukraine leaves the dollar in favor. The path of least resistance in the dollar is up but the fundamental justification for the rally is lacking as US monthly nonfarm jobs readings were patently disappointing (from the headline result).
The euro is falling from favor because of the perception it will be very difficult to control the spread of a highly infectious Covid variant. It is also likely that the euro is under pressure from a weaker than expected Sentix investor confidence reading for December. Lastly, the euro should remain off balance and soft because the environment for recovery currencies is negative. Euro positioning in the Commitments of Traders for the week ending November 30th showed Non-Commercial & Non-Reportable traders net sold 5,285 contracts and are now net long 5,188 contracts.
STOCKS:
After showing positive early action, the stock market reversed course and fell sharply last Friday. The markets were initially undermined because the headline nonfarm payroll number disappointed. However, other employment related data countervailed the headline reading and subsequent US scheduled data from ISM, factory orders and prices paid from the ISM should have provided support to the market. Unfortunately for the bull camp, Goldman predicted the US Federal Reserve will end up doubling the rate of tapering initially forecast, and may have fueled end-of-week long liquidation across equity markets. Global equity markets at the start of this week were mixed with markets in Japan, China, Russia, Australia, and Hong Kong trading fractions lower and the rest of the world trading less than 1% higher.
Fortunately for the bull camp, the S&P has managed to reject the sub 4500 level on 3 occasions and is trading moderately above that level to start the new trading week. However, the rally was somewhat suspect and tentative. It should be noted that several brokerages have indicated the current correction is a buying opportunity which seems to discount the potential severe turmoil off the virus. With early health experts suggesting omicron is highly transmissible and infections of the new variant reported in more than 15 US states, the infectiousness could be determined quickly. In short virus, jobs, and Fed news all favors the bear camp. The November 30th Commitments of Traders report showed E-Mini S&P Non-Commercial & Non-Reportable traders net bought 46,768 contracts and are now net long 199,604 contracts.
The loss of large-cap/brick-and-mortar companies is the gain of NASDAQ/tech companies. However, Chinese regulatory action toward tech companies like Didi leaves some investors concerned. From a technical perspective, the NASDAQ rejected a slide below its 200-day moving average on two occasions last week and the index appears to have made a significant bottom and managed that on an increase in trading volume over the prior 6 trading sessions! Nasdaq Mini positioning in the Commitments of Traders for the week ending November 30th showed Non-Commercial & Non-Reportable traders are net long 24,256 contracts after net buying 3,202 contracts.
GOLD, SILVER & PLATINUM:
The gold market did forge a fresh 3 day high early this week but relinquished those gains in the face of a strong dollar and a partial risk off global equity market vibe. Apparently, news that the Perth Mint November gold sales almost doubled and noted early gains in crude oil are of little benefit to the bull camp in gold. It should also be noted that Perth Mint sales of silver increased in November to 1.53 million ounces from only 1.35 million ounces in October. The gold and silver trade is at least partially off balance because of the Goldman Sachs forecast predicting the US Federal Reserve will be forced to “double” its tapering rate in the months and quarters ahead.
With the March palladium contract respecting/rejecting the $1,700 level on five occasions last week, that level appears to offer some measure of technical value. The market might also be drafting support from a 10,676-ounce single day inflow into palladium ETF holdings last Thursday. Palladium ETF holdings are now 12% higher year-to-date. Fortunately for the bull camp, the net spec and fund positioning in palladium remains net spec and fund short, with the latest reading only 307 contracts above its “record short” position. The November 30th Commitments of Traders report showed Palladium Managed Money traders net sold 1,567 contracts and are now net short 2,738 contracts. Non-Commercial & Non-Reportable traders are net short 3,360 contracts after net selling 1,395 contracts.
