• Risk-off in markets across all asset classes
  • Gold and silver continue to make new highs
  • The August WASDE was bearish for agricultural commodities
  • The dollar near the highs despite more rate cuts on the horizon
  • Lots of volatility on the horizon

The summary of trade recommendations for the coming week are as follows:

 

Summary and highlights:

 On Thursday, August 8, the bull market in stocks was back as all of the leading indices posted gains. The VIX edged lower to the 18 level. The dollar index rose marginally, while Bitcoin was steady at the $11,690 level. Precious metals corrected a bit lower, but gold remained around the $1500 level with silver just below $17 per ounce. Platinum moved marginally lower while palladium moved only slightly higher on the session. Grains moved to the upside, as did energy commodities. Copper also moved higher as the price was back at the $2.60 per pound level on September futures. Meats edged higher, with soft commodities except for cocoa which moved to the $2200 per ton level. The US 30-year bond fell by around 23/32 on the session. After all of the recent price volatility, the market needed a day to rest.

On Friday, stocks edged lower because of the many issues facing markets that could trigger price variance with events over the weekend. All of the leading indices posted losses, but they were far lower than earlier in the week. Grain prices were stable as the USDA releases its August WASDE report on Monday, August 12. Crude oil and product prices recovered, but natural gas edged lower. Crack spreads moved to the downside as products underperformed the raw crude oil. Brent underperformed WTI on the final session of last week. Precious metals prices were stable on Friday with most of the metals around unchanged. Copper slipped back below the $2.60 per pound level. Meats did not move much after recent losses as they wait for news from the WASDE report. Lumber moved to the downside along with cotton and cocoa. Coffee posted a marginal loss while sugar futures recovered. The dollar index edged lower along with the Brazilian real. The British pound fell and ended the week not far above the critical level of support at the $1.20 level. Bitcoin moved to just under the $12000 level. The market closed the week nervous over events in Hong Kong. After the stock market closed, North Korea fired two more projectiles as a message to the US and South Korea.

On Monday, increasing problems facing Hong Kong as the defeat of business-friendly leadership in Argentina in favor of a leftist political party caused the latest round of selling in stocks. The DJIA fell 391 points with losses of 1.23% and 1.20% in the S&P 500 and NASDAQ respectively. Grain prices fell sharply after the release of the USDA’s August WASDE report. Reports that corn and wheat production and stocks would be higher than the market had expected caused selling to hit all of the grain futures and soybeans, corn, and wheat prices plunged. Crude oil posted a small gain while crude oil product prices edged lower weighing the crack spread values. Natural gas fell marginally on the first session of the week. Ethanol plunged with selling in the corn futures market. Gold rose to a new and higher high taking silver back over the $17 per ounce level. Platinum was virtually unchanged while palladium moved to the upside. The price of copper edged lower and remained below the $2.60 per pound level on the September futures contract. Cattle prices moved lower, but lean hogs were close to unchanged. The soft commodities fell across the board. Cotton fell on the back of the WASDE report. Sugar, coffee, and FCOJ fell on weakness in the Brazilian real, and cocoa hardly moved on the session. The dollar index edged 0.124 lower, and Bitcoin was at just over the $11,500 level. US 30-year bonds were back above the 163 level on a flight to quality buying.

On Tuesday, news that the Trump administration delayed some of the tariffs due to take effect on September 1 to December 15 lifted the stock market. The first good news on trade in weeks had a bullish impact on stocks. The DJIA was 1.44% higher while the S&P 500 and NASDAQ rose 1.48% and 1.95% respectively. The dollar index moved to the upside after the news that inflation rose to 2.2% in July. Grain prices continued to react to Monday’s August WASDE report. Corn fell sharply while wheat was little changes. Soybeans recovered during the session. Crude oil moved higher on the positive news on trade as the nearby NYMEX futures contract was over $2 per barrel high with Brent posting an even higher gain. Natural gas moved to the upside to just under the $2.15 per MMBtu level. Gold and silver prices traded in wide ranges, but both ended with small losses on Tuesday. Platinum fell, but palladium moved to the upside. Copper posted a 4.5 cents gain on the September COMEX futures contract. Meat prices continued to disintegrate with cattle sharply lower and losses in the hog futures. Cocoa fell while FCOJ was virtually unchanged. Cotton, coffee, sugar, and lumber prices all moved to the upside. Bitcoin moved down to the $11,000 level while US 30-year bond futures slipped below the 163 level.

On Wednesday, risk-off hit markets as weak economic numbers from Germany and China and a swoon in the Argentine stock market caused contagion in the US. Market participants ran to safe-haven assets causing US bonds to rally to a new high, and gold to remains strong. The stock market suffered losses with the leading indices all posting around 3% losses and closing near the lows of the session. The VIX moved to over the 22 level. Crude oil took a hit as the price dropped by over $2 with oil products following. Natural gas posted a marginal gain. The EIA and API data were a bit bearish for the oil market. Corn and bean prices moved lower, but wheat posted a minimal gain. Gold and silver prices strengthened while platinum and palladium moved lower. Copper moved below the $2.60 level on weakness in the Chinese economy. Meats recovered a bit, but live cattle did not move much. Soft commodities were all lower except for cotton. Lumber moved to the downside. Bitcoin dropped by around $800 to the $10,300 level. Bonds exploded higher on the session to a new high. The market is now expecting a 50-basis point cut in the Fed Funds rate. Risk-off periods often cause all assets to lose value. The fears of a recession in both the US and around the world could cause lots of volatility in markets across all asset classes over the coming days and weeks. President Trump continued to point his finger at the Fed on Wednesday.

Source: Twitter

Be careful out there in markets, Wednesday’s action is a warning that we could see wide price variance and a period of risk-off with the many issues facing the world.

Late in the day, President Trump proposed a meeting with the President of China:

Source: Twitter

A positive response from China could be just what the markets need to return some sense of optimism.

Stocks and Bonds

While the leading stock indices moved lower since last week as Wednesday, August 14 was a miserable day in the equity markets. After the trade dispute escalated to what is now a trade and currency way, selling hit the stock market. Trade, problems for China in Hong Kong, a financial crisis in Argentina and poor economic data from Germany and China drove stocks lower and bonds higher on August 14.

