- Stocks come storming back
- Gold and silver rest
- Crude oil and natural gas recover, but natural gas sits below technical resistance levels
- The dollar near the highs as Bitcoin retreats
- Enjoy the end of the summer, the fall could bring increased volatility in all markets
The summary of trade recommendations for the coming week are as follows:
Summary and highlights:
On Thursday, August 15, the big news was the inversion of the yield curve and the rise in the 30-Year Treasury bond futures to a new high at 166-30 on the session. Stocks did not follow through on the downside as Thursday was a tame session compared to the price carnage of the previous day. The DJIA gained just under 100 points, while the S&P was seven points higher and the NASDAQ moved lower by only seven points on the session. Corn posted a small gain while soybeans and wheat moved a bit lower on the session. Crude oil was lower as the price fell below the $55 per barrel level on the nearby NYMEX futures contract. Oil products followed the energy commodity to the downside, but natural gas went the other way. The price gained almost 9 cents on the session as the EIA reported a smaller than expected injection of 49 bcf into storage. Gold and palladium posted gains, while silver and platinum moved lower. Copper remained at just below the $2.60 per pound level. Live cattle and feeder cattle were marginally higher, but lean hog futures moved lower. FCOJ and cocoa futures moved a bit lower, while sugar, cotton, and coffee eked out minimal gains. The dollar index was higher, and Bitcoin did not move much as it was at the $10,240 level. The market continued to be highly nervous after Wednesday’s selling.
On Friday, the stock market posted gains, bonds moved lower, and the dollar index closed at just over the 98 level. The DJIA was up over 300 points, with the other indices posting even more significant gains on the session. Grain prices edged higher, as did crude oil and oil products. Natural gas pulled back to the $2.20 per MMBtu level. Gold and silver posted small losses, but platinum and palladium moved to the upside. The meats continued to fall as the market is now focused on the end of the peak season after the Labor Day holiday. Soft commodities posted mixed results with cotton, FCOJ, and sugar posting small gains while coffee and cocoa prices moved in the opposite direction. Bitcoin edged higher to the $10,625 level on the active month futures contract.
On Monday, stocks continued to move to the upside as memories of last week’s sharp selloff faded in the market’s rearview mirror. The DJIA rose by around 250 points, as the S&P 500 and NASDAQ posted 1.21% and 1.35% gains respectively. The small-cap Russell 2000 gained just over 1% on the first session of the week. The dollar index rose to the 98.221 level as it approaches the recent high at 98.70 on the September futures contract. Grain prices slipped lower, but crude oil went the other way as NYMEX futures settled $1.34 high on the session with gains in oil products. However, the Brent-WTI spread continued to fall, as did the crack spreads. Natural gas was around one cent higher on the session. Gold and silver prices corrected to the downside with gold hovering around the $1500 level at the end of the session and silver below $17 at $16.85. Platinum and palladium posted gains, while copper was marginally higher. Meat prices edged higher after recent gains, but all of the soft commodities except for cocoa moved to the downside. Lumber was higher on the session. US bonds corrected lower, and Bitcoin was sitting at just over the $10,800 level. The market was waiting to hear from the central bankers that have gathered for the annual retreat at Jackson Hole, Wyoming.
On Tuesday, stocks edged lower with the DJIA falling 173 points, and the S&P 500 and NASDAQ posting losses of 0.79% and 0.68% respectively. The dollar index held at just above the 98 level, and Bitcoin did not change much as it remained above $10,800. US 30-Year bonds moved higher on the session to over the 165 level. Soybean futures posted a marginal gain, but corn and wheat moved lower. Crude oil did not move all that much, but oil products gained, pushing crack spreads higher. Natural gas did not move much in sleepy summer trading. Gold and silver both moved to the upside with the yellow metal over the $1515 level on December future and silver back over $17 per ounce. Platinum slipped lower, while palladium moved to the upside. Meats all posted small gains while soft commodities were mostly higher with only a small loss in cotton futures. Lumber edged lower but was at the $366.20 level. US Steel plans to lay off 200 workers in Michigan, which took X shares lower on the session. In a press conference, President Trump said that the Fed should cut the Fed Funds rate by 100 basis points over the coming months and restart quantitative easing.
