- Lots of volatility in markets across all asset classes as the trade dispute with China turns escalates to a trade and currency war
- Stocks decline
- Gold and silver move higher with US bonds as investors seek safety
- Energy moves lower on fears of global economic weakness
- Many commodities prices fall as China is the world’s leading consumer
The summary of trade recommendations for the coming week are as follows:
Summary and highlights:
On Thursday, August 1, after a rally in the stock market early in the day, news of new 10% tariffs on $300 billion of Chinese exports into the US caused selling to resume. The DJIA fell by 1.05% while the S&P 500 was 0.90% lower, and the NASDAQ dropped 0.79%. Since the new tariffs impact consumer goods, the small-cap Russell 2000 suffered the most significant selling as the index declined by 1.51%. The DJIA experienced an over 600-point swing during the session. After falling to a low at $1400.90, the price of gold reversed and was trading at the $1445 per ounce level at the end of the session on the August futures contract. September silver declined to a low at $15.935 and was at $16.36 late in the day. Copper and crude oil fell on August 1. The red metal was over 4 cents lower to the $2.6225 per pound level on September futures. September NYMEX crude oil tanked to under $54 per barrel and was over $4 per barrel lower on the session. Natural gas fell after the EIA reported that inventories rose by a more than expected 65 bcf for the week ending on July 26. The news on new Chinese tariffs sent agricultural commodity prices lower as President Trump said that China has not followed through on its promise to purchase large quantities of agricultural products from the US. Meanwhile, the dollar index rose to a new high at 98.700 before closing at 98.144. The price action in markets is telling us that the Fed did not go far enough on July 31. Trade with China and Brexit could cause a continuation of volatility over the coming days, weeks, and months. Bitcoin was trading at the $10,630 level at the end of trading in the futures market on August 1.
On Friday, employment data showed that the economy added 164,000 new jobs to a record high, and wage growth climbed by 3.2%, which was above forecasts. However, the market’s focus was on the escalation in the trade dispute between the US and China. After President Trump slapped a 10% tariff on $300 billion of Chinese exports into the US, the world is holding its breath for China’s retaliatory moves. Stocks posts losses with the Russell falling 1.1% while NASDAQ posted a 1.32% loss for the final session of last week. The S&P 500 and DJIA declined by 0.73% and 0.37% respectively.
Meanwhile, the dollar index fell back below the 98 level and closed the week at 97.852 on the September futures contract. Gold and silver moved higher on the back of uncertainty. While platinum posted a marginal gain after Thursday’s loss, palladium continued to drop and closed the week at just over the $1400 per ounce level. Grains bounced a little after losses from August 1 as did the price of crude oil. September NYMEX futures gained $1.71 on August 2 with products also moving to the upside. Natural gas fell to a new and lower low at $2.077 and closed the week at $2.121 after trading at over $2.30 per MMBtu earlier in the week. Copper was particularly ugly as the price of September futures tanked by 9.4 cents to $2.5715 on the COMEX September futures contract, the lowest price so far in 2019. With trade weighing on China’s economy, the red metal has moved significantly lower since hitting the $2.80 level in mid-July.
The Trump Administration announced a deal with the EU to export US beef to Europe, but cattle prices did not move higher on the back of the news. Hog and cattle futures drifted lower on August 2. Coffee was the only soft commodity to post a gain, but the price was below the $1 per pound level at the end of the week. Lumber edged high towards the $370 per 1,000 board feet level. Bitcoin closed the week at $10,600. Gold put in a bullish reversal on the weekly chart, but the price action in industrial commodities reflect the concerns over trade and a global economic slowdown.