The S&P 500 fell 1.5% over the past week, while the NASDAQ declined 1.13%. The DJIA posted a 2.03% loss since the previous report. The stocks market has been highly volatile over the past week.

While US stocks fell, Chinese large-cap stocks did worse over the past week. Trade issues continue to weigh more heavily on the Chinese economy compared to conditions in the US based on price action in equities.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $37.67 level on Wednesday, which was 3.04% lower than the closing level on August 7. Technical support was at the January 3 low at $38 per share. Over the past week, FXI traded down to a low at $37.66 per share and closed near the low. FXI is now trading at its lowest level since May 2017.

FXI could experience more selling pressure, particularly if President Trump decides to increase the tariffs scheduled to take effect on September 1 from 10% to 25%, which is possible given the escalation in the trade dispute. The news that the President extended the deadline for some of the duties to December 15 did not support the FXI which plunged on Wednesday after more weak economic data from China.

US 30-Year bonds exploded to a new high at 165-07 on the September futures contract and were at 164-28 on Wednesday as they moved 2.09% higher since the previous report. Bonds moved to the upside as stocks fell on fear and uncertainty.

Open interest in the E-Mini S&P 500 futures contracts fell by 1.82% since August 6. Open interest in the long bond increased by 2.46% over the past week. The bond market benefited from a flight to quality as volatility moved higher. The VIX moved higher as stocks fell over the past week. The volatility index was at the 22.10 level on August 14, a rise of 13.4% after rising to a high at 24.81 on August 5.

As I have been writing, “I have been buying the VIXY and other VIX related products and was stopping out for small losses until Wednesday. I will continue to look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market as we witnessed following the July Fed meeting.  The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.” I continue to favor purchasing the VIX and VIX-related products on dips and taking profits on rallies as I believe that volatility in the stock market will continue over the coming weeks and perhaps months. The uncertainty created by the trade and currency war, the prospects for a hard Brexit, and many other issues facing the world create a potent cocktail for continued volatility in the stock and bond markets in the United States.

With the prospects for lower rates in the US rising, come market analysts are raising the potential for negative rates in the US if the economy is heading for a recession.

 

The dollar and digital currencies

The dollar index rose 0.49% lower since August 7. The index made a new and higher high at 98.700 on August 1 before correcting the to the downside. The bullish trend in the dollar index that began in February 2018 remains intact. However, over the course of the move to the upside, each new high led to a correction in the index. Even though the Fed cut the short-term Fed Funds rate by 25 basis point at the July FOMC meeting, dovish central bank policies around the world are keeping the rate differentials between the dollar and other world currencies at elevated levels that favor the greenback. The flight to quality also caused buying in the dollar over the past week.
The policies by the US Fed remain a lot tighter than counterparts around the world when it comes to the availability of credit, which is a supportive factor for the dollar versus other currency instruments. The euro currency was 0.71% lower against the dollar since last week’s report. The trade and currency war between the US and China and the latest moves to cut rates by many central banks around the globe could cause an increase in price volatility in the foreign exchange markets.

If the dollar begins to move appreciably higher against other currencies, the chances of intervention by the US Treasury will rise. The Treasury and the Fed’s primary goal is stability in markets, and a surging dollar could have a destabilizing impact on the US and global economies. Therefore, the potential for intervention by the US or a coordinated move together with other central banks could rise with the value of the dollar. President Trump has become more than frustrated with the US central bank and its slow approach to easing monetary policy. Currency intervention is one of the tools available to the administration to counteract the Fed in the current environment.

 

The leader of the digital currency asset class was trading at the $10,219.31 level as of August 14. Volatility returned to the cryptocurrency asset class over the recent months, and it has been consolidating at a higher level. The escalation of the trade dispute and the potential for a currency war had lit a fire under the price of Bitcoin. Each time China devalues the yuan, Bitcoin moves higher as the Chinese buy the digital currency to protect assets and shelter wealth. Moreover, protests in Hong Kong and the threat of a military crackdown by Beijing have increased the demand for vehicles that can transfer wealth from China and Hong Kong to other parts of the world during periods of uncertainty. Bitcoin and gold have been two such vehicles. However, a risk-off environment weighed on the price of the digital currency over the past week. Bitcoin moved 13.12% lower since last week while Ethereum posted a 15.97% loss as it was at around $188.58 per token. The market cap of the entire asset class moved 12.87% lower as Bitcoin underperformed the other digital currencies. The number of tokens rose by 16 since August 7. Open interest in the CME Bitcoin futures rose by just 0.79% since last week.

As I wrote last week, “The higher the prices of digital currencies move, the more the spotlight on the asset class will intensify. Governments around the world will not surrender control of the money supply, so the market is likely to see an increase in regulation of digital currencies. The custody issue continues to be a roadblock when it comes to an ETF product. I believe that a leading country will eventually issue a digital currency, which would give the asset class a significant boost.” Bitcoin and the other cryptocurrencies are borderless, which is what attracts many to the asset class. However, they also act contrary to government control of money supplies, which is a reason why regulatory moves could squash the rise of the asset class.

The Canadian dollar moved 0.03% lower since last week. Open interest in C$ futures fell by 7.33% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products.

The British pound posted a 0.73% loss since the previous report as the currency is approaching the $1.20 level, which is critical technical support. Prime Minister Boris Johnson has told the citizens of the UK that he will lead the nation out of the European Union by the October 31 deadline even if it means a hard Brexit. The pound remains near the low against the US dollar and euro as the world waits for news on the new leader’s plans for an exit from the EU. A hard Brexit is likely to lead to new lows in the pound if the price action since mid-2016 is a guide.

The Brazilian real moved 1.4% lower against the US dollar over the past week. The Brazilian currency had been posting gains since late May. Reforms by the Bolsonaro government should continue to support gains in the currency that declined from over $0.65 to under the $0.2550 level against the US dollar since 2011. However, the Brazilian currency fell on contagion from Argentina as the Argentine peso fell by 32% this week.

 

Gold continued to move higher over the past week as it posted another new high on both the continuous futures contract and the active month December contract. Gold is the ultimate currency as central banks around the world hold the yellow metal as part of foreign currency reserves. Central banks have been net buyers of gold over the past years. The rise in gold in all currencies since the early part of this century is a sign of the declining value of fiat currencies. The rise of the digital currency asset class is another example of a trend away from government-issued legal tender to other means of exchange. While currency instruments will not disappear any time soon, the value of foreign exchange instruments is declining based on the price action in both gold and cryptocurrencies such as Bitcoin over the past months.