On Wednesday, the Italian Prime Minister resigned putting additional pressure on the euro currency. The Fed released its minutes from the July 31 Fed meeting. There were two dissenters to the rate cut. Eric Rosengren and Esther George cited economic growth and recent data as reasons for keeping rates unchanged. However, a couple of members favored a 50-basis point rate cut at the meeting. The Fed pointed to three reasons for the 25-point cut. Slow growth when it came to business investment and manufacturing caused by the trade war was the first issue. Uncertainty over economic conditions around the world was the second, and inflation at below the 2% target rate was the final factor leading to the pivot to lowering the short-term interest rate. The move was part of an ongoing reassessment of the rate path in the US. The Fed gave no real signal for the future, but we must remember that the escalation in the trade dispute occurred the day following the July 31 Fed meeting. The stock market continued to move higher in the aftermath of the Fed minutes, and other markets did not move all that much. The market is now waiting for Chairman Powell’s comments from Jackson Hole on Friday. President Trump continued to put pressure on the central bank. On Wednesday, he tweeted:
I wonder if Teddy Roosevelt could have imagined the impact of social media when he coined the term “bully pulpit.” Stocks finished higher on Wednesday, the dollar index remained near the high above the 98 level, and the action in most markets was quiet mid-week at the end of the summer.
Stocks and Bonds
Stocks recovered significantly over the past week after last week’s significant move to the downside prompted by a growing fear over a global recession. All of the leading indices posted gains, and the VIX moved lower. In a sign that calm has not returned to markets, the US bonds continued to remain at an elevated level.
The S&P 500 rose by 2.95% over the past week, while the NASDAQ moved 3.17% higher. The DJIA posted a 2.84% gain since the previous report. We have witnessed increased volatility in the stock market in August this year, which is typically a quiet month.
As US stocks rose, Chinese large-cap stocks did better over the past week. Despite trade issues, the leading Chinese stocks posted a higher percentage gain than the leading three US indices since the last report.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $39.35 level on Wednesday, which was 4.46% higher than the closing level on August 14. Technical support has moved lower to the recent low at $37.66 per share on August 14.
FXI is an indicator when it comes to the ups and downs of the trade war between the US and China. It is also sensitive to the ongoing problems China faces in Kong and the potential for a standoff between the Chinese military and protestors. Any sudden settlement with the Hong Kong or a break through on trade would lift the value of the FXI, perhaps dramatically.
US 30-Year bonds moved to a new high at 166-30 on the September futures contract on August 15 and were at 164-16 on Wednesday as they moved 0.23% lower since the previous report. The strength in the bond market comes from the trend of lower global interest rate and a flight to quality as volatility increases in the stock market.
Open interest in the E-Mini S&P 500 futures contracts rose by 0.83% since August 13. Open interest in the long bond increased by 2.03% over the past week. The VIX moved lower as stocks recovered over the past week. The volatility index was at the 15.80 level on August 21, a decline of 28.51% after rising to a high at 24.81 on August 5. The VIX has been jumping around with the stock market over the past weeks, creating lots of trading opportunities.
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. Nothing has changed in my approach to trading volatility since the previous report.
The many factors facing markets should continue to foster wide price variance at times. The stock market stalled near the recent highs at the end of July, which is a pattern since early 2018. Each time the stock market reached a record, substantial corrections have followed. When it comes to the bond market, expectations for significant interest rate cuts in the US have grown to a level where if the Fed does not act aggressively, the potential for disappointment and selling in the stock market have increased. I believe we will continue to see wide price variance in the stock and bond markets over the coming weeks and months.
The dollar and digital currencies
The dollar index rose 0.36% since August 14. The index made a new and higher high at 98.700 on August 1 before correcting the to the downside. The index is now flirting with those highs once again. The rising concerns over global recession have caused a flight to quality, and the US dollar has been a beneficiary.
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. If the Fed moves slower than other central banks to cut interest rates, the dollar is likely to remain strong and on its bullish path. The euro currency was 0.56% lower against the dollar since last week’s report. We could see increased volatility in the currency market over the coming weeks, given the many issues facing the world from both a political and economic perspective. When it comes to the euro, the resignation of the Italian Prime Minister on August 21 was a reminder of the political and economic issues facing the EU and ECB aside from Brexit.