COPPER:
Like many physical commodity markets, the copper market continues to fail to regain its 200-day moving average and has spent a significant amount of trading time below that level since November 26th. The market might be undermined because of a forecast on Bloomberg projecting that global mined supply of copper will rise in each of the next 2 years and because of reports that Chinese regional copper supply was building. However, the latest Shanghai copper warehouse stocks decline, produced the lowest stock levels since May 2009 leaving supply side fundamentals supportive. Surprisingly, there has been little in the way of news on the number of omicron infections in China and with infections throughout the world leaping, we suspect the same is taking place inside China.
ENERGY COMPLEX:
Energy prices were tracking sharply higher at the start of this week off chatter that the omicron virus might not present severe health problems. The markets are also drafting lift from the looming beginning of Iranian talks and from comforting Saudi confidence that demand will hold up in the face of the latest variant. Furthermore, crude oil in floating storage declined by 15% in the past week with Asian-Pacific stock levels down by 18% and Europe stocks down by 15%. In yet another partial technical bullish development the United States oil fund (USO) saw the largest daily inflow since August 2020 last Friday which could indicate surging oil investor interest in “picking a bottom”. We see the ability to raise prices into Asia by the Saudis as a sign that Asian demand remains strong.
Like the crude oil market, the gasoline market managed to reject the spike down move last Thursday but remains within a downtrend formation. With European crack margins soft to end last week, troublesome US daily infection readings and suggestions from the US President that retail gasoline prices are now “falling”, the bear camp has several themes operating in its favor. On the other hand, the most recent spec and fund long positioning in gasoline fell in the recent COT report and with the market falling $0.06 after the report was measured, the spec and fund long positioning in RBOB is probably the lowest since September 21st.
With a severe gap down washout to start the new trading week, a violation of the psychological $4.00 level, falling gas/electric prices in Japan and mild/warm temperatures in the US, more declines are likely. On the other hand, further significant losses in natural gas prices could soon result in the highest net spec and fund short positioning since March 2020! The November 30th Commitments of Traders report showed Natural Gas Managed Money traders net sold 5,438 contracts and are now net short 7,087 contracts. Non-Commercial & Non-Reportable traders are net short 93,539 contracts after net buying 3,447 contracts. As indicated already, US temperatures out to midmonth show a very large portion of the US posting above normal temperatures which in turn is likely to put 2021/2022 winter heating degree days even further below normal levels.
BEANS:
The Argentina forecast is still mostly dry for the next two weeks but there is a little more coverage for week two. A drier trend in South America may have helped support the market Friday as traders are nervous with only scattered rains in the two week forecast for Argentina. While demand factors remain mostly positive, it may still take a weather issue in South America in order to expect any tightness for the season. January soybeans closed sharply higher on the session Friday and experienced the highest close since November 23. The market managed to close 14 1/2 cents higher on the week. A recovery and stability in energy markets helped to support soybean oil, while the meal market continues to find strength from strong domestic cash market.
The Brazil government kept its biodiesel mixture at 10% for 2022 instead of raising it to 13%/14% which was planned. This triggered a sharp break in soybean oil which might make oil more competitive on the world vegetable oil market. In addition, this could spark smaller than expected crush in Brazil which could tighten meal supply. For the USDA supply/demand report this week, traders see slight revisions lower for Brazil and Argentina soybean production. However, traders expect US ending stocks to come in near 352 million bushels, 325-411 million range, as compared with 340 million bushels last month. World ending stocks are expected near 104.13 million tonnes, 103.00-105.20 million range, as compared with 103.78 million tonnes last month.
CORN:
The outlook for the next two weeks has very little rain for parts of southern Brazil, Paraguay and much of Argentina as La Nina dryness conditions are persistent. While soil moisture in lots of areas is drying up, traders still believe that a shift to a wetter weather pattern would help. For now, however, until that occurs, the market should be well supported. For the USDA supply/demand report, traders see ending stocks coming in near 1.487 billion bushels, 1.420-1.576 billion range, as compared with the November USDA estimate of 1.493 billion bushels. Traders expect a slight increase in Brazil corn production for the report and a slight decline for Argentina. World ending stocks are expected near 304.47 million tonnes, 302.21-306.20 million range, as compared with 304.42 million tonnes last month. March corn closed sharply higher on the session Friday and up for the third day in a row. Even with the strong recovery, the market closed 7 3/4 cents lower on the week.