Monday was an ugly day in markets across all asset classes. It did not take long for the Chinese to retaliate to the August 1 tariffs slapped on their exports by President Trump. China devalued the yuan and canceled purchases of US agricultural commodities. The stock market became a falling knife, and bonds exploded to the upside on the first trading day of the week. The dollar index fell while precious metals prices posted gains as safe havens. Bitcoin exploded higher to the $12,000 level. The DJIA fell by 2.90%, and the S&P 500 fell 2.98% on the session. Both the NASDAQ and Russell 2000 posted even larger losses of 3.47% and 3.02% respectively. The dollar index fell by 0.544 on the September futures contract to settle at 97.308, but that did little to help many commodities. Gold rose to a new high while silver, platinum, and palladium all posted gains. Grains edged higher after last week’s selling even though the Chinese will take revenge on US tariffs in the agricultural markets. Crude oil fell along with oil products. Natural gas fell to another lower low at $2.029 per MMBtu and closed at under the $2.10 level. Copper declined to another new low and fell below critical support at the late 2018 bottom at $2.5430 when the price traded to $2.5315 on Monday. Meat prices edged a bit higher, but all soft commodities moved to the downside. The 30-year US Treasury bond was at 161-10 on the September futures contract late in the day, which was the highest level since November 2016. Monday, August 5 was a risk-off day in most markets. Late in the day, North Korea fired two projectiles as military tests from the hermit nation continue to threaten peace in the region. Additionally, the US Treasury designated China as a currency manipulator which is another shot across the bow in what is now a currency war. The VIX index closed on August 5 at 24.59, the highest level since the first sessions of 2019. For those following my advice to buy the VIX and VIX-related instruments, Monday was a day where taking some profits paid for prior losses leaving lots of profits on the table. VIXY moved to the $24.15 per share level.
On Tuesday, what started as a gruesome session on Monday night after the US slapped China with a designation as a currency manipulator calmed throughout the day. China moved into the market to support the value of its currency, which likely tempered volatility. The DJIA swung from over a 500-point loss to end the session with a 311.78 gain. The S&P 500 was 1.30% higher, and NASDAQ gained 1.39%. The Russell 2000 moved higher by 0.99%. Gold and silver prices moved to the upside despite the action in stocks. The dollar index was just 0.109 higher on the session. Crude oil fell, and the selling continued late in the session even after the API reported another decline in inventories for the week ending on August 2. The price action in oil reflects the concerns over global economic growth. Natural gas posted a small gain and closed at just over the $2.10 per MMBtu level on the nearby futures contract. Grain prices slipped led by wheat. Meat prices moved lower led on the downside by hogs. Sugar and cocoa fell while the other soft commodities posted gains. Bitcoin was at just over the $11,800 level. With uncertainty in China and the devaluation of the yuan, Bitcoin and gold have attracted buying.
On Wednesday, volatility in markets continued as more than a few central banks around the world cut interest rates. Stocks started out the day under severe pressure, but most of the leading indices closed near unchanged levels on the session. Gold and silver took off on the upside with gold moving over the $1500 per ounce level and silver over $17. Gold and silver remained above those levels at the end of the day. Platinum moved higher while palladium moved lower to around $1400 per ounce. Grain prices edged higher, while crude oil fell to new short-term lows. Oil and oil products fell hard on concerns over a global economic slowdown. Natural gas settled below the $2.10 per MMBtu level. Meat prices were mostly higher, while soft commodities went the other way. Sugar fell to a new low as all of the other soft commodities except for cotton posted losses on Wednesday. Bitcoin was trading at around the $11,762 level.
Stocks and Bonds
Stocks turned south and bonds north over the past week. The disappointment following the July Fed meeting when the central bank only cut the short-term rate by 25 instead of 50 basis points created a sell the event environment in the stocks market. Two dissenters on the FOMC and Chairman Powell’s press conference added to the selling following the meeting on July 31. On August 1, the escalation of the trade dispute between the US and China sent stocks even lower and lit a fire under the bond market as fear and uncertainty over the global economy returned. Even though August is often the quietest month of the year in markets, the potential for a risk-off environment has increased since the Fed meeting. The developments on trade between the US and China could set the stage for another Fed rate cut sooner, rather than later. China retaliated by canceling purchases of US agricultural products and it devalued the yuan. The Chinese currency reached the 7 level against the dollar. On Wednesday, central banks around the world cut interest rates which added to market volatility.
The S&P 500 moved 3.23% lower over the past week, while the NASDAQ fell 3.82%. The DJIA posted a 3.19% loss since the previous report. The small-cap Russell 2000 experienced significant selling as the new 10% tariffs could impact smaller business and consumers in the US even more than past protectionist measures. Share prices turned lower after reaching the recent record highs. Trade, Brexit, Iran, and the Presidential election in the US are all issues that face the stock market and could cause periods of increasing volatility over the coming weeks and months.
The news on trade weighed on Chinese large-cap stocks over the past week as they declined even more than the US indices. The trade dispute continues to weigh more heavily on the Chinese economy than conditions in the United States.