The potential for intervention in the US dollar could rise with the value of the greenback, particularly if the Fed does not take a more aggressive approach to cut short-term interest rates. The Trump administration remains frustrated with the Federal Reserve. The President could resort to market operations through the Treasury Department to push the dollar lower against other currencies if the central bank does not lower rates by 50 basis points at the next FOMC meeting. The current environment could cause wider price variance in the foreign exchange market.
The leader of the digital currency asset class was trading at the $10,086.29 level as of August 21. Bitcoin and other digital currencies have been consolidating over recent weeks. Bitcoin appears to be settling into a $9000-$12,500 trading range. The escalation of the trade dispute and the potential for a currency war had lit a fire under the price of Bitcoin. Chinese devaluation of the yuan has caused Bitcoin and other members of the asset class to move 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. Meanwhile, the Chinese government’s desire to control the money supply is likely causing a crackdown on both digital currency and gold buying. A risk-off environment could weigh on the prices of all assets, and digital currencies and gold could become susceptible to periods of selling and lower prices. Bitcoin moved 1.30% lower since last week while Ethereum posted a 2.17% loss as it was at around $184.49 per token. The market cap of the entire asset class moved 1.82% lower as Bitcoin outperformed the other digital currencies. The number of tokens rose by 19 since August 14. Open interest in the CME Bitcoin futures declined by 5.16% since last week.
As I wrote last week, “The higher the prices of digital currencies move, the more the spotlight on the asset class will intensify. Governments around the world will not surrender control of the money supply, so the market is likely to see an increase in regulation of digital currencies. The custody issue continues to be a roadblock when it comes to an ETF product. I believe that a leading country will eventually issue a digital currency, which would give the asset class a significant boost.” Bitcoin and the other cryptocurrencies are borderless, which is what attracts many to the asset class. However, they also act contrary to government control of money supplies, which is a reason why regulatory moves could squash the rise of the asset class. The recent sideways price action has reduced the pressure on governments to address the digital currencies, but that is likely a temporary phenomenon.
The Canadian dollar moved 0.17% higher since last week. Open interest in C$ futures fell by 3.22% 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 0.49% gain since the previous report as the currency drifted away from 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 clock is ticking with a little over two months to go before the deadline. We could see lots of volatility in the British pound in September and October based on the daily flow from the news cycle over Brexit.
The Brazilian real moved 0.28% higher 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 $0.2481 level against the US dollar since 2011. However, the Brazilian currency fell recently on contagion from Argentina.
Gold made another new high last week and remains a hybrid between a currency and a commodity. Since central banks around the globe hold the yellow metal as a part of foreign exchange reserves, gold is a means of exchange in the world. The trend in the gold market in all currency terms is telling us that the value of other forms of legal tender is declining. While gold has not reached a new record high in dollar terms, it is close in euros, and at an all-time peak in many other currencies. Gold is money, and it is telling us that we could be on the verge of a currency crisis around the globe. Central bank stimulus amounts to running the printing pressures to provide liquidity in the form of low interest rates. While there is no limitation to how much currency the world’s monetary authorities can print, they cannot create more gold. The yellow metal is a barometer of fear and uncertainty, but also a store of value. Gold continues to appreciate versus all of the currency instruments around the world.
The platinum group metals posted gains since last week’s report, but gold and silver edged lower. However, the two most closely watched metals in the sector, gold, and silver, only posted marginal losses as gold remained over $1500 and silver above $17 per ounce on the active month futures contracts. Gold and silver mining shares outperformed the metals, which was a function of the rise in the stock market. August is typically a quiet month in markets across all asset classes, but the first half of the month was atypical. The final days of August may provide the market will a breather, which is overdue.
Gold was 0.79% lower since August 14 while silver fell by 0.75% over the same period. The price of December gold was just above the $1515 per ounce level on Wednesday while silver was around $17.15. 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. While prices have not backed off all that much, the markets appear to be consolidating before making their next moves.
The price of platinum rose 1.19% since last week. Rhodium rose by 2.72% while palladium gained 3.47%. Palladium and rhodium continue to be the star performers of the sector since early 2016. Platinum remains the laggard when it comes to price performance.
