- Fears over the Coronavirus calm, but cases continue to mount in China
- Stocks and the dollar move higher in volatile conditions
- Gold corrects, but all of the other precious metals post gains
- Energy prices continue to decline with copper but bounce on Wednesday
- Agricultural prices move mostly lower over the past week
The summary of trade recommendations for the coming week are as follows:
A more detailed picture is available on the spreadsheet that is linked below.
Summary and highlights:
On Thursday, January 30, stocks recovered in a respite from the fears over the Coronavirus. While the spread around the globe appeared to be under control, 170 deaths in China and over 7,700 reported cases continued to be the primary issue facing markets. The market action over the past weeks is a sign that a global pandemic would cause a continuation of risk-off conditions in all asset classes. On the impeachment front, it was starting to look like an acquittal of the President is on the horizon after the Q&A period that followed opening arguments by the House managers and defense counsel for President Trump. The sitting President would be the third in US history to survive impeachment as he would join Andrew Johnson and William Jefferson Clinton in the exclusive club. No President had ever been convicted and removed from office; only Richard Nixon resigned from office facing the prospect for removal.
The March 30-Year bond futures market was unchanged at the 162-08 level on Thursday. The March dollar index edged a touch lower to settle at 97.706. Grains continued to move lower, led by soybeans, which declined by 16.75 cents per bushel on fears over Chinese demand. Corn and wheat prices fell, but soybeans were the leader on the downside. Crude oil and oil products declined to a lower low and posted losses on the session. Natural gas fell to a new low at $1.815 per MMBtu in the March futures contract, the lowest level in January since 1999. Precious metals prices moved higher, with silver and palladium leading the way on the upside. Copper continued to decline, reaching a low of $2.5160 per pound on the March futures contract. Lean hogs fell the three cents per pound limit on the events in China. Live and feeder cattle futures were on either side of unchanged after the recent losses. Sugar, cocoa, and lumber prices moved to the upside, while cotton, FCOJ, and coffee futures fell. Bitcoin was working its way towards the $10,000 level as it moved $205 higher to $9730 per token.
On Friday, weak economic data from Europe and confirmation of sluggish business investment in the US, together with a rising number of cases of the Coronavirus weighed on stocks and sent the leading industrial commodities prices lower. The DJIA fell 2.09%, the Russell 2000 lost 2.07%, while the S&P 500 fell 1.77% on the final session of the week. The NASDAQ dropped 1.59%. March 30-Year Treasury Bonds rose 0-29 to the 163-26 level. The dollar index fell 0.493 to 97.213. Corn edged higher, but beans and wheat futures prices continued to decline. Crude oil made a new low and put in a bearish reversal on the monthly chart in January. Gasoline and heating oil futures fell, while natural gas posted a marginal gain but closed at under the $1.85 per MMBtu level. Gold and silver did not move much, but gold continued to exhibit strength, and silver closed the week at just over the $18 per ounce level on March futures. Platinum continued to decline, but palladium posted a small gain. Cattle and feeder cattle prices were on either side of unchanged, but lean hog futures continued to plunge. Cotton, cocoa, and lumber prices moved lower, while FCOJ, coffee, and sugar were marginally higher on the final session of January. Bitcoin was $290 lower to the $9440 per token level. At the stroke of midnight, the UK finally officially separated from the EU.
On Monday, stocks moved to the upside, but the market continued to worry about the spread of Coronavirus. Monday was the day of the first primary as the Iowa Caucuses are the first chance for voters to choose a candidate to challenge President Trump in November 2020. The primary season is now underway in the United States. The March 30-Year bond futures edged 0-07 higher to the 163-24 level. The dollar index rallied to 97.625 on the first trading day of February. Soybean and wheat futures prices posted small gains, but corn moved a bit lower. Crude oil probed below the $50 per barrel level of the first time in over one year, but nearby March NYMEX futures settled at $50.11 per barrel. Product prices moved lower with the energy commodity. The oil market followed through on the downside after the bearish reversal on the monthly chart in January. Natural gas was trading at the lows at just above the $1.80 per MMBtu level. Gold and silver fell, with the most significant loss coming in silver. Platinum and palladium prices moved to the upside. Copper probed below the $2.50 per pound level after its bearish reversal on the monthly chart in January. Copper settled at $2.5070 on the March futures contract. Live and feeder cattle prices moved higher, along with the price of April lean hog futures after recent losses. Sugar traded above the 15 cents per pound level, which was a new high on the back of drought conditions in Thailand. The sweet commodity was the only winner on February 3, as cotton, FCOJ, coffee, cocoa, and lumber futures all posted losses. Bitcoin shed only $30 per token to $9410.