Source: Barchart
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.85 level on Wednesday, which was 5.47% lower than the closing level on July 31. Since April 5 the FXI had traded in a range from $39.90 to a high at $45.96. Technical support is now at the January 3 low at $38 per share after breaking through the May 24 low. Technical resistance stands at the April 5 peak.
FXI could experience more selling as China retaliated with protectionist measures on US goods and a devaluation of its currency. President Trump is likely considering increasing the tariff rate from 10 to 25% on $300 billion in Chinese exports.
US 30-Year bonds exploded 3.69% 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 1.47% since July 31. Open interest in the long bond increased by 4.49% over the past week. The bond market benefited from a flight to quality assets as volatility rose. The VIX moved higher as stocks declined over the past week. The volatility index was at the 19.49 level on August 7, a rise of 20.91% after last week’s increase of over 35%.
As I wrote in last week’s report, “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.” After taking some small losses, the gains in VIX and VIXY trading over the past two weeks has yielded highly profitable results.
The dollar and digital currencies
The dollar index rose moved 0.93% lower since July 31, but the index made a new and higher high at 98.700 on August 1 before correcting the to the downside. The dollar rose in the aftermath of the July 31 Fed meeting even though lower rates typically weigh on the value of the greenback. The recent dovish statement by the ECB together with the marginal rate cut and unclear guidance from Chairman Powell lifted the dollar index to another in a long series of higher highs. The bullish trend in the dollar index that began in February 2018 remains intact. The euro currency was 1.45% higher since last week’s report. Interest rate cuts by other central banks around the world caused increased price variance in currency pairs.
Last week I wrote about the proposal by Peter Navarro to intervene in the foreign currency market to push the dollar lower. While President Trump initially rejected the idea, frustration with the Federal Reserve and the escalation of the trade dispute with the Chinese could cause him to rethink currency manipulation. The President has been a critic of both Chinese and European currency manipulation, which could cause the Treasury to attempt to devalue the dollar at some point. The higher the dollar index rises, the more likely that the US will consider currency intervention. A runaway dollar on the upside makes US exports less attractive on the global marketplace. Pushing the greenback lower could be a useful tool with it comes to trade negotiations with China. The trade dispute is now moving to a point where it is a trade war, and a currency war. The US officially declared that China is a currency manipulator over the past week, which is a symbolic move in the conflict.
The leader of the digital currency asset class was trading at the $10,762.36 level as of August 7. Volatility returned to the cryptocurrency asset class over the recent weeks, and it has been consolidating at a higher level. The escalation of the trade dispute and the potential for a currency war has 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. Bitcoin moved 17.48% higher since last week while Ethereum posted a 3.86% gain as it was at around $224.41 per token. The market cap of the entire asset class moved 11.35% higher as Bitcoin outperformed the other digital currencies. The number of tokens rose by 36 since July 31. Open interest in the CME Bitcoin futures rose by 9.07% since last week.
The higher the prices of digital currencies move, the more the spotlight on the asset class will intensify. Governments around the world will not surrender control of the money supply, so the market is likely to see an increase in regulation of digital currencies. The custody issue continues to be a roadblock when it comes to an ETF product. I believe that a leading country will eventually issue a digital currency, which would give the asset class a significant boost.
The Canadian dollar moved 0.90% lower since last week. Open interest in C$ futures rose by 5.38% 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 0.18% loss since the previous report. 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.
The Brazilian real corrected by 5.52% against the US dollar over the past week. The Brazilian currency had been posting gains since late May. Reforms by the Bolsonaro government continue to support gains in the currency that declined from over $0.65 to the $0.25 level against the US dollar since 2011.
Gold had a big week last week as the yellow metal put in a bullish reversal on the weekly chart and followed through on the upside this week. The price of gold fell to just over the $1400 level in the wake of the Fed meeting and closed last Friday above the previous week’s high. On Wednesday, the price climbed to over $1500 per ounce. Gold is the oldest means of exchange in the world. The precious metal has been a currency long before there were dollars, euros, yen, or any of the other forms of legal tender that float through the global financial system. Gold continues to appreciate in all currencies in a move that began during the early years of this century. Gold is telling us that the faith in foreign exchange instruments is declining and the credit quality of government-issued form of legal tender is decreasing.
