• Trade progress stalls
  • Precious metals continue to consolidate
  • A choppy week in energy but only marginal price moves by the end of the week
  • Coffee continues to move higher
  • Digital currencies plunge

The story of this week:

 

Confusion Over Trade Grips Markets

 

The trade war between the US and China has been one of the leading issues facing markets across all asset classes since 2018. The level of political divisiveness in the United States has increased with the impeachment inquiry and the upcoming 2020 election. Meanwhile, there is plenty of bipartisan support for leveling the playing field on trade with China. The abuse of intellectual property rights continues to be a significant issue for the United States and other nations around the world.

Commodities are global assets. As China is the world’s most populous country with a growing economy, it is the demand side of the equation for many raw materials. The US is a leading producer of agricultural products. Since the trade war has weighed on Chinese economic growth, commodities have been in the crosshairs of the dispute. The threat of a global recession caused the prices of copper, oil, grains, and many other commodities to decline. Moreover, tariffs and retaliatory measures have created surplus conditions in some parts of the world and deficits in others. One of the most noticeable distortions of supply and demand fundamentals are in the pork market. The outbreak of African Swine Fever in China killed millions of pigs and has caused a shortage of pork. In the US, the price of hogs has moved lower on the back of a glut of supplies.

Source: CQG

As the weekly chart of lean hog futures highlights, the price of pork declined from over 90 cents to the 60 cents per pound level since late May. Some of the selling is a function of seasonality However, the oversupply of US pork has weighed on the price of the futures. Meanwhile, domestic pork prices in China have soared.

The hogs are just one example of how protectionism and the current trade war have created distortions. The weakness in China’s economy has caused the price of copper to decline to under $2.65 per pound and oil to under $60 per barrel on nearby COMEX and NYMEX futures contracts as of November 22.

Progress on trade that leads to a de-escalation of the trade war would likely lift commodities prices, but a continuation of the status quo and any escalation could send prices lower. The recent optimism over a “phase one” deal turned to pessimism last week as it looks like any progress will have to wait for 2020. We should expect a continuation of an environment where optimism and pessimism over the prospects for a trade agreement shift back and forth, creating volatility in markets over the coming months.

Volatility creates a paradise of opportunity for nimble traders with their fingers on the pulse of markets. As the final month of 2019 approaches, the trade issue will continue to cause confusion and price variance in markets across all asset classes well into the coming year and perhaps beyond.

 

Highlights in commodities:

  • December gold falls by only 0.33% and settled at $1463.60 per ounce
  • December silver rises 0.31% on the week as the volatile precious metal settled at $17.00 per ounce
  • Platinum posts a 0.21% loss on the week. January platinum was at a $571.00 per ounce discount to December gold futures, which marginally narrowed since last week
  • Palladium moved 3.62% higher for the week as it settled at over $1740 per ounce
  • December copper rose 0.38% as the red metal sits at the $2.65 level
  • December iron ore futures moved 3.86% higher on the week
  • The BDI continued to fall and was 7.99% lower since November 15 at the 1255 level
  • January Rotterdam coal moves 3.58% higher since last week
  • January lumber moved 3.53% higher since November 8 to $410.40 per 1,000 board feet
  • January NYMEX crude oil moved 0.43% lower since November 15 after a choppy week of trading
  • January Brent crude oil moved 0.27% higher since the previous report as Brent outperformed NYMEX crude oil
  • The premium for Brent over WTI in January closes Friday at the $5.65 level up 23 cents since last week
  • January gasoline moved 2.50% higher while January heating oil futures fell 0.97% over the past week
  • The gasoline crack spread in January was 15.16% higher while the January heating oil crack moved 2.19% to the downside since November 15 as products ignored seasonal factors
  • Natural gas fell 0.86% on December futures closing the week at $2.665 per MMBtu after trading down to $2.501 during the week. The EIA reported the first withdrawal of the season of 94 bcf from storage on Thursday for the week ending on November 15
  • January ethanol moves 0.50% higher on the week on strength in gasoline
  • January soybeans fell 2.31% since last week
  • December corn fell 0.67% on the week
  • CBOT December wheat rose 2.49% since last week. December KCBT wheat trading at a 91.25 cents discount under December CBOT wheat. The discount moved away from the historical norm by 5.50 cents since last week
  • March sugar rose 0.79% since November 15
  • March coffee posted a 5.04% gain on the week
  • March cocoa declined 2.68% after recent gains
  • March cotton moved 2.79% lower since November 15
  • January FCOJ futures dropped 2.34% since last week’s report
  • December live cattle fell 0.36% since last week
  • January feeder cattle were 3.47% lower since November 15
  • December lean hog futures moved 3.13% lower over the past week as they approach 60 cents per pound
  • The December dollar index futures contract rose 0.32% on the week
  • December Long-Bond futures trading at 159-27 up 1-16 for the week
  • The Dow Jones Industrial Average closes at 27,876 on Friday, November 22, down 129 points from November 15. The S&P 500 declined by 0.33% since last week. The VIX was up only 0.29 on the week and was trading at around 12.34 on Friday as stocks back off new highs
  • Bitcoin was trading at $7,368.46 on Friday down $1,132.35 or 13.32% since November 15.
  • Ethereum was trading at $153.83 on Friday, down 14.54% since the last report

 

Price Changes for the week:

DBC closes at $15.61 per share, up three cents since November 15

Source: Barchart

DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.37 billion and trades an average daily volume of 1,036,115 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. The average volume rose over the past week while the price of the ETF was posted a marginal gain.

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.