On Tuesday, stocks exploded higher. The upward trajectory of Tesla shares in 2020 has been nothing short of amazing. On the political front, the Iowa caucuses turned out to be a disaster for Democrats. As of the close of the stock market on February 4, the results were still not available because of “technical difficulties.” President Trump delivers the annual State of the Union address on Tuesday evening. The Senate will likely vote to acquit the President on the impeachment charges on Wednesday. All of the leading stock indices roared higher on Tuesday. Grain prices moved marginally higher on Tuesday. Crude oil settled below the $50 per barrel level for the first time since early 2019 on the nearby NYMEX futures contract. Heating oil moved higher, but gasoline fell alongside crude oil. Natural gas fell to a new low of $1.804, which prompted a rally to the $1.888 per MMBtu level. Gold corrected sharply lower falling over $25 per ounce on the session. Silver posted a marginal loss along with platinum, but palladium exploded over $100 higher on the session. The price of copper moved higher and away from the $2.50 per pound level after recent losses. Copper ended a string of thirteen consecutive losing sessions on February 4. Live and feeder cattle futures prices were on either side of unchanged. Lean hogs edged a bit lower on the April futures contract. The price of sugar fell slightly after rising to a new high of 15.31 cents per pound during the session. Cotton, coffee, and cocoa prices gained, but FCOJ, sugar, and lumber moved lower. Bitcoin was around $200 per token lower on the session.
On Wednesday, the US Senate acquitted President Trump on both impeachment charges. Stocks moved significantly higher on the session. During the State of the Union address on Tuesday night, the animus between the bitterly divided political parties in the US was apparent as the nation moves forward to what promises to be a highly contentious election in November 2020. As stocks moved higher, the March 30-Year Treasury Bond fell 0-29 points. The March dollar index continued to rise and settled at the 98.158 level. Wheat and soybeans edged higher, but corn posted a marginal loss. Crude oil and oil products finally bounced higher, while natural gas was marginally lower on the session. Gold and silver prices edged higher. Platinum posted the most significant gain, while palladium settled lower on the session. Live and feeder cattle futures moved to the downside, and lean hogs fell to a lesser extent. Coffee posted a small loss, but all of the other soft commodities and lumber moved higher. Bitcoin moved $575 higher to $9830 per token.
Stocks and Bonds
The stock market experienced downside pressure on the back of the rising number of fatalities and cases of Coronavirus in China. The US declared a health emergency, and the risk of a pandemic grew over the past week. Risk-off behavior did not only impact stocks but markets across all asset classes. Meanwhile, after rising to new highs in January, stocks may had been looking for an excuse for a correction. When it comes to the Chinese, the world’s second-leading economy has gone from problem to problem over the past years. The economic slowdown in late 2015 and early 2016 caused the government to roll out a “new normal” that set growth expectations at lower, but stable levels. In 2018 and 2019, the escalating trade war with the US weighed on growth. Over the past months, protests in Hong Kong increased fears that unrest could lead to slower economic expansion. China has not been able to catch a break as the Coronavirus is the next factor that has created a challenge for its economy. However, the resiliency of the stock market was on full display as all of the leading indices turned around and posted significant gains since January 29.
The S&P 500 moved 1.87% higher since the previous report, while the NASDAQ rose 2.52% since last week. The DJIA posted a 1.94% gain since the last report. All of the leading indices moved to the upside after a brief correction.
Chinese stocks underperformed US indices. Since China is ground zero for Coronavirus, FXI did not move higher with US stocks since the previous report.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.35 level on Wednesday, which was only 0.36% higher than the closing level on January 29. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which now stands as technical resistance. Above the most recent peak, the next level of resistance is at the early April high of $45.96 per share. The FXI is likely to move lower or higher depending on developments on the spread of the virus. As the number of cases increases, the pressure on Chinese stocks is likely to intensify.