 

Precious Metals

Precious metals took a bit of a breather over the past week with small gains in gold, silver, and palladium. Platinum continued to be the laggard as it fell by just over 2.5% on the week. The price of rhodium exploded higher since August 7 and was the best-performing precious metal. The precious metals sector remains in bullish mode, but in a risk-off environment we could see increased volatility and price corrections. Gold stocks underperformed the price action in the yellow metal which is a warning sign. The equities fell since last week in sympathy with selling in the stock market. On August 14, market participants seemed to sell any stock with a ticker.

Gold was just 0.54% higher since August 7 while silver rose by 0.49% over the same period. The price of December gold was just below the $1530 per ounce level on Wednesday while silver was around $17.20. December gold rose to a new high at $1546.10 on August 13 and September silver moved to a high at $17.49 per ounce on the same day.

The price of platinum fell 2.64% since last week. Rhodium rose by 5.44% while palladium gained 0.43%. Given the spectacular rise in palladium to $1600, it should come as no surprise that a significant correction was overdue. More than a few issues facing the world are likely to keep the bid in gold and silver prices over the coming weeks. While the odds of a correction have risen with prices, I would view any significant pullbacks as buying opportunities. Platinum is still lagging the other members of the sector, while palladium and rhodium have been in bull markets since the early 2016 lows.

Open interest in the gold futures market moved 1.06% lower since the previous report. The metric moved 1.98% higher in platinum while it was 7.35% lower in the palladium futures market. Silver open interest fell 2.28% over the period. Gold open interest was just below the 594,000-contract level since the last report.

Technical resistance on the December gold futures contract is at $1546.10 per ounce, the August 7 high. Gold has been moving higher in all currency terms since the early 2000s, which is a sign of overall strength for the yellow metal and weakness for fiat foreign currency instruments.

The silver-gold ratio moved higher over the past week as gold fell less than silver.

Source: CQG

The daily chart of the price of nearby October gold divided by September silver futures shows that the ratio was at 88.49 on Wednesday, 0.84 higher than the level on August 7. The long-term average for the price relationship is around the 55:1 level. The relationship had probed above the all-time 1990 high at the 93:185 level on the quarterly chart. While the ratio has moved a bit lower, it remains at an elevated historical level. A move back to the long-term average at 55:1 would put the price of silver at over $27.75 per ounce with gold at $1527.80. Silver is over $10 below its historical price compared to gold which tells us that the silver market is historically cheap at under the $17.30 per ounce level.

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report as the stock market declined. While gold moved 0.54% higher, the GDX was 2.90% lower since August 7 and GDXJ was down 5% from last week’s level. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week was a symptom of the selloff in equities. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted a 0.69% gain since August 7 as it outperformed the price action in the silver futures market. Gold and silver remain in bullish price patterns. I believe that any substantial price corrections over the coming week will create scale-down buying opportunities.

Platinum and palladium moved in opposite directions since August 7. October platinum futures fell by 2.64% to the $848 per ounce level. Palladium posted a 0.43% gain as of the close of business on August 14 and was at the $1416.40 per ounce level. Palladium rose to a new record high at $1600.50 per ounce on July 11 and has corrected which should not come as a surprise. Palladium was trading at a premium over platinum with the differential at the $568.40 per ounce level on Wednesday, which widened over the past week. October platinum was trading at a $679.80 discount to December gold at the settlement prices on August 14 which widened over the period. The price of rhodium which does not trade on the futures market moved $190 higher over the past week and was at $3,680 per ounce on Wednesday.

We are long the PPLT platinum ETF product which moved 2.11% lower since August 7. I continue to believe that platinum offers the best value proposition in the precious metals sector given its discount to gold, palladium, and rhodium, and its position as a rare precious metal with a myriad of industrial applications. A significant upside correction is long overdue in the platinum futures market.

Precious metals have been a hot sector when it comes to markets across all asset classes since June. Gold is the metal that most market participants watch closely, but silver can be the most speculative of all of the metals as it tends to move the most on a percentage basis when the price trends. I continue that higher prices for both gold and silver are on the horizon, given the many issues facing the world. At the same time, platinum is the member of the precious metals sector that continues to offer the most attractive value proposition despite its bearish price action.

 

Energy Commodities

After a rough week in the last report, most of the members of the energy sector bounced and moved to the upside since August 7. Crude oil and products posted gains over the period as did the natural gas market. Ethanol tanked on the back of the selling in the corn market. Coal in Rotterdam moved to the upside. In a bearish sign for the crude oil market, the Brent-WTI spread moved lower since August 7 and both gasoline and distillate processing spreads moved to the downside as the market looks forward to the switch from the driving to the heating season in the coming months. The end of the summer is a time where markets shift attention to the winter season.

September NYMEX crude oil futures rebounded by 8.1% making back a bit over half the losses from the previous week. October Brent futures moved 5.8% higher since August 7 as they continue to underperform the WTI NYMEX futures. September gasoline was 3.43% higher, and the processing spread in September posted a 10.11% loss since August 7. The gasoline market is now shifting its focus to the end of the peak driving season in September. September heating oil futures moved 5.16% higher since the previous report, and the heating oil crack spread fell by 1.51% since last week. Technical resistance in the September NYMEX crude oil futures contract is at just above the $60 per barrel level with support at just over the $50 level. Crude oil open interest fell by 0.54% since last week. The situation between the US and Iran in the Middle East could cause an increase in volatility in the blink of an eye. However, the situation around the Straits of Hormuz has been relatively quiet over the past week.

The spread between Brent and WTI crude oil futures in October fell to the $4.21 per barrel level for Brent, which was $0.96 below the August 7 level. The spread is a barometer of the political risk in the Middle East as well as a measure of US versus OPEC and Russian production. Brent versus WTI is a location and a quality spread in addition to a political risk metric. Two-thirds of the world’s crude oil use the Brent benchmark, which is the pricing mechanism for oil from Europe, Africa, and the Middle East. Brent has a higher sulfur content, which makes it more appropriate for refining into distillate products. New pipelines in the Permian Basin have relieved the bottleneck which weighs on the spread.