Precious Metals
Gold continued to be the leader of the pack in the precious metals sector over the past week. Silver also posted a gain on the week. The prices of platinum group metals moved lower, with palladium suffering a significant corrective move. Gold’s role as hard money is difficult to ignore in the current environment.
Gold was 6.56% higher since July 31 while silver rose 4.82% over the same period. The price of gold dropped to just over the $1400 level in the aftermath of the Fed meeting but came roaring back on the back of the escalation of the trade dispute.
Source: CQG
The weekly chart shows that gold put in a bullish reversal trading pattern from a medium-term perspective since the previous report. The yellow metal traded to a lower low last week than the prior week and closed above the previous week’s peak. The highest level of weekly volume since early 2018 provides technical validation for the bullish price action in the gold futures market. Gold followed through on the upside after last week’s bullish technical pattern.
The price of platinum fell 0.90% since last week. Rhodium decline by 0.57% while palladium dropped 7.49%. Given the spectacular rise in palladium to $1600, it should come as no surprise as a significant correction was overdue. The escalation of the trade dispute pushed the prices of precious metals that have a substantial industrial user base to move lower over the past week.
Open interest in the gold futures market moved 6.57% higher since the previous report. The metric moved 0.97% lower in platinum while it was 5.99% lower in the palladium futures market. Silver open interest rose 0.10% over the period. The rise in gold open interest continues to provide technical validation to the bullish price action in the futures market.
December gold futures moved to over the $1500 per ounce level on Wednesday, which is the highest price since April 2013. Technical resistance on December futures is at $1522.70 per ounce, Wednesday’s 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 rallied more than silver.
Source: CQG
The daily chart of the price of nearby gold divided by silver futures shows that the ratio was at 87.65 on Wednesday, 0.05 higher than the level on July 31. 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.
Last week’s price action in the gold market was another sign of the bullish tone in the market. While gold has been shinning, the rise in the price of the metal is a function of the declining value of all fiat currencies, including the US dollar.
We are long the gold mining stock ETF products GDX and GDXJ, which outperformed the price of gold since the last report. While gold moved 6.56% higher, the GDX was 10.46% higher since July 31 while GDXJ moved 11.45% to the upside. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. I continue to rate both ETFs as a hold. The moves in GDX and GDXY since June have been supportive of more gains in gold, which could drive the mining shares even higher if gold moves to higher highs. We are also long SLV, the silver ETF product which posted a 5% gain since July 31 as it outperformed the price action in the silver futures market. Gold and silver remain in bullish price patterns. Last week I wrote, “The reaction to the Fed meeting which led to new highs in the dollar threatens a to push prices lower over the coming week. However, I would view any downside action as a buying opportunity.” Gold fell to a low at $1400.90 and silver below $16 per ounce in the aftermath of the Fed meeting, but both metals came storming back to the upside with gold leading the way.
Platinum and palladium moved lower since July 31 as the escalation in the trade dispute weighed on the prices of industrial metals. October platinum futures fell by 0.90% to the $871.00 per ounce level. Palladium posted a 7.49% loss as of the close of business on August 7 and was at the $1410.30 per ounce level. Palladium rose to a new record high at $1600.50 per ounce on July 11 and has corrected by almost $200 in under one month. Palladium was trading at a premium over platinum with the differential at the $539.30 per ounce level on Wednesday, which narrowed over the past week. October platinum was trading at a $648.60 discount to December gold at the settlement prices on August 7 which widened over the period. The price of rhodium which does not trade on the futures market moved $20 lower over the past week and was at $3,490 per ounce on Wednesday.
We are long the PPLT platinum ETF product which moved 0.04% lower since July 31. 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.
Gold is making a statement that the value of all currencies is declining. Even though the dollar index moved to a new high after the Fed meeting, it has decreased in value versus gold over the past week. I remain bullish on the gold, silver, and platinum markets for the coming weeks and months, but the road higher could be very bumpy with lots of sharp corrections. However, I would not be surprised to wake up one morning and see the yellow metal $100 or more higher.
Energy Commodities
The energy sector moved significantly lower across the board over the past week. Crude oil has come under pressure despite declining inventories in the US. Natural gas moved to a new and lower low after an attempt to recover that took the price over the $2.30 per MMBtu level. Oil products followed the crude oil price lower, and losses in the crack spreads is a sign of slack demand. OPEC has said that the cartel’s “sweet spot” for the price of oil is $60 to $70 per barrel. OPEC output uses the Brent benchmark, the price slipped below the bottom end of their desired range over the past week.