Open interest in the gold futures market moved 0.14% higher since the previous report to just under the 595,000-contract level. The metric moved 0.48% higher in platinum while it was 2.91% higher in the palladium futures market. Silver open interest rose 1.82% over the period.
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 breakout to the upside in June was another leg in a long-term bull market for gold.
The silver-gold ratio edged lower over the past week as gold fell a touch more than silver.
The daily chart of the price of nearby October gold divided by September silver futures shows that the ratio was at 88.13 on Wednesday, 0.36 lower than the level on August 14. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold. The silver market is highly speculative, and thus far, the recent gold fever has not lit a significant bullish fuse under the silver market. If gold continues to post gains, silver will likely go along for the ride, eventually.
We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 0.79% lower, the GDX was 1.02% higher since August 14 and GDXJ was down only 0.23% 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 atypical of the relationship between the metal and the mining stocks. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted a 0.19% loss 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. However, the trajectory of the rallies stalled, and a period of retracement may be in the cards for both precious metals.
Platinum and palladium prices moved higher since August 14. October platinum futures rose by 1.19% to the $858.10 per ounce level. Palladium posted a 3.47% gain as of the close of business on August 21 and was at the $1465.50 per ounce level. Palladium was trading at a premium over platinum with the differential at the $607.40 per ounce level on Wednesday, which widened over the past week. October platinum was trading at a $657.60 discount to December gold at the settlement prices on August 21 which narrowed over the period. The price of rhodium which does not trade on the futures market moved $100 higher over the past week and was at $3,780 per ounce on Wednesday.
We are long the PPLT platinum ETF product which moved 1.05% higher since August 14. Platinum continues to offer the most attractive value proposition in the precious metals sector, but the price action has been disappointing.
The final days of August may be a resting period for the metals. The US dollar and interest rates around the world will continue to guide the prices on a short-term basis. The trade and currency war between the US and China and the many issues facing the world over the coming weeks and months will determine if the current leg of the bull market in gold will continue to reach new heights. Silver will likely follow gold with outperformance on the upside and underperformance on the downside on a percentage basis. Palladium and rhodium continue to display strength. Each dip in the two PGMs has been buying opportunities since early 2016. Platinum is the rarest and densest metal with the highest resistance to heat. While platinum is both an investment and industrial metal, the price-performance has ignored the other PGMs and the gold market. Since platinum liquidity is far less than gold and silver, if a substantial amount of buying returns to the market, the price of platinum could move appreciably higher. However, a move to above the $1000 per ounce level is likely necessary to change the trend and encourage trend-following and investment buying to return to the market.
Ethanol and natural gas prices recovered over the past week, and the prices of crude oil and oil products also posted gains since last week. The products marginally outperformed the oil sending crack spreads a bit higher. September futures rolled to October which is not the active month in the oil market. As the summer ends, the weakness in gasoline is a typical seasonal phenomenon, but the distillate refining spread underperformed the gasoline crack spread over the past week which was likely a function of the roll in the futures market.
October NYMEX crude oil futures gained 1.40% since last week. October Brent futures moved 1.33% higher since August 14. October gasoline was 2.21% higher, and the processing spread in October posted a 5.12% gain since August 14. The gasoline crack spread had been declining steadily since the week of July 11. October heating oil futures moved 1.12% higher since the previous report, and the heating oil crack spread rose by just 0.09% since last week. The heating oil refining spread has also been trending lower since mid-July in a sign of weakening demand for oil products.
Technical resistance in the October NYMEX crude oil futures contract is at $57.40 per barrel level with support at the $50.50 level. Crude oil open interest fell by 2.73% 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 remained relatively quiet over the past week.
The spread between Brent and WTI crude oil futures in October rose to the $4.57 per barrel level for Brent, which was $0.36 above the August 14 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. I had been writing that the pressure on the spread could be a buying opportunity for Brent compared to WTI, given the potential for a flare-up of incidents or hostilities in the Middle East. However, I would use a tight stop on any long Brent versus short WTI futures positions in the current environment. The Brent premium traded as high as $11.59 per barrel in late May, but the October contract reached a lower level at $7.91 on the high when it comes to the spread. Brent will roll from October to November futures at the end of August while NYMEX WTI futures are rolling from September to October. The roll periods can cause distortions in the spread between the two benchmark crude oils at times. The spread found at least a temporary bottom at $3.48. Now the market will prepare for the Brent roll from October to November on the final day of the month.