Meanwhile, WTI is lighter and sweeter with less sulfur making it easier to refine into gasoline. The Brent-WTI tells us a lot about the fundamental equations for both crude oil production and demand. These days, it is highly sensitive to the situation in the Middle East as WTI represents the price for US crude oil. Supply concerns surrounding the Middle East should keep a bid under the Brent premium. Last week I wrote that I believed the spread has declined to a level that is close to the lows given the potential for problems in the Middle East. However, it continued to fall over the past week. I believe scaling into long Brent versus short WTI positions in oil in either the futures market or by using USO and BNO ETF products is a way to take advantage of the decline in the spread. So long as Iran remains a threat in the Middle East, the Brent-WTI should find support. At just over the $4 l level, it appears to be inexpensive. I would keep tight stops on any positions over the coming week.

US daily production stood at 12.3 million barrels per day as of August 9 according to the Energy Information Administration, which is unchanged from the previous week’s level. Daily output in the US is back at the record level at the 12.3-million barrel per day level. Crude oil inventory data had been supportive of the price of the energy commodity over the past weeks, but last week, the API and EIA data diverged. As of
August 2, the API reported a decline of 3.400 million barrels of crude oil stockpiles while the EIA said they rose by 2.40 million barrels for the same week. The API reported a drop of 1.10 million barrels of gasoline stocks and said distillate inventories rose by 1.20 million barrels as of August 2. The EIA reported a rise in gasoline stocks of 4.40 million barrels and an increase in distillates of 1.5 million barrels. Rig counts, as reported by Baker Hughes, fell by six last week to 764 rigs in operations as of August 9, which is 105 below the level operating last year at this time. The reduction in the number of rigs with daily output at a record 12.3 million barrel per day level is a sign of production efficiency in North American output.

OIH and VLO shares moved in opposite directions since last week. OIH fell by 8.57%, and VLO moved 0.25% higher since August 7. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is too low at its current price level, but the stock market is taking it to new multiyear lows.

September natural gas futures fell to a lower low on August 5 at $2.029 per MMBtu but recovered a bit from the lowest price since 2016. The September futures were at $2.143 on August 7, which was 2.88% higher than on August 7. Last week, the EIA reported an injection of 55 bcf into storage brought the total amount of gas in storage to 2.689 tcf as of August 2. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November is likely to be higher than last year.

Source: EIA

As the chart shows, stockpiles of natural gas are 14.6% above last year’s level but were still 4.0% under the five-year average as of August 2. Last week’s injection was close to the level the market had expected. This week, I expect the EIA to report an injection of around 56 bcf as the hot conditions during the heart of the summer season continue to increase the demand for electricity to power air conditioners, limiting the amount of natural gas flowing into storage across the United States. Injections should increase over the coming weeks as cooler weather in September arrives. Open interest fell by 0.15% over the past week. The shorts continue to have a hold on the natural gas futures market at around the $2.14 per MMBtu level.

With approximately 14 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 39.9 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 93.7 bcf per week is needed to push the supplies over the four tcf level at the start of the 2019/2020 peak season for demand. The average amounts have risen once again over the past week. I would not be surprised if natural gas if the price of natural gas continues to decline. $2 is likely to be the first critical psychological target on the downside if natural gas moves to a lower low and the March 2016 bottom at $1.611 per MMBtu is the level of critical technical support for the energy commodity. Little has changed in the natural gas futures arena since last week. I continue to look for a spike to the downside to purchase call options with strike prices below $2.80 per MMBtu for expiration in December 2019 through February 2020. I would also consider a long position in the leveraged GASL product on a spike to the downside in the natural gas futures market.

September ethanol prices collapsed by 11.69% over the past week. Open interest in the thinly-traded ethanol futures market rose by 3.1% over the past week after the recent significant declines. With only 672 contracts of long and short positions, the thinly-traded biofuel market is untradeable. The KOL ETF product fell by 3.66% compared to its price on August 7, but the price of October coal futures in Rotterdam rose by 2.67% over the past week. I had been writing that we could find a bottom in the price of coal over the coming weeks as the market begins to look past the summer season.

On Tuesday, the API reported that oil inventories rose by 3.7 million barrels for the week ending on August 9, and the EIA said they increased by 1.6 million barrels on Wednesday. Analysts had expected a decline of 2.761 million barrels for the API report. When it comes to products, the API reported an increase in gasoline inventories of 3.7 million barrels and a decrease in distillate stocks of 1.3 million barrels. On Wednesday, the EIA said that gasoline stocks fell by 1.4 million barrels and distillate inventories decreased by 1.9 million barrels for the week ending on August 9. The inventory data was not bullish for the price of crude oil and products. When it comes to crude oil, the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming week. Bullish and bearish factors continue to pull the price of crude oil in opposite directions.

In natural gas, the price action continues to be bearish over the past week despite the marginal recovery.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.541 in January, which was 2.7 cents per MMBtu higher than last week. I have been patiently waiting to buy call options for a spike to the downside. However, as the end of August approaches, I may begin nibbling on some small long positions over the coming week, leaving plenty of room to add on price weakness. I am looking at December through February call options with strike prices below the $2.80 per MMBtu level and the GASL product.

I have been tracking the price action in BG shares. Since August 7, the price of BG shares moved 5.21% lower to $53.34 per share on August 14. I will stop out of this position at $51.47 per share on the downside on a closing basis while initially looking for at least an equal profit on the upside depending on the price action. I will continue to post weekly updates on this position.

As I wrote last week, “I continue to favor trading crude oil from the long side of the market on downdrafts in the price of the energy commodity, given the potential for incidents in the Middle East triggered by Iranian retaliation to US sanctions. A deal between the US and Iran is unlikely given the history between the two nations dating back to the late 1970s.” The market will likely watch the inventory and rig count data for direction over the coming week, but volatility in the stock market increases the potential of risk-off periods in the crude oil futures contracts.

I continue to favor a long position in PBR, Petroleo Brasileiro SA. I suggested adding another unit to the long position in PBR at a price below the $14.19 per share level last week. We are now long two units at an average price of $15.16 per share. PBR shares were 5.64% lower over the past week. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and selling in the overall stock market pushed the price of the shares lower.