September NYMEX crude oil futures fell by 12.79% while October Brent futures moved 14% lower since July 31. Larger than expected inventory draws were supportive of the price of the energy commodity but did little to prevent the price of a decline. September gasoline was 13.02% lower, and the processing spread in September posted a 14.49% loss since July 31. The gasoline market will soon focus on the end of the peak driving season in September. September heating oil futures moved 11.04% lower since the previous report, and the heating oil crack spread fell by 6.7% 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 rose by 0.06% 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. Over the past week, Iran seized another tanker in the region saying it was “smuggling” fuel.
The spread between Brent and WTI crude oil futures in October fell to the $5.17 per barrel level for Brent, which was $1.19 below the July 31 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.
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. I believe the spread has declined to a level that is close to the lows given the potential for problems in the Middle East.
US daily production stood at 12.3 million barrels per day as of August 2 according to the Energy Information Administration, which is 0.100 million barrels above the previous week’s level. Daily output in the US moved to the record level. Crude oil inventory data had been supportive of the price of the energy commodity over the recent weeks. As of July 26, the API reported a decline of 6.024 million barrels of crude oil stockpiles while the EIA said they fell by 8.50 million barrels for the same week. The API reported a drop of 3.135 million barrels of gasoline stocks and said distillate inventories fell by 890,000 barrels as of July 26. The EIA reported a decrease in gasoline stocks of 1.80 million barrels and a decline in distillates of 900,000 barrels. Rig counts, as reported by Baker Hughes, fell by six last week to 770 rigs in operations as of August 2, which is 89 below the level operating last year at this time. The reduction in the number of rigs and lower oil stocks may have prevented further losses during the week.
OIH and VLO shares moved significantly lower since last week. OIH fell by 15.81%, and VLO moved 11.07% lower since July 31. We are long the OIH ETF product, and given the recent price action, I suggest adding another unit of OIH to double the position at the $12.14 per share level over the coming week.
September natural gas futures fell to a lower low over the past week. The September futures were at $2.083 on August 7, which was 6.72% lower than on July 31. The price reached a new low at $2.029 on August 5 after trading to a high at $2.333 on August 1. Natural gas has not been able to make it to the technical resistance level at above the $2.50 level, which was a bearish sign for the energy commodity. Last week, the EIA said that a larger than expected injection of 65 bcf into storage brought the total amount of gas in storage to 2.634 tcf as of July 26. 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 14.5% above last year’s level but were still 4.5% under the five-year average as of July 26. Last week’s injection was higher than the market had expected. This week, I expect the EIA to report an injection of around 57 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. Open interest rose by 2.44% over the past week, which is a technical validation of the bearish price trend.
With approximately 15 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 40.9 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 91.1 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 over the past week, given the low level of the previous injection data. 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.
September ethanol prices fell 1.45% over the past week. Pressure in the ethanol futures market had come from selling in the corn market as the price dropped from over $1.60 per gallon. Open interest in the thinly-traded ethanol futures market fell by 15.33% over the past week. The decline to only 652 contracts in the thinly-traded biofuel is a sign that the market is untradeable. The KOL ETF product fell by 9.32% compared to its price on July 31, and the price of October coal futures in Rotterdam declined 4.29% 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 hot summer season.
On Tuesday, the API reported that oil inventories fell by 3.4 million barrels for the week ending on August 2, but the EIA said they increased by 2.4 million barrels on Wednesday. Analysts had expected a decline of 2.848 million barrels for the API report. When it comes to products, the API reported a decline in gasoline inventories of 1.1 million barrels and an increase in distillate stocks of 1.2 million barrels. On Wednesday, the EIA said that gasoline stocks rose by 4.4 million barrels and distillate inventories increased by 1.5 million barrels for the week ending on August 2. 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.
In natural gas, the price action continues to be bearish over the past week.
Source: NYMEX/RMB
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.514 in January, which was 12.7 cents per MMBtu lower than last week. I am waiting to buy call options for December through February at lower prices for mid to late August. I am not anxious to purchase the options as I would prefer to wait to avoid paying elevated levels when it comes to the time value for the options. I will continue to watch the action in the forward curve over the coming weeks for buying opportunities in limited risk options. Nothing has changed since last week as the price of the energy commodity continued to make lower lows over the past week. The market ran out of buying at over the $2.300 per MMBtu level, and the price action has been bearish. Natural gas will have to rise to over the $2.50 level to change the tone of the market.