US daily production stood at 12.3 million barrels per day as of August 16 according to the Energy Information Administration, which is unchanged from the previous week’s level. Daily output in the US remains at the record level at the 12.3-million barrel per day level. As of
August 9, the API reported an increase of 3.700 million barrels of crude oil stockpiles while the EIA said they rose by 1.60 million barrels for the same week. The API reported a rise of 3.70 million barrels of gasoline stocks and said distillate inventories fell by 1.30 million barrels as of August 9. The EIA reported a decline in gasoline stocks of 1.40 million barrels and a decrease in distillates of 1.9 million barrels. Rig counts, as reported by Baker Hughes, rose by six last week to 770 rigs in operations as of August 9, which is 99 below the level operating last year at this time. The increase in the number of rigs with daily output at a record 12.3 million barrel per day level weighs on the price of the energy commodity.
OIH and VLO shares posted gains since last week. OIH rose by 4.14%, and VLO moved 3.16% higher since August 14. 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 far too low at its current price level. I intend to add to the position on further price weakness.
September natural gas futures hit the low so far in 2019 on August 5 at $2.029 per MMBtu. Over the past week, the price continued to drift higher. The September futures were at $2.170 on August 21, which was 1.26% higher than on August 14. Last week, the EIA reported an injection of 49 bcf into storage brought the total amount of gas in storage to 2.738 tcf as of August 9. 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.
As the chart shows, stockpiles of natural gas are 15% above last year’s level but were still 3.9% under the five-year average as of August 9. Last week’s injection was below the level the market had expected. This week, I expect the EIA to report an injection of around 58 bcf as the hot conditions during the final days 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 1.67% over the past week. Technical resistance stands at $2.267 on the September contract and at just over the $2.50 per MMBtu level on the continuous futures contract. $2.53 and $2.522 were the lows from 2018 and 2017 respectively. We will likely see a challenge of those levels when the 2019/2020 withdrawal season comes closer. The peak season for demand tends to begin in mid-November, but the futures market has a habit of reflecting the shift from injections to withdrawals from storage a lot earlier.
With approximately 13 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 39.2 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 97.1 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.
$2 per MMBtu is a critical psychological target on the downside if natural gas moves to a lower low and towards the March 2016 bottom at $1.611 per MMBtu. As the days of summer are almost over, I am starting to put some bids in the market to purchase call options with strike prices below $2.80 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market. I am also looking to purchase the leveraged GASL product at prices below $9 per share. I will leave plenty of room to add on any future price weakness in the natural gas call options. In GASL, I will work tight stops and look to establish long positions at a lower level if selling in natural gas, the stock market, or both continue to weigh on the leveraged ETF.
October ethanol prices rebounded by 6.23% over the past week after the 11.69% collapse last week on September futures. Open interest in the thinly-traded ethanol futures market fell by 14.44% over the past week after the recent significant declines. With only 575 contracts of long and short positions, the thinly-traded biofuel market is untradeable and could be delisted. The KOL ETF product rose by 1.11% compared to its price on August 14, but the price of October coal futures in Rotterdam fell by 5.12% over the past week. 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 fell by 3.45 million barrels for the week ending on August 16, and the EIA said they decreased by 2.70 million barrels on Wednesday. Analysts had expected a decline of 1.889 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 403,000 barrels and a rise in distillate stocks of 1.806 million barrels. On Wednesday, the EIA said that gasoline stocks rose by 300,000 barrels and distillate inventories increased by 2.6 million barrels for the week ending on August 16. The inventory data was mildly 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. Nothing has changed since the previous report.
In natural gas, prices continue to be at low levels for the coming peak season, which begins in mid-November.
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.532 in January, which was 0.90 cents per MMBtu lower than last week. I had been patiently waiting to buy call options for a spike to the downside. This week, I will begin nibbling on some small long positions, 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 14, the price of BG shares moved 2.55% higher to $54.70 per share on August 21. 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 have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market.