Crude oil is the commodity that powers the world. As we are in the final weeks of the summer season, some seasonal changes are beginning to take hold in oil, oil product, and natural gas futures markets. While the potential for a risk-off period over the trade war is a clear and present danger for the oil market, so is the potential for incidents in the Middle East that would cause supply fears to rise. Therefore, trading rather than investing is likely to continue to be the optimal approach to the energy commodity.

 

Grains                                                             

On Monday, August 12, the US Department of Agriculture released its August World Agricultural Supply and Demand Estimates report. Prices moved lower in the aftermath of the fundamental report. In the aftermath of the August WASDE report, Sal Gilberte, the founder of the Teucrium family of agricultural ETF products told me:

 

The August 12 WASDE report, released in conjunction with the prevent plant acreage report, was a surprise to most in the trade and seems to indicate price volatility in grain prices will remain for many months to come. Field reports and weekly crop progress reports do not mesh with the August WASDE report’s estimated increases in corn yields nor in the projected acreage for both corn and soybeans being so high. The strong post-report downward corn price reaction was also surprising given the fact that world corn production is still projected to be below world corn usage, and global corn inventories are still projected to decline by over six percent year-on-year. Each successive WASDE report from this point onward should more accurately reflect this year’s true production as the harvest gets underway and projections begin to be replaced by actual numbers.

Despite the differences mentioned by Sal, grain prices moved to the downside since last week.

 

 

The soybean futures market remains in the crosshairs of the trade dispute between the US and China. New-crop November soybean futures fell 1.3% over the past week to just under $8.80 per bushel. Open interest in the soybean futures market fell by 1.67% since last week. The full text of the August WADSE report is available via this link:

https://www.usda.gov/oce/commodity/wasde/wasde0819.pdf

 

The USDA told market participants in the oilseed:

U.S. oilseed production for 2019/20 is projected at 111.5 million tons, down 4.5 million from last month mainly due to a lower soybean production forecast. Soybean production is forecast at 3.68 billion bushels, down 165 million on lower harvested area. Harvested area is forecast at 75.9 million acres, down 3.4 million from the NASS June Acreage Report led by reductions for Ohio and South Dakota. These States account for almost half of the national reduction. The first survey-based soybean yield forecast of 48.5 bushels per acre is unchanged from last month but 3.1 bushels below last year’s level. With lower production partly offset by higher beginning stocks, soybean supplies for 2019/20 are projected at 4.77 billion bushels, down 3 percent from last month. U.S. soybean exports are reduced 100 million bushels to 1.78 billion reflecting reduced global import demand, mainly for China. Soybean ending stocks are projected at 755 million bushels, down 40 million. The U.S. season-average soybean price for 2019/20 is forecast at $8.40 per bushel, unchanged from last month. The soybean meal and oil price forecasts are also unchanged at $300 per short ton and 29.5 cents per pound, respectively. Changes for 2018/19 include reduced soybean crush, reflecting lower domestic use and exports of soybean meal. Soybean ending stocks are projected at 1.07 billion bushels, up 20 million. This month’s 2019/20 global oilseed supply and demand forecasts include lower production, trade, and stocks compared to last month. Lower soybean, rapeseed, and peanut production are partly offset by higher sunflowerseed output. Rapeseed production is lowered for the EU mainly on a lower area and yield for France. India’s soybean and peanut harvested area is reduced due to slow planting progress to date. Ukraine’s sunflowerseed production is forecast higher, as timely rainfall in late July and early August boosted yield prospects. Global 2019/20 oilseed exports are reduced 3.0 million tons mainly on a 2-million-ton reduction to soybean trade. China’s soybean imports are lowered 2 million tons to 85 million reflecting lower soybean meal crush in 2019/20. With crush also lowered in 2018/19, China’s protein meal consumption growth is forecasted flat in 2019/20. Global 2019/20 soybean ending stocks are lower relative to last month due to lower stocks in the United States and China.

Source: USDA

 

The report on soybeans was not all that bearish, but the price of the oilseed fell in sympathy with corn and wheat prices in the aftermath of USDA report.

The December synthetic soybean crush spread was volatile, but held steady at the $1.0675 per bushel level on August 14 which was just 1.50 cents higher than on August 7. A rise in the value of the spread that represents the economics of crushing the raw oilseed into soybean meal and oil would be a sign of demand for the products. Rising processing spreads often translate into support for the underlying commodity. Recent weakness in the price of soybean meal came on the back of falling demand for animal feed because of African swine fever in China, which has killed off a significant percentage of the hog population.

New-crop December corn was trading at $3.7025 per bushel on August 14, which was 10.57% lower on the week. The WASDE report was highly bearish for the price of corn. Open interest in the corn futures market fell by 2.72% since August 7. The decline in the price of corn over recent weeks kept the pressure on ethanol prices, which are at the $1.262 per gallon level, down 16.7 cents or 11.69% since last week. The spread between September gasoline and ethanol futures widened to 41.38 cents per gallon on August 14, up 22.25 cents since the prior week as the price of gasoline moved up and corn tanked since August 7.  In its August WASDE report the USDA told the corn market:

This month’s 2019/20 U.S. corn outlook is for larger supplies, reduced exports and corn used for ethanol, and greater ending stocks. Corn production is forecast at 13.9 billion bushels, up 26 million from the July projection as a decline in harvested acres is virtually offset by an increase in yield. The season’s first survey-based corn yield forecast, at 169.5 bushels per acre, is 3.5 bushels higher than last month’s projection. Today’s Crop Production report indicates that Illinois, Indiana, Iowa, Minnesota, Nebraska, Ohio, and South Dakota are forecast to have yields below a year ago. Of the major producing states, only Missouri is forecast to have yields above a year ago. Corn used for ethanol is reduced 25 million bushels to 5.5 billion. Exports are lowered reflecting U.S. export competitiveness and expectations of increasing competition from Argentina, Brazil, and Ukraine. With supply rising and use falling, ending stocks are up 171 million bushels to 2.2 billion. The season average corn price received by producers is lowered 10 cents to $3.60 per bushel. This month’s 2019/20 foreign coarse grain outlook is for larger production, increased trade, and greater stocks relative to last month. Ukraine corn production is projected record high, reflecting increases to both area and yield. Cool temperatures and timely rain during reproduction are expected to boost yield prospects. EU corn production is raised, as increases for Romania, Hungary, and Bulgaria more than offset declines for Poland, France, and Germany. Barley production is raised for Argentina and Russia, but lowered for Turkey, the EU, and Kazakhstan. Major global coarse grain trade changes for 2019/20 include corn export increases for Ukraine and Serbia, with a partially-offsetting reduction for Russia. For 2018/19, exports for Argentina and Brazil are raised for the local marketing year beginning March 2019, based on larger-than-expected shipments during the month of July. Corn imports for 2019/20 are raised largely reflecting increases for the EU and Indonesia. For China, corn feed and residual use is lowered based on lower forecast protein meal consumption. Foreign corn ending stocks are higher relative to last month, mostly reflecting increases for China, EU, Ukraine, and Turkey partially offset by reductions for Argentina and Indonesia.