WHEAT:
March wheat closed sharply lower on the session Friday, and the chart pattern is a bit bearish. The break left the market down 36 1/2 cents for the week. Russia is considering export quotas, there is more rain in the Australia forecast and end-user buyers are still active in the international tender market. This is mostly positive news, so the sharply lower close is a concern for the bulls. While the durum wheat crop was low, Statistics Canada pegged all wheat production at 21.7 million tonnes which was unchanged from their previous estimate but came in higher than the average trade estimate at 21.2 million tonnes.
For the USDA supply/demand report, traders see ending stocks near 589 million bushels, 573-632 range, as compared with 583 million bushels in November. World ending stocks are expected near 276.30 million tonnes, 273.50-279.00 range, as compared with 275.80 million tonnes in November. The November 30th Commitments of Traders report showed Wheat Managed Money traders reduced their net long position by 11,763 contracts to a net long 6,200 contracts. CIT traders are net long 120,363 contracts after net selling 3,453 contracts. For KC Wheat, Managed Money traders are net long 62,368 contracts after net selling 3,241 contracts. Non-Commercial & Non-Reportable traders were net long 53,180 contracts after decreasing their long position by 2,187 contracts.
HOGS:
Choppy trade may continue over the near-term after February hogs closed moderately lower on the session Friday. The sharp turn higher in the pork product market led by hams and bellies helped to support the solid gains Thursday. Supply has a tendency to peak for the year in early December and if pork product prices are showing a tendency to bottom out, futures could be probing for a low. However, the USDA pork cutout, released after the close Friday, came in at $78.97, down $6.88 from Thursday and down from $81.68 the previous week. This was the lowest the cutout had been since February 3rd and could be an indication that the cash market has still not found a low. The market traded below key support at 79.37 three times last week but closed well above the support level. The CME Lean Hog Index as of December 1 was 70.86, up from 70.27 the previous session but down from 72.56 the previous week.
The USDA estimated hog slaughter came in at 479,000 head Friday and 265,000 head for Saturday. This brought the total for last week to 2.667 million head, up from 2.261 million the previous week (Thanksgiving) but down from 2.786 million a year ago. Estimated US pork production for the week ending December 4 came in at 576.7 million pounds, up from 487.9 the previous week and down from 612.4 a year ago. Friday’s Commitments of Traders report showed managed money traders were net buyers of 897 contracts of lean hogs for the week ending November 30, increasing their net long to 56,373. Non-commercial & non-reportable were net buyers of 2,581, increasing their net long to 43,567.
CATTLE:
The strong export pace remains a positive force for the market, as it should keep supply tight into the first quarter. US beef cumulative export sales for 2021 have reached 1.043 million tonnes, up from 903,200 a year ago and the highest on record for this point in the year. China has purchased 184,300 tonnes from the US this year, compared to 58,000 tonnes at this point last year and 9,600 two years ago. The USDA boxed beef cutout was up $1.92 at mid-session Friday and closed $2.34 higher at $274.36. This was down from $280.01 the previous week. The cash live cattle market was quiet on Friday, with 142 head reported in the five areas at an average price of 140.90.
The 5-year average weekly weight for that week is 835.4. Estimated beef production for the same week came in at 562.5 million pounds, up from 561.6 million a year ago. The USDA estimated cattle slaughter came in at 119,000 head Friday and 69,000 head for Saturday. This brought the total for last week to 676,000 head, up from 566,000 the previous week (Thanksgiving) and up from 669,000 a year ago. Friday’s Commitments of Traders showed managed money traders were net buyers of 9,484 contracts of live cattle for the week ending November 30, increasing their net long to 78,517. Non-commercial & non-reportable traders were net buyers of 9,197, increasing their net long to 80,818.