I continue to favor a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 3.14% higher 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.
Risk-off could be the leading factor for the crude oil market. If the price of oil heads below the $50 per barrel support on the nearby NYMEX futures contract, all bets are off. Crude oil tends to take the stairs higher and elevator shaft to the downside as we saw last October through December and in 2016. Any long positions require very tight stops in the current environment. However, sudden spikes to the upside because of supply concerns from the Middle East could appear in a flash if Iran decides to provoke the US over the coming days and weeks. I will be concentrating on picking up some bargains in natural gas in the futures options market for December through February expiration over the coming week.
Grain prices stabilized a bit after last week’s selling that followed the release of the August World Agricultural Supply and Demand Estimates report. Wheat was the biggest loser last week. The market will now be following the weather conditions over the final weeks of the 2019 growing season as the harvest is coming closer each day.
Meanwhile, the trade war between the US and China remains the most significant issue that could inject volatility in the corn and soybean futures markets. Any signs of positive momentum in trade talks that lead to Chinese purchases of the grain and oilseed from the US could cause rallies from the current price levels. The weather and trade will remain the critical factors to watch over the coming week.
New-crop November soybean futures edged only 0.57% lower over the past week. Open interest in the soybean futures market rose by 3.28% since last week. The December synthetic soybean crush spread edged higher and was at the $1.080 per bushel level on August 21, up 1.25 cents since August 14. Weakness in the price of soybean meal had been the result of the falling demand for animal feed because of African swine fever in China, which has killed off a significant percentage of the hog population. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures.
New-crop December corn was trading at $3. 7025 per bushel on August 21, which was unchanged on the week. The WASDE report was highly bearish for the price of corn and pushed the price to a low at $3.6625 on the December futures contract on August 21 as the selling continues to weigh on the price of corn. Open interest in the corn futures market fell by 1.22% since August 13. The lack of and price gain in the price of corn over the past week did not stop a recovery in the price of ethanol to $1.347 per gallon level, up 7.9 cents or 6.23% since last week. The spread between October gasoline and ethanol futures narrowed to 21.69 cents per gallon on August 21, down 1.82 cents since the prior week as ethanol recovered more than the oil product since August 14 despite the price action in the corn futures market.
December CBOT wheat futures declined 1.63% since last week. The December futures were trading $4.6800 level on August 21. Open interest rose by 0.46% over the past week in CBOT wheat futures as September rolled to December.
As of Wednesday, the KCBT-CBOT spread in December was trading at a 67.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread recovered by 4.00 cents since August 14. 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 I view as bearish for the wheat market.
My positions in the grain markets continue to be minimal, 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 the odds of a price recovery in the corn and wheat markets are high. Nothing has changed since last week as the harvest season approaches. Any significant moves are likely to come from the news cycle on trade.
Copper, Metals, and Minerals
Nickel has been the strongest base metals sector over the past weeks as the price probed above the $16,000 per ton level on the LME 90-day forwards over the past week. The price of nickel had moved to the upside over concerns that a leading Indonesian producer will accelerate an export ban that was previously set to start in 2022. However, the price declined to just over the $15,800 level on Wednesday. The other nonferrous metals except for zinc and tin posted gains over the past week. Meanwhile, the price of lumber recovered and moved to the upside, and the Baltic Dry posted a double-digit percentage gain since August 14. The price of iron ore continued to slip to the downside on the back of protectionism and Chinese retaliation. Uranium futures moved lower since last week.
Copper moved 0.37% lower on COMEX, while the red metal posted a 0.04% gain on the LME over the past week. Open interest in the COMEX futures market moved 4.65% lower. Copper was trading at below the $2.60 per pound level on the nearby September futures contract, which is now rolling to December. 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 exploded to the upside, which did not impact the price all that much.
LME lead moved higher by 0.34% since August 14, while the price of nickel gained 0.60% over the past week. Tin posted a 2.82% loss since the previous report. Aluminum was 1.36% higher on the week. The price of zinc fell 1.32% since August 14.