Source: USDA

 

The USDA report was bearish for the corn futures market, and the price plunged to under the $4 per bushel level in the aftermath of the release on Monday, August 12 and kept on going on the downside to the lowest level since mid-May.

 

September CBOT wheat futures fell 2.97% since last week. The September futures were trading $4.7375 level on August 14. Open interest fell by 3.57% over the past week in CBOT wheat futures. The August WASDE reported:

The outlook for 2019/20 U.S. wheat this month is for greater supplies, increased use and higher ending stocks. U.S. wheat production is raised 59 million bushels to 1,980 million on increased winter wheat and other spring wheat production as indicated by the NASS August Crop Production report. Estimated food use for the 2018/19 market year is lowered 5 million bushels to 955 million based on the latest NASS Flour Milling Products report. Food use for the 2019/20 market year is also lowered 5 million bushels to 960 million. Feed and residual use is raised 20 million bushels to 170 million on greater wheat supplies and more competitive prices. Projected 2019/20 U.S. wheat exports are raised 25 million bushels to 975 million on lower exportable supplies from key competitors, notably the EU, Kazakhstan, and Russia. Ending stocks for 2019/20 are raised 14 million bushels to 1,014 million, down 5 percent from the previous year. The season-average farm price is lowered $0.20 per bushel to $5.00 on updated NASS prices, lower U.S. corn prices, and reduced wheat price expectations for the remainder of the market year. Foreign 2019/20 wheat supplies are reduced 4.5 million tons, primarily on lower production in several major competing exporters. The production declines are led by a 2.0-million-ton reduction for Turkey on both an updated harvested area estimate as well as a lower yield. EU, Kazakhstan, and Russia are lowered 1.3 million tons, 1.0 million tons, and 1.2 million tons, respectively. These reductions are based on harvest results confirming yield losses due to hot and dry June conditions in winter wheat regions and expanding dryness in the spring wheat areas of Russia and Kazakhstan. Moldova production is also down 0.2 million tons. Partly offsetting is a 0.5-million-ton production increase for Argentina and a 0.2-million-ton increase for Ukraine. Projected 2019/20 global exports are down 0.5 million tons led by a 1.0-million-ton reduction for Kazakhstan and 0.5-million-ton reductions each for the EU and Russia, all on the smaller crops. Partly offsetting is a 0.7-million-ton increase for the United States and 0.5-million-ton increases for both Argentina and Ukraine. Projected 2019/20 world consumption is 2.0 million tons lower on both reduced feed and residual use and food and industrial consumption. With supplies falling more than use, global ending stocks are revised 1.1 million tons lower to 285.4 million tons but remain record large.

Source: USDA

 

The rise in US supplies and stocks in the August WASDE report sent the price of wheat futures significantly lower after the release of the report.

 

As of Wednesday, the KCBT-CBOT spread in September was trading at an 89 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 18.5 cents lower than on August 7 and moved to a new high and remains at an elevated historical level. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market.

The WADSE report pushed most prices lower over the past week.  My positions in the grain markets continue to be very small, given the time of the year and the recent price volatility. I have very small long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move towards the harvest season, the less active I will be when it comes to trading. The trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. For the coming week, the price volatility is likely to be a function of the weather forecasts in the US grain belt and the growing regions in the northern hemisphere when it comes to wheat.

The markets will now shift focus to the 2019 harvest, and the upcoming planting season in the Southern Hemisphere. The one constant in the grain markets is that each quarter the demand side of the fundamental equation grows as the world population expands by approximately twenty million. Grains are at a level where a the odds of a price recovery in the corn and wheat markets are high.

 

Copper, Metals, and Minerals

 

Nickel was once again the leader on the upside when it comes to the LME metals. The nonferrous metal moved over 4.6% higher since last week. The price of nickel has been rallying over fears that a leading Indonesian producer will accelerate an export ban that was previously set to start in 2022. Copper and lead prices also moved higher since last week’s report, but aluminum, zinc, and tin prices slipped lower. The price of uranium was unchanged over the past week. Meanwhile, the price of lumber posted a loss, but the Baltic Dry Index moved marginally higher and was at the 1864 level since August 7. The price of iron ore continued to move to the downside on the back of protectionism and Chinese retaliation.

Copper moved 0.93% higher on COMEX, while the red metal posted a 0.62% gain on the LME over the past week. Open interest in the COMEX futures market moved 2.69% lower after last week’s 13% gain. Copper was trading at just below the $2.60 per pound level on the nearby September futures contract. Copper is one of the leading barometers when it comes to the trade dispute between the US and China, which is now a trade war. Over the past week, copper inventories on the LME declined but moved higher on the COMEX in a continuation of the trend from last week.

LME lead moved higher by 2% since August 7, while the price of nickel gained 4.66% over the past week. Tin posted a 0.74% loss since the previous report. Aluminum was 0.28% lower on the week. The price of zinc dropped 2.39% since August 7.

September lumber futures were at the $348.10 level, 2.77% lower since the previous report. The price of uranium for December delivery did not move from the $25.70 per pound level. The Baltic Dry Index was 7.5% higher as it rose to the 1864 level. September iron ore futures posted a 0.96% loss compared to the price on August 7 after last week’s more than 19% loss as trade issues trumped the shortages from Brazil. Open interest in the thinly-traded lumber futures market fell by 1.27% over the past week.