I have been tracking the price action in BG shares because of the volatility in the price of ethanol. Bunge is an ethanol refiner with interests in Brazil as the company processes sugarcane into the biofuel. BG released better than expected earnings, but the decline in the stock market sent the price of the stock lower. Since July 31, the price of BG shares moved 3.70% lower to $56.27 per share on August 7. 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.
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 inventory data over the recent weeks has been supportive of the price of oil. In natural gas, I continue to favor the short side of the market using the DGAZ ETN product with tight stops and limited time horizons on positions. However, if the price experiences a sudden downdraft below the $2 per MMBtu level, I will begin gently purchasing call options on NYMEX natural gas futures for December 2019 through February 2020 expiration with strike prices below the $2.80 per MMBtu level.
I continue to favor a long position in PBR, Petroleo Brasileiro SA. I believe that this stock has the potential to double in value but moved lower over the past week and was trading at the $14.19 per share level on August 7, down 5.71% from last week’s level. I continue to rate PBR as a buy. I suggest adding another unit to the long position in PBR at a price around the $4.19 per share level this week. I believe that reforms by the Bolsonaro government will take the value of the Brazilian real higher, which would be bullish for PBR shares.
Bullish and bearish factors continue to pull the price of crude oil in opposite directions. The current trend is lower. However, the situation in the Middle East continues to suggest that any price spikes would likely be on the up rather than the downside in the energy commodity.
Grains
Grain prices were steady to lower over the past week with losses in soybeans and small gains in corn and CBOT wheat futures. The USDA will release the August WASDE report on Monday, August 12 at noon EST time. The report will provide a substantial overview of crop progress as the 2019 harvest season is right around the corner. Meanwhile, Chinese retaliation over new tariffs is hitting US grain producers directly causing prices to move to the downside.
The soybean futures market has been in the crosshairs of the trade dispute between the US and China. Therefore, the new 10% tariffs on $300 billion of Chinese exports into the US and retaliatory measures on the US from Beijing caused bean prices to move to the downside. New-crop November soybean futures fell 1.67% over the past week to under $8.67 per bushel. Open interest in the soybean futures market rose by 4.47% since last week.
In a sign of some underlying support for the soybean futures market, the December synthetic soybean crush spread was at the $1.0525 per bushel level on August 7 which was 4.25 cents higher than on July 31. A rise in the value of the spread that represents the economics of crushing the raw oilseed into soybean meal and oil is 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 $4.14 per bushel on August 7, which was 0.98% higher on the week. Open interest in the corn futures market rose by 1.84% since July 30. The decline in the price of corn over recent weeks kept the pressure on ethanol prices, which are at the $1.429 per gallon level. The spread between September gasoline and ethanol futures narrowed to 19.13 cents per gallon on August 7, down 22.15 cents since July 31 as the price of gasoline moved down and corn posted a small gain over the past week.
September CBOT wheat futures edged 0.21% higher since last week. The September futures were trading $4.8825 level on August 7. Open interest rose by 5.46% over the past week in CBOT wheat futures. The weather conditions in Europe and Russia will determine the path of wheat prices over the coming weeks as the USDA continued to project that Russia will be the leading exporter of wheat to the world in 2019. Now that we are moving into August, the harvest season is approaching fast.
As of Wednesday, the KCBT-CBOT spread in September was trading at a 70.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 6.0 cents lower than on July 31 and remained 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 could weigh on the price of the grain as it is a sign that consumers have no concerns over wheat prices or availabilities over the coming months.
There is no change from last week when it comes to the grain markets as we enter the final stretch in the 2019 growing season. 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 region in the northern hemisphere when it comes to wheat. The next significant event for the futures market will be the release of the monthly World Agricultural Supply and Demand Estimates report from the US Department of Agriculture on August 12. The August report will shed light on crop progress and the impact of trade on export demand. Markets will likely see an increase in volatility at the end of this week and beginning of next week after the release of the report.
