• The Fed disappoints with a 25-basis point cut
  • An escalation in the trade dispute weighs on industrial commodities
  • Gold puts in a bullish reversal pattern on the weekly chart
  • New highs in the dollar index
  • Copper falls to a new low for 2019- Weakness in energy and agricultural commodities

 

The story of this week:

 Trade + Fed = Volatility

August is typically a sleepy month in markets across all asset classes. However, the Fed meeting on July 31 and President’s Trump’s move to slap 10% tariffs on another $300 billion of Chinese exports to the US set the stage for a volatile month.

The Fed meeting did not provide many surprises. In June, the FOMC prepared the market for a rate cut. Not only did the central bank reduce the Fed Funds rate by 25 basis points on July 31, but they also immediately ended the program of balance sheet normalization. The end of quantitative tightening came one month ahead of schedule. Meanwhile, some market participants were expecting a more significant move by the central bank. The one-quarter, instead of a one-half percent rate cut caused some degree of disappointment. Three significant factors led to selling in stocks in the immediate aftermath of the FOMC meeting on the final day of July. First, the FOMC was not unanimous in its decision. Two members of the committee dissented as Eric Rosengren, and Esther George voted to leave the Fed Funds rate unchanged. Second, the market became a bit too overenthusiastic, and 25 basis points was just not enough. Finally, and most significantly, Chairman Jerome Powell wound up with a case of foot in mouth disease at his press conference. When he stated that the move to lower rates was not the start of a prolonged easing cycle intensified selling in stocks and precious metals markets. The Fed faces robust economic data in the US while does not justify lower rates. However, the low level of inflation and economic weakness in China and the Eurozone are compelling reasons for more than a 25-basis point reduction in the short-term rate. The US does not exist in a vacuum, and the potential for contagion could translate to a slowdown in the US economy.

The Fed did not have to wait too long for justification for another rate cut or two by the end of 2019. On August 1, frustration over the progress of trade negotiations with China caused President Trump to slap China with new tariffs escalating the ongoing trade war. Chinese retaliation will likely come sooner, rather than later. President Trump has not been pleased with the Fed and his appointee, Chairman Powell. It is possible that the absence of a more substantial rate cut from the central bank figured into the President’s decision to up the ante in the trade dispute with China. The escalation increases the chances of more rate cuts before the end of this year.

Stocks dropped in the aftermath of the trade news. The US dollar rallied to a new high, and while gold recovered, crude oil, copper, grain, and many other commodities prices suffered declines on the week. The two commodities that reflect the current environment best were copper and gold.

Source: CQG

The price of copper, a barometer for the health and wellbeing of the Chinese and global economies, fell to a new low for 2019 over the past week.

Source: CQG

The weekly chart of the gold futures market illustrates that kneejerk selling in the wake of the Fed meeting took the price to a low at $1400.90. However, the escalation of the trade dispute caused the price to rally and put in a bullish reversal trading pattern on the weekly chart. Nearby gold futures settled the week at $1445.60 per ounce with the active month December futures at $1457.50, not far below the recent high and the highest levels since 2013.

August can be a sleepy month in markets. Meanwhile, trade and the prospects for more rate cuts on the horizon are reasons why we could see lots of volatility in markets across all asset classes. Moreover, the rising potential for a hard Brexit adds another catalyst that could increase price variance throughout this month.

Friday’s employment data showed that the economy added 164,000 new jobs to a record high, and wage growth climbed by 3.2%, which was above forecasts.

 

Highlights in commodities:

  • Gold moves 1.79% higher on the week
  • September silver declines 0.77% since last week
  • Platinum moves 1.71% lower since last week. October platinum was at a $592.60 per ounce discount to August gold futures, which widened significantly since last week
  • Palladium tanks by 8.28% for the week and settles at just above the $1400 per ounce level
  • September copper falls 4.23% on the week on trade escalation and a stronger dollar
  • September iron ore futures move 6.87% lower
  • The BDI corrects 6.93% lower since July 25 and falls to the 1812 level
  • Rotterdam coal moves 2.11% lower on the back of weak energy prices
  • September lumber rises 9.83% since last week on the back of the Fed rate cut
  • September NYMEX crude oil moves 0.96 higher since July 26 on the back of trade and despite inventories declines
  • September Brent crude oil falls 2.49% since the previous report. September Brent was at $61.82 per barrel on Friday as the Brent underperformed WTI crude oil
  • The premium for Brent over WTI in October closes Friday at the $6.15 level down from last week
  • September gasoline moves 2.24% lower while September heating oil futures fall 1.21% over the past week
  • The gasoline crack spread in September was 6.78% lower while the September heating oil crack moved 2.76% lower since July 26
  • Natural gas fell 1.39% on September futures closing the week at $2.121 per MMBtu. The EIA reported an injection of 65 bcf into storage on Wednesday for the week ending on July 26, which weighed on the price of natural gas and sent it to a lower low
  • September ethanol moves 3.0% lower on the week
  • November soybeans fell 3.61% since last week on the back of trade tariffs
  • December corn drops 3.53% on the week
  • CBOT September wheat moves 1.06% lower since last week. September KCBT wheat trading at a 69 cents discount under CBOT wheat. The discount remains far from the historical norm with KCBT wheat trailing as the spread widened by 5.0 cents over the past week
  • October sugar did not move on the week as it closed at 12.02 cents per pound
  • September coffee falls by 1.6% on the week as selling takes the price below the $1 level
  • September cocoa moves 2.89% lower since last week
  • December cotton falls 7.93% since July 26 as the trade dispute sends the price below 60 cents per pound
  • September FCOJ futures moved 3.17% lower, as the price closes at just below $1 per pound
  • October live cattle moves 1.98% higher since last week despite a trade deal with Europe on US beef exports
  • October feeder cattle fall 3.90% since July 26
  • October lean hog futures tank by 17.28% over the past week
  • The September dollar index futures contract rises 0.10% on the week after rising to a new high at 98.700 after the Fed rate cut
  • September Long-Bond futures trading at 158-25 up 4-11 for the week as volatility returns to the markets
  • The Dow Jones Industrial Average closes at 26,485 on Friday, August 2, down 707 points from July 26. The S&P 500 falls 3.10% since last week. The VIX gains 5.65 and was trading at around 17.80 on Friday
  • Bitcoin was trading at $10,473.21 on Friday up $600.06 or 6.08% since July 26
  • Ethereum was trading at $217.47 on Friday, down 1.17% since the last report

 

Price Changes for the week:

DBC closes at $15.14 per share, down 36 cents per share since July 26 on weakness in energy prices

 Source: Barchart

DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.61 billion and trades an average daily volume of 946,756 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. Total average volume rose over the past week in a sign of increasing interest in the commodities asset class even though the ETF edged lower.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.