LME copper inventories moved 1.95% lower to 272,550 metric tons since last week. COMEX copper stocks increased 2.71% since last week to 41,508 tons. With the LME considering new rules to improve transparency when it comes to stockpile data, the stock numbers could have a greater impact on short-term price volatility in the future without the specter of manipulation.

Lead inventories on the LME fell by 4.26%, while aluminum stocks fell by 3.28%. Aluminum stocks edged below the one-million-ton level. Zinc stocks moved 3.06% lower since the previous report. Tin inventories moved 1.55% higher since last week. Nickel inventories were 1.36% higher compared to the level on August 6. However, the price of nickel continued to make higher highs and rose to $15,725 per ton. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. The trade war continues to be the most significant factor when it comes to the path of least resistance of LME metals over the coming weeks.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.57 per share on Wednesday up two cents since last week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.88 on August 14. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

We own two units of FCX shares at an average of $10.56. The stock was trading at $9.36 on August 14, 72 cents lower over the past week. I will maintain a small long position in FCX shares and would only add if the price drops from the current level. I am looking to purchase another unit at between $8 and $9 per share. I am keeping my position small in FCX to add on further price weakness over the coming weeks.

With market volatility picking up over the recent weeks because of the escalation of the trade dispute, the odds of a risk-off period have increased. Industrial commodities tend to move to the downside during periods where investors and traders seek safety in government bonds, and other havens. I have left room to add on any significant downdrafts in most of my positions in the industrial sector of the commodities market.

 

Animal Proteins

Animal protein prices moved lower across the board since the past week. As we are now in the middle of August, the peak season of demand that runs from the end of May to the beginning of September in the United States is coming to an end. At the same time, the trade dispute continues to weigh on all agricultural product prices. The August WASDE, which came out on August 12, did little to support the prices of the meat futures. When it comes to the beef and pork markets, the USDA told markets:

The forecast for total meat production in 2019 is raised from last month as increases in broiler and turkey production more than offset declines in beef and pork production. Broiler production is raised on June production data and the expectation of a continued higher proportion of heavier weight birds in the slaughter mix. Forecast turkey production is also raised on recent production data and higher expected slaughter in the fourth quarter. The decline in beef production largely reflects a slower pace of cattle slaughter in the third quarter and lighter expected carcass weights through 2019. The pork production forecast is reduced on a slower expected pace of slaughter during the third quarter. For 2020, the red meat and poultry production forecast is raised on higher expected beef and poultry production forecasts. The beef production forecast is raised from the previous month on a higher expected pace of first-half marketings. However, the 2019 calf-crop estimated in the July 19th Cattle report implies lower-than-previously expected marketings in the latter part of 2020. Continued growth in average bird weights is expected to result in higher forecast broiler production in 2020. Turkey production is raised slightly. Forecast pork production is unchanged from the previous month. For 2019, the beef import forecast is adjusted to reflect June trade data; the import forecast for 2020 is unchanged. Beef export forecasts are unchanged for both 2019 and 2020. The pork import forecasts for 2019 and 2020 are lowered on slowing import demand. The pork export forecast for 2019 is adjusted based on June trade data. No change is made to the 2020 pork export forecast. The 2019 broiler export forecast is reduced on recent trade data, but the 2020 forecast is unchanged. No changes are made to 2019 and 2020 turkey trade forecasts. Fed cattle prices are raised for 2019 on current price strength. The 2020 price forecast is also raised. The 2019 hog price forecast is lowered on recent price pressure, but the 2020 price forecast is unchanged from last month. The broiler price forecast for 2019 and 2020 are lowered on larger forecast supplies. The turkey price forecast for 2019 is raised; no change is made to the 2020 turkey price forecast.

Source: USDA

 

The USDA data was not all that bearish for beef and pork prices, but the animal protein futures fell sharply in sympathy with other agricultural commodities since last week’s report. The coming offseason for demand also has weighed on the meat prices.

 

October live cattle futures were trading at 98.50 cents per pound level down 7.47% from last week. Technical resistance is at $1.10600 which was the July 29 peak on the October contract.  Technical support stands at 98.40 cents per pound level, which is the low over the past week. Price momentum and relative strength indicators are in oversold territory on the daily chart. Open interest in the live cattle futures market moved 1.08% higher since the last report.

October feeder cattle futures outperformed live cattle again last week as they fell by 3.98% since last week. October feeder cattle futures were trading at the $1.33375 per pound level with support at $1.27325 and resistance at $1.44425 per pound. Open interest in feeder cattle futures rose by 0.23% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others the opposite occurs. Live cattle futures caught up with the feeder cattle on the downside over the past week.

Lean hog futures continued to decline. October lean hogs were at 66.775 cents on August 14, which was 0.11% lower on the week. The open interest metric rose by 0.01% from last week’s level. Price momentum and relative strength crossed higher in oversold territory on August 14 as the selling has slowed in the pork market. Support is at 61.50 cents with technical resistance on the October futures contract at just below the 70 cents per pound level.

The forward curve in live cattle is in contango from October 2019 until April 2020. From April 2020 until August 2020 a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through December 2020. The Feeder cattle forward curve has moved into a slight backwardation from August through September 2019. From September 2019 through November 2019 there is a small contango, bit the curve moved into backwardation from November 2019 through March 2020. A small contango returns from March 2020 through May 2020.

In the lean hog futures arena, there is a backwardation from August until December 2019 after which contango returns until July 2020. There is a backwardation from July through December 2020. The forward curves reflect the seasonal trading patterns in the meat markets. The curves shifted to reflect the recent selling in the animal protein futures markets.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two meats narrowed slightly in the October futures contracts as the price of beef underperformed pork on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.4751:1 compared to 1.5924:1 in the previous report. The spread decreased by 11.73 cents as cattle became less expensive compared to hogs on a historical basis. The price action over the past weeks has not reflected a continuation of African swine fever, which is still impacting global supplies. The WASDE report on Monday, August 12 was not particularly bearish for meat prices. However, cattle fell sharply since last week.

The end of the peak season, fears of economic weakness around the world, and the trade war between the US and China are likely weighing on meat prices.

