• Precious metals remain strong
  • The dollar continues to gain along with the stock market during earnings season
  • Crude oil edges higher as natural gas returns to the lows
  • Weakness in agricultural commodities
  • The markets are now waiting for news from the Fed on July 31

The story of this week:

 

The ECB Forces The Fed’s Hand

 

Friday’s GDP data that showed the US economy grew at 2.1% in the second quarter was slightly above the market’s consensus estimate. Even though economic growth in the US may not warrant a cut in the Fed Funds rate at the FOMC’s July meeting next Wednesday, the pressure is coming from abroad. The Fed cited “crosscurrents” from China and Europe as one of the primary reasons for lowering the short-term interest rate at its June meeting. The most recent statement from the European Central Bank made a 25-basis point cut a done deal.

ECB President Mario Draghi told markets that more accommodation is coming in Europe. The gap between the dollar and euro rates and push the dollar even higher. If “crosscurrents” do not weigh on the US economy, a runaway dollar on the upside would weigh on the earnings of many US multinational companies. A stronger dollar makes US exports less competitive in global markets. The Trump administration discussed intervening in the currency markets to devalue the dollar on Tuesday, July 23. However, the President, his Secretary of the Treasury, and Chief Economic Advisor, shot down a proposal by Peter Navarro, the trade advisor to push the dollar lower. President Trump has objected to other nations manipulating currencies but rejected doing the same to the dollar, for now. At the same time, the administration has been pushing the US central bank to push down the Fed Funds rate. While the FOMC is likely to cut rates by 25 basis points, the administration would prefer to see them fall by twice that amount. On Friday, President Trump tweeted:

Source: Twitter

The administration continues to blame the central bank for going too far in increasing rates in 2018.

On Friday, the dollar index rose to a new high on the September futures contract.

Source: CQG

The daily chart highlights that the dollar index rose to a peak at 97.835 on July 26, which was above the May high at 97.715. The index settled at 97.751 and is zeroing in on the continuous contract high at 98.26.

The markets are now waiting to hear from the Fed on Wednesday. The central bank is most likely to reduce the Fed Funds rate by 25 basis points and incur the wrath of 1600 Pennsylvania Avenue. However, the devil will be in the details as the statement and press conference that follows the rate but will reveal the Fed’s bias for the coming months. If the central bank signals that more cuts are on the horizon before the end of 2019, stocks are likely to continue to make new record highs. At the same time, we could see the price of gold move higher and above the recent peak at $1454.40. The Fed lit a bullish fuse in the gold market at the June meeting, and they could keep the bullish party going with a dovish statement on Wednesday, July 31.

Meanwhile, a continuation of dovish monetary policy in Europe is a sign that the Fed will need to follow as contagion and “crosscurrents” are likely to continue for the rest of 2019. Trade with China and the rising potential for a hard Brexit under Prime Minister Boris Johnson are issues the Fed must prepare for at the July meeting. Moreover, the potential for a much stronger dollar could threaten economic growth in the United States.

 

Highlights in commodities:

  • Gold edges 0.54% lower on the week but remains above $1400 per ounce
  • September silver gains 1.25% since last week
  • Platinum moves 1.84% higher since last week. October platinum was at a $551.20 per ounce discount to August gold futures, which narrowed since last week
  • Palladium gains 1.51% for the week and settles at above the $1530 per ounce level
  • September copper declines 2.45% on the week on trade concerns
  • September iron ore futures move 1.61% lower
  • The BDI corrects 8.59% lower since July 19 and falls below the 2000 level
  • Rotterdam coal moves 3.74% lower on the back of weak energy prices
  • September lumber falls 5.65% since last week
  • September NYMEX crude oil moves 0.61% higher since July 19 on inventories declines after Hurricane Barry
  • September Brent crude oil gains 1.18% since the previous report. September Brent was at $63.40 per barrel on Friday as the Brent outperformed WTI crude oil
  • The premium for Brent over WTI in September closes Friday at the $7.20 level up 30 cents since July 19
  • September gasoline moves 1.09% higher while September heating oil futures gains 0.57% over the past week
  • The gasoline crack spread in September was 3.64% higher while the September heating oil crack moved 0.96% higher since July 19
  • Natural gas fell 3.64% on August futures closing the week at $2.169 per MMBtu. The EIA reported an injection of only 36 bcf into storage on Wednesday for the week ending on July 19, which provided no support for the price of natural gas
  • September ethanol moves 0.33% higher on the week
  • November soybeans fall 1.99% since last week
  • December corn drops 2.58% on the week
  • CBOT September wheat moves 1.29% lower since last week. September KCBT wheat trading at a 64 cents discount under CBOT wheat. The discount remains far from the historical norm with KCBT wheat trailing as the spread widened by 1.50 cents over the past week
  • October sugar recovered by 3.71% since July 19 and closed at 12.02 cents per pound
  • September coffee falls by 7.05% on the week as selling takes the price below the $1 level
  • September cocoa moves 3.16% lower since last week
  • December cotton rebounds by 2.33% since July 19
  • September FCOJ futures moved 1.59% lower, as the price closes at $1.0245 per pound
  • August live cattle moves 0.98% higher since last week
  • August feeder cattle gain 2.68% since July 19
  • August lean hog futures rally by 3.04% over the past week
  • The September dollar index futures contract rises 0.96% on the week on the back of the prospects for lower rates in Europe
  • September Long-Bond futures trading at 154-14 down 0-09 for the week
  • The Dow Jones Industrial Average closes at 27,192 on Friday, July 26, up 38 points from July 19. The S&P 500 gains 1.65% since last week. The VIX falls by 2.30 and was trading at around 12.15 on Friday
  • Bitcoin was trading at $9,873.15 on Friday down $558.48 or 5.35% since July 19
  • Ethereum was trading at $220.04 on Friday, up only 0.29% since the last report

 

Price Changes for the week:

DBC closes at $15.50 per share, down 6 cents per share since July 19 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 925,309 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.