Weekly Futures Market Summary Feb 14 22

BONDS:

Despite a significant oversold condition bond and note prices were pinned down to last week’s spike low. With energy prices forging another strong rally, grain prices surging, and the dollar steady traders were uninterested in bargain hunting buying and failed to rally off a much softer than expected Michigan consumer sentiment index for February that was nearly 6 points below expectations! However, Treasury received significant safe-haven inflows following reports that Russia may invade Ukraine next week. Obviously, the treasury markets are garnering flight to quality lift at the start of this week along with the dollar and precious metal markets.

A Reuters story suggesting hedge funds have “caught and positioned for” a “seismic” shift in US interest rate market fundamentals. The weekly positioning report showed both bonds and notes to be holding significant speculative short positioning. The February 8th Commitments of Traders report showed Bonds Non-Commercial & Non-Reportable traders reduced their net short position by 1,415 contracts to a net short 67,310 contracts. T-Notes positioning showed Non-Commercial & Non-Reportable traders reduced their net short position by 28,827 contracts to a net short 565,126 contracts.

CURRENCIES:

Once again the dollar index forged a significant range up new high for the move late last week following reports that Russia may invade Ukraine this week. We were not surprised to see the Pound firm as UK economic data was generally positive and economists are suggesting the omicron flare did not hold back the UK economy as much as was feared. Countervailing the bullish inflationary news flowing from the US is the fact that inflation has been documented in a long list of countries. The dollar along with treasuries and precious metals are benefiting from uncertainty over the Ukraine battle for survival.

The Euro is out of favor to start this week, as the Ukraine situation could spark an explosion in energy costs throughout Europe. In fact, natural gas prices in the futures market have gapped higher with price levels in European cash markets also up sharply. Furthermore, the euro remains under pressure because of ECB foot dragging on when they will shift policy toward tightening. The Commitments of Traders report for the week ending February 8th showed Euro Non-Commercial & Non-Reportable traders were net long 70,119 contracts after increasing their already long position by 18,349 contracts.

In addition to a significant oversold technical condition off the slide from the middle of last week, the Yen is seeing some fundamental flight to quality buying. However, strength in the dollar should keep the Yen off balance and in turn leave the Yen capable of sliding back to the early January lows. Furthermore, the Yen will likely remain out of favor as the Bank of Japan has indicated they will intervene to keep interest rates low. With a pattern of lower highs in place since the beginning of the month, and the Swiss franc hovering near extremely critical support levels on the charts, a key trend decision looks to be in the offing. Unfortunately for the bull camp, the initial view toward the Swiss franc is bearish which is surprising considering the Swiss franc historically has been a haven instrument.

STOCKS:

While the equity market waffled around both sides of unchanged in the early trade last Friday, the markets in general did impressive job in standing up to a significant rising interest rate threat. However, the bull camp burned through a lot of favorable corporate earnings news this week without sustaining the recovery from earlier in the week. As a result, US equity markets were vulnerable to their late downdraft following reports that Russia may invade Ukraine next week.

With a range down new low for the move to start this week, the S&P is obviously starting the week out under duress. As indicated already, the markets are fighting two major bearish themes of rising rates and the prospect of war. Unfortunately for the bull camp, the net spec and fund long positioning in the S&P is problematic for the longs and is likely feeding stop loss selling into the equation to start the new trading week. The Commitments of Traders report for the week ending February 8th showed E-Mini S&P Non-Commercial & Non-Reportable traders were net long 197,950 contracts after increasing their already long position by 8,429 contracts.

With a big range down trade to start the new week the technical and fundamental condition for the Dow Jones is bearish. In fact, with flight to quality markets like treasuries, gold, silver, and the dollar in favor early this week, we expect equities to open weak and slide from there. The Commitments of Traders report for the week ending February 8th showed Dow Jones $5 Non-Commercial & Non-Reportable traders were net short 5,613 contracts after decreasing their short position by 1,802 contracts. However, the most recent COT long positioning in the Dow Jones index is likely overstated with the market into the low early this week below the last report mark off level by 1,100 points.

Not to be left out the NASDAQ has also fallen to a new low for the move in the early going and appears to be poised to return to the late January lows. In the short-term positive news from strong Tesla sales in China are all but forgotten in the current trade with investors fearful of losses instead of fearful of missing out on gains. The Commitments of Traders report for the week ending February 8th showed Nasdaq Mini Non-Commercial & Non-Reportable traders were net short 2,986 contracts after decreasing their short position by 8,733 contracts.