Copper, Metals, and Minerals
The escalation of the trade dispute between the US and China only exacerbated the market’s reaction to the 25-basis point cut. The prices of most of the base metals that trade on the London Metals Exchange moved lower since last week. Only nickel posted a gain since the previous report. The nickel market has been on fire over supply concerns. The price of uranium edged marginally lower over the past week. Meanwhile, the price of lumber posted a gain, but the Baltic Dry Index continued to decline and was below the 1740 level since the previous report. The price of iron ore moved significantly lower on the back of protectionism and Chinese retaliation. The trade dispute is now a trade war. China’s move to devalue the yuan threatens to launch a currency war that could destabilize markets across all asset classes.
Copper moved 3.56% lower on COMEX, while the red metal posted a 4.61% loss on the LME over the past week. Open interest in the COMEX futures market moved 13% higher as the price fell to a new low for 2019 on the active month September futures contract, which is a bearish technical sign for the red metal. Copper also declined below the late December 2018 bottom. 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.
LME lead moved lower by 0.40% since July 31, while the price of nickel gained 5.4% over the past week. Tin posted a 3.19% loss since the previous report. Aluminum was 2.22% lower on the week. The price of zinc dropped 5.45% since July 31.
September lumber futures were at the $358.00 level, 4.1% higher since the final day of July. The price of uranium for December delivery fell by 0.19%. The Baltic Dry Index was 8.69% lower as it fell to the 1734 level. The BDI had been rallying over the past weeks on the back of new regulations for low-sulfur fuels that increase the cost of ocean shipping. The shipping index turned lower at over the 2000 level on the back of the escalation of the trade dispute. September iron ore futures posted a 19.34% loss compared to the price on July 31 as trade issues trumped the shortages from Brazil. Open interest in the thinly-traded lumber futures market rose by 3.5% over the past week.
LME copper inventories moved 4.97% lower to 277,975 metric tons since last week. COMEX copper stocks increased 2.05% since last week to 40,414 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 rose by 26.55% weighing on the price of the metal, while aluminum stocks fell by only 0.60%. Aluminum stocks remained at over the one-million-ton level. Zinc stocks moved 6.05% higher since the previous report, which likely caused the price to be the worst-performing LME metal since last week. Tin inventories moved 16.26% lower since last week. Nickel inventories were 1.24% lower compared to the level on July 30. Falling stocks have supported the price of nickel and pushed the price of the base metal to over $15,000 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 market was disappointed by the 25-basis point rate cut from the Fed on Wednesday, but it was the escalation of the trade dispute that sent prices of many of the metals reeling on the downside.
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 were working a stop at $1.49 and have an initial profit target at $6 per share. I am lowering the stop at $1.19 on close over the coming week. There is a double bottom on the long-term chart at the $1.29 level. I want to give 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 $1.55 per share on Wednesday.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.08 on August 7. 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 one unit of FCX shares at $11.16. The stock was trading at $10.08 on July 31, 98 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 $9 and $10 per share and recommend adding another unit of FCX at below the $10 level. I am keeping my position small in FCX to add on further price weakness over the coming weeks.
August is typically a quiet month in the base metal and industrial commodities sector. However, the trade dispute has deteriorated into a trade war, which could cause a risk-off period in markets across all asset classes. Copper, base metals, and other industrial commodities are likely to experience high levels of volatility in the current environment.
Animal Proteins
The prices of all animal protein futures posted losses over the past week. While the US signed a deal on beef exports to the EU last week, the price of cattle slumped since the last report. Trade issues and the end of the peak season of demand that arrives in early September sent the prices of cattle and hog futures lower since July 31. The next significant event for the animal proteins will come on Monday, August 12, when the USDA releases the August World Agricultural Supply and Demand Estimates report.
October live cattle futures were trading at $1.06450 per pound level down 1.12% from last week. Technical resistance is at $1.10600 which was the July 29 peak on the October contract. Technical support stands at $1.04850 per pound level, which was the low from August 5. Price momentum and relative strength indicators are falling from neutral territory on the daily chart. Open interest in the live cattle futures market moved 1.94% lower since the last report.
October feeder cattle futures underperformed live cattle again last week as they fell by 2.56% since last week. October feeder cattle futures were trading at the $1.38900 per pound level with support at $1.34575 and resistance at $1.44425 per pound. Open interest in feeder cattle futures rose by 1.91% 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 futures caught up with the live cattle over the past week.