COCOA:
Cocoa prices were able to shake off a negative shift in global risk sentiment to extend their winning streak to 3 sessions. While near-term demand remains a front and center issue, cocoa is showing more signs that a longer-term low may be in. March cocoa built on early strength and shook off midsession and late pullbacks to finish Friday’s trading session with a moderate gain. For the week, March cocoa finished with a gain of 71 points (up 3.0%) which was a third positive weekly result over the past 4 weeks as well as a positive weekly reversal from Wednesday’s 4 1/2 month low.
The November 30th Commitments of Traders report showed Cocoa Managed Money traders net sold 26,887 contracts which moved them from a net long to a net short position of 24,370 contracts. CIT traders reduced their net long position by 3,546 contracts to a net long 22,037 contracts. Non-Commercial No CIT traders added 19,081 contracts to their already short position and are now net short 27,548. Non-Commercial & Non-Reportable traders net sold 26,657 contracts which moved them from a net long to a net short position of 15,790 contracts.
COFFEE:
Coffee prices have held up relatively well to near-term demand concerns as larger at-home consumption was able to offset a large portion of the lost restaurant and retail shop demand during the COVID pandemic. As a result, significant supply issues from many of the world’s major-producing nations have kept coffee within striking distance of new multi-year highs. March coffee was able to break out of a near-term consolidation zone to the upside as it finished Friday’s trading session with a sizable gain. For the week, March coffee finished with a gain of 0.40 cent (up 0.2%) which was a fourth positive weekly result in a row.
Front month London Robusta coffee reached their highest levels since August 2011, and that provided early support to New York Arabica coffee futures. In addition to their supply issues, Major Arabica-coffee producing nations are dealing with a global shortage of shipping container which provided additional support to the coffee market. Brazil has dealt with drier than normal conditions since last year, severe frosts in July and have a La Nina weather event through the first quarter of 2022. As a result, Brazil is wildly expected to have production problems for the 2022/23 and 2023/24 seasons, which gave coffee prices a further boost going into the weekend. Costa Rica’s November coffee exports came in more than 22% below last year’s total, with their 2021/22 production expected to come in 6% below last season’s total.
COTTON:
March cotton closed higher on Friday for the first positive daily result since the session before Thanksgiving. There were reports of mills taking advantage of the recent price break and putting in orders to buy. However, the market gave up most of its gains by end of the session, and the market closed just slightly higher on the day. The break last week took the market almost to the 0.382 retracement of the April-November rally. Talk of a bumper crop in northwest China this year has added to the more negative tone for the market this year.
Friday’s Commitments of Traders report showed managed money traders were net sellers of 6,050 contracts of cotton for the week ending November 30, reducing their net long to 77,743. Non-commercial, no CIT traders were net sellers of 8,985 contracts, reducing their net long to 77,409. Non-commercial & non-reportable traders were net sellers of 14,295, reducing their net long to 110,684.
SUGAR:
Since the US Thanksgiving holiday, sugar prices have moved sharply to the downside as they reached a four-month low on December 2. With the market well below its November highs, sugar could see a significant recovery over the next few weeks. March sugar had trouble holding onto early strength, but held its ground above Thursday’s 4-month low as they finished Friday’s trading session with a moderate gain. For the week, however, March sugar finished with a loss of 60 ticks (down 3.1%) which was a third negative weekly result in a row.
The November 30th Commitments of Traders report showed Sugar Managed Money traders were net long 178,233 contracts after decreasing their long position by 50,752 contracts. CIT traders net sold 2,225 contracts and are now net long 192,490 contracts. Non-Commercial No CIT traders net sold 46,791 contracts and are now net long 111,098 contracts. Non-Commercial & Non-Reportable traders were net long 230,365 contracts after decreasing their long position by 70,158 contracts.
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