September lumber futures were at the $369.10 level, 6.03% higher since the previous report. The price of uranium for December delivery declined by 1.17% to the $25.40 per pound level. The Baltic Dry Index was 10.46% higher as it rose to the 2059 level. October iron ore futures posted a 8.92% loss compared to the price on August 14. Open interest in the thinly-traded lumber futures market fell by 6.31% over the past week.
LME copper inventories exploded 20.93% higher to 329,600 metric tons since last week. COMEX copper stocks increased 0.16% since last week to 41,574 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 1.62%, while aluminum stocks fell by 2.97%. Aluminum stocks edged below the 960,000-ton level. Zinc stocks moved 4.59% lower since the previous report. Tin inventories moved 25.64% higher since last week to 6,175 tons. Nickel inventories were 3.82% higher compared to the level on August 13. However, the price of nickel continued to make higher highs and rose to $16,050 per ton before correcting. 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 $1.74 per share on Wednesday up 17 cents since last week.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.08 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:
We own two units of FCX shares at an average of $10.56. The stock was trading at $9.14 on August 14, 8 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.
As we are at the end of August, the base metal and industrial commodities markets will likely be quiet over the coming week, as many market participants in Europe are on vacation. However, any developments in the trade war or events that could spur risk-off behavior in markets have the potential to create volatility in the prices of industrial commodities.
Animal protein prices were at low levels over the past week as we come closer to the end of the 2019 grilling season. The peak season for demand will come to an end on the Labor Day weekend in early September. The current price action in the cattle and hog futures market reflects the seasonality of the meat futures, but the trade war between the US and China and strong US dollar are also weighing on prices.
Cattle futures plunged after a fire at a Tyson Foods plant in Kansas on Friday, August 9. While Tyson said it plans to rebuild the facility, it is now closed “indefinitely” according to the company. The plant processed around 6,000 cattle per day, which is 5% of the entire industry but over 20% of Tyson’s capacity. The fire has weighed on both live and feeder cattle futures contracts over the past sessions and drove the price of October futures below the $1 per pound level for the first time since 2016. The event came at a seasonally weak time of the year for meat prices, and support for live cattle is now at the 2016 low at 94.30 cents per pound.
October live cattle futures recovered from the low over the past week and were trading at $1.00225 per pound level up 1.75% from last week after falling 7.5% last week. Technical resistance is at $1.0485, which is the upper end of a recent gap on the October contract. Technical support stands at 97.775 cents per pound level, which is the low over the past week. Price momentum and relative strength indicators were crossing higher in oversold territory on the daily chart on Wednesday. Open interest in the live cattle futures market moved 3.72% higher since the last report. The fire in Kansas had a devastating impact on the price of cattle futures at a time of the year where seasonal factors already weighed on the price of beef.
October feeder cattle futures marginally underperformed live cattle again last week as they rose by 0.88% since last week. October feeder cattle futures were trading at the $1.34550 per pound level with support at $1.27325 and resistance at $1.40325 per pound. Open interest in feeder cattle futures fell by 1.74% 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. Feeder cattle prices had also been a victim of the fire at Tyson’s plant.
Lean hog futures continued to decline. October lean hogs were at 63.30 cents on August 21, which was 5.2% lower on the week. The open interest metric fell by 2.59% from last week’s level. Price momentum remains in oversold territory on the daily chart, while relative strength has moved towards a more neutral condition. 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 backwardation from August through March 2020. From March 2020 through May 2020 a small contango returns.
In the lean hog futures arena, there is a backwardation from October until December 2019 after which contango returns until July 2020. There is a backwardation from July through December 2020. Contango returns from December 2020 through February 2021. 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.
Based on settlement prices, the spread was at 1.5833:1 compared to 1.4751:1 in the previous report. The spread increased by 10.82 cents as cattle became more 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 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. The fire at Tyson’s plant in Kansas on August 9 is another factor that has pushed the price of beef lower. The 2016 lows in cattle and hog markets will stand as critical levels to watch as the markets move into the offseason in early September.