Lean hog futures continue to be the worst performer in the sector. October lean hogs were at 66.85 cents on August 7, which was 5.03% lower on the week. The open interest metric fell by 5.85% from last week’s level. Price momentum and relative strength were falling in oversold territory on August 7 as the selling continues in the pork market.
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 March 2020. The curve moved to a small contango 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 continued to move higher in the October futures contracts as the price of beef gained on pork.
Source: CQG
Based on settlement prices, the spread was at 1.5924:1 compared to 1.5162:1 in the previous report. The spread increased by 7.62 cents and cattle and became more expensive compared to hogs on a historical basis. The move does not account for the continuation of African swine fever, which is still impacting global supplies. Moreover, a new trade deal with Europe over beef and a breakdown in the US-Chinese trade relations have caused strength in cattle compared to hogs since the previous report.
Animal protein futures tend to be highly volatile. Next week’s WASDE report could cause an intensification of price variance as the market moves towards the end of the peak season for demand during the first weekend of September.
Soft Commodities
All of the soft commodities suffered price declines over the past week. Cotton sustained the most significant loss as the fiber is the one member of the sector that reflects the trade dispute with the US and China. Sugar declined by over 7% while the prices of coffee and FCOJ fell by over 2% on the week. Cocoa lost over 5% compared to its price on July 31.
The October sugar futures fell below the 12 cents per pound level since the previous report. October sugar futures posted a 7.13% decrease 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. The value of the Brazilian real against the US dollar moved to the downside over the last week and was at the $0.25090 level against the US dollar, which was $0.01465 or 5.52% lower. The fall in the Brazilian currency weighed on the price of sugar.
Price momentum on the daily sugar chart crossed to the downside and is now falling towards neutral territory. The metric on the weekly and monthly charts are declining in neutral territory. If sugar suffers a substantial decline, I will look to add to long positions.
September coffee futures declined by 2.76% since last week’s report and were trading below the 97 cents per pound level. Short-term support was at the June 19 low at 96.25 cents on the September futures contract, but the price fell to a low at 94.30 on August 5. 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 $33.37 on Wednesday. Open interest in the coffee futures market rose by 4.04% since last week. The decline below the 96.25 cents per pound level on the September futures could lead to some further losses in the coffee futures market. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle.
Cocoa futures continued to decline over the past week. On Wednesday, September cocoa futures were at the $2224 per ton level, 5.16% lower than last week. Open interest fell by 6.46%. Relative strength and price momentum are in oversold territory after twelve straight losing session in the futures market. 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. While the soft commodity avoided that pattern, the price action continues to be bearish as the market correction continued over the past week. Given rising global demand, I favor buying cocoa on a scale-down basis over the coming week after the recent price correction. I suggest purchasing the NIB ETN product, which closed at $25.76 on Wednesday, August 7.
December cotton was the worst-performing soft commodity over the past week, as the fiber futures fell by 7.85% 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 4.97% 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 will be the next significant event for the cotton market. Given the move to a multiyear low, I am adding another unit to out long position and suggest purchasing one unit of the BAL ETN product at $35.88 per share.
Meanwhile, price momentum and relative strength metrics are falling in oversold territory on the daily chart. 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 was just over the $1 per pound level. On Wednesday, the price of September futures was trading around the $1.01 cents per pound level. FCOJ nearby futures moved 2.37% 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 0.67% since July 30.
Soft commodities prices had a bad week, and all of the members of the sector experienced losses. I will be keeping an eye on the Brazilian real when it comes to coffee and sugar. The price of cocoa has declined to a level where the potential for a recovery has increased. Cotton is at a multiyear low on the back of concerns over China. I expect that we will see a continuation of heightened price volatility in this sector over the coming week.
A final note
The Fed meeting was the appetizer for markets, but the escalation of the trade dispute between the US and China became the main course over the past week. The dispute is now upgraded to a trade way, and a currency war could be breaking out between the nations with the world’s leading GDPs.
The potential for a risk-off period is high. While it is critical to be careful when volatility rises in markets across all asset classes, it is also a time where bargains occur. Watch risk and reward on all positions on the long and short sides of the market over the coming week. Only look to pick up bargains where microeconomic factors support the price of an asset, which could soften the blow on the downside that results from the macroeconomic environment.
The summer is usually a sleepy time in markets, but August 2019 has the potential to be a wild month. Be careful out there over the coming week as market action could become treacherous.
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.