US 30-Year bonds declined as stocks rose. On Wednesday, February 5, the March long bond futures contract was at the 161-02 level, down 0.85%, after last week’s gain. The odds of any changes in Fed monetary policy in 2020 are low as it is an election year in the US. At its January meeting, the Fed left rates unchanged. The central bank is not likely to increase interest rates before the November 2020 election. If a risk-off period intensifies, the Fed is more likely to cut than increase short-term rates. A flight to quality during risk-off periods has put upward pressure on the long bond.
Open interest in the E-Mini S&P 500 futures contracts fell by 1.64% since January 28. Open interest in the long bond futures rose by 12.11% over the past week on a flight to quality buying. The VIX moved higher at first, but eventually lower on the back of gains in stocks. The volatility index was at the 15.15 level on February 5, 7.11% lower over the period after a more than 26% gain last week.
I had advocated for buying the VIX and VIX-related products when volatility was low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies has been the optimal approach over the past months. I would only trade these products from the long-side and maintain a small core long core position in case risk-off conditions reach a peak, and we see an explosive move in the VIX.
The dollar and digital currencies
The March dollar index futures contract moved higher since January 29. The contract posted a .035% gain since last week. The index settled at 98.158 on Wednesday. Interest rate differentials between the US currency and the euro continue to provide support for the dollar index. The dollar index traded to its lowest level since July 2019 when it fell to 96.02 on December 31, which is now the technical support level, while resistance is at 98.735, the October 1 high on the March futures. Continuous contract support stands at 95.365 with resistance at the 99.33 level. The dollar index moved to the bottom end of its range at the end of 2019. On January 31, the index fell sharply, which could have been the result of Brexit. Bullish and bearish factors continue to pull the dollar in opposite directions. While interest rate differentials are bullish for the greenback, Brexit and trade agreements could weigh on the dollar index. At the same time, the 2020 US election is likely to inject mounting uncertainty over the future of US policy into currency markets. The acquittal of President Trump on the two articles of impeachment will give way to a highly contentious election season in the US, which could impact the path of the dollar index over the coming months.
The euro currency was 0.25% lower against the dollar since January 29 on the March futures contract. Since the euro accounts for 59.5% of the dollar index, the euro and pound could appreciate as the uncertainty over Brexit ended on January 31. Over the past week, the pound edged 0.31% lower against the US currency. Technical support is at the $1.2940 level against the dollar. I continue to expect more volatility in currency markets in 2020 compared to 2019 based on the contentious nature of the November 2020 US Presidential election.
Bitcoin edged higher since January 29. Bitcoin was trading at the $9,637.76 level as of February 5, as it moved 2.78 % higher than the value on January 29, adding to recent gains as the cryptocurrency seems to have its sights set on moving above the $10,000 level. Ethereum rose by 14.25% and was at $202.43 per token on Wednesday. The market cap of the entire asset class moved 5.41% higher as it outperformed the price action in Bitcoin. The number of tokens increased by 18 to 5093 tokens since January 29. The rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $271.019 billion. Open interest in the CME Bitcoin futures fell by 11.19% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign, but over the past week it declined as Bitcoin rose. As I have been writing, an ETF product in 2020 could cause even more interest and higher prices for the digital currency asset class. The Chinese government cracked down on the asset class over the past months, but these days it has its hands full with Coronavirus.
The Canadian dollar moved 0.76% lower since last week. Open interest in C$ futures fell by 6.2% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Weakness in commodities prices accounts for the lower level of the C$. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 0.25% since the January 29 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus.
The British pound posted a 0.31% loss since the previous report. The pound rose to just over $1.35 after the December 12 election, the highest level since May 2018, but pulled back to the $1.30 level. As I wrote last week, “I continue to believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips.” The stroke of midnight on Saturday, February 1, marked the official end of the UK’s membership in the EU. The UK and EU Parliaments both approved Prime Minister Johnson’s plan, and now the hard work of negotiating trade protocols and other matters begins for the British government. Without the uncertainty of Brexit hanging over the UK, the pound could rally towards the $1.40 level against the US dollar over the coming weeks and months.
The Brazilian real continued to decline against the US dollar since January 29, as it moved 0.36% lower and closer to the 2015 low at $0.23040. The low over the past week was at the $0.23100 level. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. I continue to believe that the real will eventually appreciate against the US dollar. Risk-off conditions had weighed on emerging market currencies. Since the Brazilian economy has significant exposure to commodity prices, the currency has been weak. While a lower low is possible, I continue to believe that the upside potential for the Brazilian currency is far greater than the downside risk at the current exchange rate.