GOLD, SILVER & PLATINUM:

While the gold market did not forge a higher high for the move early this week, prices remained close to their breakout price levels. Unfortunately for the bull camp, the dollar has also forged a 9-day high and appears to be positively correlated with other flight to quality instruments like bonds. Nonetheless, the gold and silver trade are not undermined by the dollar action and instead are embracing “war headlines”. In fact, gold, and silver managed gains last Friday despite a 6-day high in the dollar. However, inflation fears also drove money to gold and silver at the end of last week, which was at least partially the result of a rally in crude oil that at times surpassed $3.50 a barrel. In conjunction with the sharp gains in crude oil prices, multi-decade highs in various US consumer inflation components leaves the inflation theme in play.

As indicated last week, long-term fundamentals of supply and demand are in favor of the silver bull camp and a true inflationary spiral could send silver out of a 13-month downtrend pattern to the upside. Fortunately for the bull camp, the net spec and fund long in silver remains very modest and within “relative proximity” to the lowest levels seen since June 2019. Silver positioning in the Commitments of Traders for the week ending February 8th showed Managed Money traders were net long 10,139 contracts after decreasing their long position by 1,434 contracts. Non-Commercial & Non-Reportable traders reduced their net long position by 2,091 contracts to a net long 33,322 contracts.

Palladium finished last week with a very damaging move on the charts, suggesting the bull camp has lost its control. Certainly, palladium will benefit in the event of spiraling inflationary fears but in the near term the rising rate, sharply lower equities, and auto plant closures (due to protests) has fostered some near-term demand concerns. On the other hand, Russian Nornickel recently projected the world palladium market deficit would be 300,000 ounces this year and that should underpin prices. With the palladium market in the most recent positioning report maintaining a net spec and fund short, a moderate down move could put the market moderately oversold. The Commitments of Traders report for the week ending February 8th showed Palladium Managed Money traders net sold 125 contracts and are now net short 324 contracts. Non-Commercial & Non-Reportable traders are net short 1,129 contracts after net selling 70 contracts.

There is little remarkable about the platinum charts and for that matter platinum fundamentals. Obviously, the threat of supply lost by a Russian trade embargo would impact palladium more than platinum and therefore platinum could remain in a range bound by $1,056 and $1,000. The net spec and fund positioning in platinum is very modest which is not surprising for a range bound market. Platinum positioning in the Commitments of Traders for the week ending February 8th showed Managed Money traders were net long 7,426 contracts after decreasing their long position by 2,334 contracts. Non-Commercial & Non-Reportable traders net sold 2,776 contracts and are now net long 19,274 contracts.

COPPER:

Entering this week’s trading, copper was boosted by strength in aluminum and nickel prices in Asia and undermined by iron ore prices from Asia. Early last week, market chatter centered on the prospects of a “short squeeze” but instead the opposite seemed to happen at the Shanghai exchange. In fact, Shanghai copper exchange stocks on a weekly basis more than doubled with an inflow of 66,213 tonnes (+164%) and that went a long way toward killing the short squeeze story in London. Unfortunately for the bull camp, a Russian incursion of the Ukraine would likely be bearish initially from the fear of demand destruction.

ENERGY COMPLEX:

While crude prices forged fresh contract highs at the start of this week, prices have initially retrenched from those highs as if waiting for additional Russian/Ukraine news. In fact, Brent crude oil pricing is now within striking distance of the psychologically important $100 price level and the energy markets are likely to see further inflation buying from the funds. It should also be noted that Asian buyers have stepped up their interest in securing supply as they are fearful that Russian exports could be blocked. In addition to Western leaders traveling to the Ukraine, we suspect Western military equipment is flowing into the Ukraine which could make it more difficult for Russia to achieve minimal objectives. Furthermore, with Ukrainian citizens promising to support their military a Russian incursion could result in a “bloodbath”.

When the crude oil market rallies more than $3.00 in a single session, there are usually several forces at work. Apparently, buyers were stirred late last week by International Energy Agency predictions of a stellar recovery in energy demand from pandemic lows to pre-pandemic highs. The IEA also indicated that Saudi Arabia and the UAE could help balance the world market with increased production, but that news was combined with evidence that OPEC on a month over month basis is adding back only incremental supply. From a longer-term perspective, supply is on the way with the US Baker Hughes rig operating count jumping by “19” rigs in a single week, with Canadian oil drilling rigs up by only one. A sign of demand is seen from continued declines in key US storage facilities like Cushing, Oklahoma especially given reports that significant Canadian oil has been flowing through to the Gulf to meet international demand!