Three of the soft commodities posted losses over the past week, but cotton edged higher and FCOJ recovered. Brazil is the world’s leading producer and exporter of oranges, sugarcane, and Arabica coffee beans. The decline in the Brazilian real versus the US dollar on the back of contagion from Argentina weighed on prices of the three agricultural products. After hitting a low, FCOJ bounced and gained on the week. Cocoa edged lower but could be running out of steam on the downside. Cotton was trading at just under the 60 cents per pound level, which has become a pivot point for the fiber over recent weeks. All of the softs that trade on the Intercontinental exchange, except for sugar and cotton, are rolling from September to December futures.
October sugar futures fell 1.90% 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 August 12 peak at 11.96 cents. Nearby sugar futures traded to a low at 11.27 cents on August 7 which is now the level of short-term support. The value of the Brazilian real against the US dollar edged a touch higher over the last week and was at the $0.24810 level against the US dollar, which was $0.00070 or 0.28% higher. The fall in the Brazilian currency likely weighed on the price of sugar over the recent weeks.
Price momentum and relative strength on the daily sugar chart is falling towards oversold territory. The metrics 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. Sugar open interest fell by 0.19% over the past week.
December coffee futures declined by 1.53% since last week’s report and were trading at just below the 97 cents per pound level. Short-term support is now at the August 20 low at 93.40 cents on the December futures contract. 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 $31.97 on Wednesday. Open interest in the coffee futures market fell by 0.69% 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, December cocoa futures were at the $2207 per ton level, 0.41% lower than last week. Open interest fell by 1.86%. Relative strength and price momentum are in deeply oversold territory after eighteen out of twenty-two losing sessions in the futures market. September futures rolled to December in the cocoa market, which could have caused an 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. We are long the NIB ETN product at $25.76. NIB closed at $25.03 on Wednesday, August 21. I may be adding another unit to the position over the coming week at a lower price and would post any change in the chat area if the market has another leg to the downside.
December cotton futures rose by 0.62% over the past week. Cotton is trading near 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 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 fell by 0.88% since August 13. Trade with China and the weather across growing regions will be the primary drivers of the price of the fiber over the coming weeks. We are long two units at $37.90 per share. BAL was at $36.50 on August 21.
Price momentum and relative strength metrics have moved into neutral conditions on the daily chart and were rising on Wednesday. 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.
November FCOJ futures posted the most significant decline in the soft commodities sector over the past week as the price fell to under the 95 cents per pound level. However, the OJ market came roaring back and finished the on Wednesday with a substantial week-on-week gain. On Wednesday, the price of November futures was trading around $1.0045 per pound. FCOJ nearby futures moved 6.13% higher over the past week. Support is at the 94.65 cents level, the August 19 low. Technical resistance at the early August high at around $1.06 per pound. Open interest rose by 0.93% since August 13.
Soft commodities prices continued to display weakness over the past week. The recent decline in the Brazilian real weighed on the sector. Coffee, sugar, and cotton prices are close to the bottom end of their respective pricing cycles. While lower lows are possible in the sector, any surprises and violent price action could come on the upside. Sugar and coffee reached lows in September 2018 and experienced explosive price recoveries from the lows into October. I continue to be a buyer of most of the members of the soft commodities sector on a scale-down basis.
A final note
The summer season is almost over. Here in Las Vegas, the 2019/2020 school year is already underway. Enjoy the last days of summer, as the fall has the potential to be a busy time in markets across all asset classes. Trade will remain the central issue for markets, but Brexit has the potential to create ripples in the global economy that could move around the world like a tsunami. The Middle East is a hotspot with Iran and the US at each other’s throats. While the situation near the Strait of Hormuz has been quiet, there are no guarantees that will continue over the coming weeks and months. The 2020 election will start to have an increasing impact on markets since many of the opposition candidates have promised to reserve many of the current administration’s initiatives. Volatility in the final quarter of this year looks probable.
Central banks are continuing to add stimulus. The ECB looks like it is preparing to overshadow the Fed with a move to cut rates further into negative territory before President Mario Draghi passes his dovish baton to Christine Lagarde. The markets will be watching for clues from Fed Chairman Jerome Powell’s speech at Jackson Hole this Friday. The President will likely be ready to tweet in response to the comments of his appointee.
Be careful in markets over the coming week. The trading conditions are likely to create an environment where markets look great one day and awful the next. Avoid any unnecessary risks at the end of the summer season.
Until next week,
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.