Precious metals prices moved mostly higher over the past week, except for gold the leader of the pack. Rhodium moved to the $10,000 per ounce level, which was the previous all-time high. Silver outperformed gold, as the yellow metal corrected. Palladium moved higher since the last report. Precious metals continue to attract buying in the low interest rate environment.
Platinum, silver, palladium, and rhodium prices posted gains since January 29, but gold declined. Silver outperformed gold as the former recovered. The price of silver was volatile over the past week. Rhodium continued to be the star performer as the price of the metal was offered at over the $10,000 per ounce level. Palladium posted a gain, and platinum moved towards the $1000 per ounce level.
Gold fell by 1.19% since last week, while silver was 0.66% higher. February gold futures rolled to April and were just over the $1560 per ounce level on Wednesday, while March silver was just above $17.60 per ounce. Open interest in the gold market fell by 8.52%. Declining open interest when the price of a futures contract falls is not a technical validation of a bearish trend in a futures market.
Silver fell to a low of $17.28 on January 29, but the price came storming back to the $18 level before selling returned to the market. April gold futures reached a peak at $1619.60 on January 8, and March silver climbed to $18.895 on the same day at the height of the Iranian missile attack on Iraqi airbases. Gold made a new multiyear high, but silver did not reach the September 2019 peak of $19.54 on the continuous futures contract during the rally earlier this month. The price action and trends in both gold and silver markets remained bullish over the past week.
The price of April platinum rose by 1.21% since January 29 after a 4.50% loss last week. April futures were at the $987.10 per ounce level. The level of technical resistance is at $1046.70, the January 16 high on the April futures contract. Support in platinum is nearby at $954.30 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium surged higher since the end of 2019. The midpoint price of the metal was at $10,000 per ounce on February 5, $650 higher than the level on January 29. Palladium rose by 5.65% since the previous report. The price traded to a new peak at $2427 on January 23 on the March futures contract and settled at the $2326.70 per ounce level on Wednesday. The risk of significant volatility in palladium and rhodium rises with the prices of the metals.
Open interest in the gold futures market moved 8.52% lower over the past week, which is a significant move during the correction. The metric reached a new record peak of 799,541 contracts on January 15 and moved steadily lower from that level. Risk-off conditions in other markets likely caused some longs to take profits since late January, which could turn out to be healthy for the gold market. The metric moved 3.96% lower in platinum while it was 2.83% lower in the palladium futures market. Silver open interest fell by 3.02% over the period. The bullish trend in the precious metals sector remains intact as of February 5.
The silver-gold ratio moved lower since January 29, as gold underperformed silver.
The daily chart of the price of April gold divided by March silver futures shows that the ratio was at 88.69 on Wednesday, down 1.51 from the level on January 29. 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, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets.
We are long the gold mining stock ETF products GDX and GDXJ, which declined with the price action in gold since the last report.
Gold moved down by 1.19%, while the GDX was 2.81% higher since January 29, and GDXJ fell by 2.16% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.30% gain since January 29, which slightly underperformed the percentage gain in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for periodic corrections will rise with prices. Silver volatility increased as the price fell sharply to a low of $17.28 and bounced back to the $18 level before returning to $17.60 on the back of weakness in gold.
Platinum and palladium prices posted gains since January 29. March Palladium was trading at a premium over January platinum with the differential at the $1339.60 per ounce level on Wednesday, which widened since January 29. April platinum was trading at a $575.70 discount to April gold at the settlement prices on February 5, which narrowed since the previous report as platinum outperformed gold since last week.
The price of rhodium, which does not trade on the futures market was at $10,000 per ounce on Wednesday. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. As I wrote since late 2019, when the price of rhodium was below $5500 per ounce, “Some analysts projected that the price of the rare metal was heading for the $10,000 per ounce level.” Rhodium reached the $10,000 mark over the past week. The spread widened to $1000 per ounce at times in a sign of the wild price action in the illiquid metal. Markets rarely move in a straight line, and we could see an increase in volatility in the rhodium market, which is in a deficit condition. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Rhodium experience a wild January as the price almost doubled since the end of 2019.