Soft Commodities

Sugar posted a gain since last week along with cotton, but the other members of the soft commodities sector moved to the downside. The decline in the Brazilian real against the US dollar weighed on the prices of sugar, coffee, and FCOJ futures. Brazil is the world’s leading producer and exporter of those three soft commodities. The Brazilian currency likely fell after bordering Argentina is facing more political problems. This week’s election did not bode well for the business-friendly government which could be a sign for the Bolsonaro administration that took over in Brazil last October. Cotton continues to trade below the 60 cents per pound level on the back of the trade war between the US and China. Cocoa futures fell as the correction from the recent high continued since August 7.

October sugar futures gained 2.38% higher since last week. Sugar fell below technical support at 11.36 cents per pound, which was the late May low on the continuous futures contract. Technical resistance is at the June 28 peak at 12.84 cents. Nearby sugar futures traded to a low at 11.27 cents on August 7 but recovered over the past week. The value of the Brazilian real against the US dollar edged to the downside over the last week and was at the $0.24740 level against the US dollar, which was $0.0035 or 1.4% lower. The fall in the Brazilian currency likely weighed on the price of sugar over the recent weeks.

Price momentum on the daily sugar chart is in the lower region of neutral territory. The metric on the weekly and monthly charts are declining below neutral territory. If sugar suffers a substantial decline, I will look to add to long positions.

September coffee futures declined by 2.53% since last week’s report and were trading below the 94.50 cents per pound level. Short-term support is now at the May 7 low at 90.05 cents on the September futures contract. September futures are now rolling to December, which could create more selling in the days ahead.  I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $32.63 on Wednesday. Open interest in the coffee futures market fell by 8.97% since last week. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle. I have been a scale-down buyer leaving room to add on further weakness over the coming days and weeks.

Cocoa futures continued to decline over the past week. On Wednesday, September cocoa futures were at the $2143 per ton level, 3.64% lower than last week. Open interest rose by 1.33%. Relative strength and price momentum are in deeply oversold territory after fourteen out of fifteen out of seventeen losing sessions in the futures market. September futures are rolling to December in the cocoa market, which could be a cause of the intensity of selling.  The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures. The price of cocoa posted gains over five consecutive months and had close above the $2307 per ton level at the end of July to avoid a bearish reversal on the long-term chart. However, the bullish streak ended in July, and the price of cocoa has been falling throughout August. Given rising global demand, I favor buying cocoa on a scale-down basis over the coming week after the recent price correction. Last week, I suggested purchasing the NIB ETN product at $25.76. NIB closed at $25.05 on Wednesday, August 14.

December cotton futures rose by 1.26% over the past week. Cotton is trading at its lowest price since March 2016 when the price found a bottom at 55.66 cents per pound. The trade dispute between the US and China has sent cotton below the 60 cents per pound for the first time in over three years. The first significant target on the upside is technical resistance at 64.68 cents, the July 25 high. Above there, the next level on the upside is at the 68.35 cents per pound level on the December contract, the July 1 peak. On the downside, support is at 55.66 cents per pound. Open interest in the cotton futures market rose by 4.31% since July 30. Trade with China and the weather across growing regions will be the primary drivers of the price of the fiber over the coming weeks. The August 12 WASDE report to the market:

This month’s 2019/20 U.S. cotton outlook includes higher beginning stocks, production, exports, and ending stocks. Production for the 2019 crop is raised 2 percent to 22.5 million bales, on NASS’s first survey-based production forecast. The survey indicates slightly higher area and yield compared with last month’s expectations, resulting in the largest crop in 14 years. Beginning stocks are raised 250,000 bales due to lower-than expected 2018/19 exports. Exports for 2019/20 are raised 200,000 bales this month, and ending stocks are raised 500,000 bales to 7.2 million. The 2019/20 season-average price for upland cotton is forecast at 60 cents per pound, down 3 cents from last month. Lower projected world cotton consumption largely accounts for a 2.0-million-bale increase in 2019/20 global ending stocks from the July forecast. Beginning stocks are higher, largely due to a 500,000-bale decline in 2018/19 consumption. Production in 2019/20 is forecast 200,000 bales lower this month, but higher beginning stocks and a 1.2-million-bale decline in projected consumption are more than offsetting. Consumption is lower in China, India, and Uzbekistan.

Source: USDA

 

Higher beginning stocks and lower consumption in the August WASDE report was not bullish news for the price of cotton, but the price is at the lowest level in years, which could cause a relief rally. Last week, I suggested adding another unit to our long position in the BAL ETN product at $35.88 per share level. We are now long two units at $37.90 per share. BAL was at $36.31on August 14.

Price momentum and relative strength metrics have declined into oversold territory on the daily chart and were crossing higher. The metrics remain in oversold conditions on the weekly and monthly charts. I continue to believe cotton is in the buying zone and that a correction to the upside will eventually occur from above the 55.66 cents per pound level.

September FCOJ futures also posted a decline over the past week as the price fell to under the $1 per pound level. On Wednesday, the price of September futures was trading around the 98.80 cents per pound level. FCOJ nearby futures moved 2.18% lower over the past week. Support is at the 95.85 cents level, the August 5 low. Technical resistance at the early June high at $1.1530 per pound with minor resistance at the July 9 high at $1.06 per pound. Open interest rose by 0.08% since August 7.

Soft commodities prices continued to lose value over the past week. As many of the members of the sector roll from September to December futures, we could see a bit more two-way volatility later this month or in early September. Last September, the prices of coffee and sugar fell to lows and recovered throughout October. Time will tell if we see a repeat performance of that type of price action over the coming weeks.

 

A final note

Aside from the trade and currency war between the US and China, the Chinese government now faces rising protests in Hong Kong, which could spiral out of control. At the same time, as each day passes, the deadline for Brexit is closer, and Prime Minister Johnson has made it clear he is prepared to leave the EU with no deal. The many issues facing the world could cause periods of risk-off in markets across all asset classes. Commodities are no exception in the current environment.

August tends to be a quiet month in markets, but that has certainly not been the case in 2019. Be careful out there in the markets as we could see a continuation of volatility over the coming week. Watching risk levels in the current market is the most important factor. There is nothing wrong with clearing the decks of all positions and sitting on the sidelines in the current environment until the dust settles and calm returns to the markets.

 

 

 

Until next week,

 

Andy Hecht

 

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.