We are long the PPLT platinum ETF product, which moved 0.70% lower since January 29 as it underperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis. After the recent price action, the price needs to get back above the $1000 level, which has been a problem area over the past years.
We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $10.71 on February 5, down 2.46% since the last report as mining shares underperformed the silver futures market.
I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week. Low interest rates and increased interest in precious metals should contain any corrections. The latest Fed meeting was a confirmation that interest rates will remain low. Economic data from Europe continues to point to monetary policy accommodation, which is bullish for precious metals prices. Risk will rise with prices in all of the precious metals, but pullbacks have been golden buying opportunities. The case for higher highs in gold and silver remains compelling. The risk-off conditions in other markets over the past two weeks increased volatility, but prices mostly remained strong. I continue to believe that gold is heading for a new all-time high, and we will see the price move over the $2000 per ounce level sooner than most analysts think possible.
The selling continued in the energy sector over the past week. Crude oil and oil product prices posted declines since January 29, but crack spreads edged higher, meaning gasoline and heating oil futures outperformed the crude oil. Natural gas made a new low, and ethanol fell. Coal for delivery in Rotterdam posted a gain.
March NYMEX crude oil futures fell 4.84% since the previous report.
As the monthly chart highlights, NYMEX crude oil put in a bearish reversal on the monthly chart in January, which pushed the energy commodity below the $50 per barrel level at the start of this month, before it recovered marginally. February tends to be a weak month in the crude oil market. In 2016, the price fell to a low of $26.05 per barrel during the second month of the year.
April Brent futures moved 6.25% lower since January 29. March gasoline was 3.54% lower, but the processing spread in March posted a 2.70% gain since January 29 as gasoline marginally outperformed the price of crude oil over the period. March heating oil futures moved 3.46% lower since the previous report, but the heating oil crack spread rose 1.27% since the last report.
Technical resistance in the March NYMEX crude oil futures contract is at $54.37 per barrel level, the high from January 29, with support close by at the $49.31 level, the low over the past week on the March futures contract. All signs were pointing lower in the oil futures market at the beginning of February, but Iran continues to lurk in the background when it comes to Middle East supplies. Crude oil open interest rose by 4.59% over the period. The increase in the total number of open long and short positions as the price declined tends to be a validation of a bearish trend in a futures market. The price of crude oil will be highly sensitive to the news cycle. Any hostilities between the US and Iran or Iran and Saudi Arabia could cause the price to return to levels above $60 per barrel quickly. However, any signs of negotiations and movement towards a nuclear nonproliferation agreement could push the price of NYMEX futures lower. As I wrote in last week’s report, “I expect lots of price variance in the oil futures arena in the coming weeks, be careful when approaching the energy commodity when it comes to any risk positions. While the situation in the Middle East has calmed since January 8, the odds do not favor peace breaking out in the world’s most turbulent political region anytime soon.” Over the past week, crude oil was a falling knife, and the bearish reversal on the monthly chart could be a sign that more of the same is in store for the energy commodity in February. Time will tell if the recovery from below the $50 level is a dead cat bounce and oil is heading for a test of the late 2018 low. The events surrounding Coronavirus are likely to determine if crude oil continues to decline.
I continue to expect oil-related equities to outperform the commodity in 2020 eventually, but we have not seen that as of yet. Last year, the underperformance on a percentage basis should limit the downside potential for ETFs like the XLE, VDE, and OIH as well as for many of the stocks that make up those products. The dividend yields in the oil patch continue to be attractive. The energy equities did not show many signs of a recovery over the past week as oil fell, but they did bounce with the price of petroleum futures. I would be a buyer of energy-related equities on price weakness on a scale-down basis to add to long positions. The recent move in Apache Corp (APA), which rallied by around 30% after an oil discovery in Suriname is an example of what a piece of good news can do to a company in this sector that has lagged the stock market as well as the oil market throughout 2018, 2019, and now into the first month of 2020. I believe the current price levels and lack of appreciation in oil stocks over the past months limit the downside potential, even if the price of NYMEX crude oil futures falls below the $50 per barrel level again. The oil equities continues to provide value for investors, but many analysts continue to shun the sector.
As I wrote over the past weeks, “Iran poses the most significant threat to oil supplies from the Middle East. Even though the tensions between the US and Iranians seem to have calmed since the January 8 missile attack on Iraqi airbases, the rhetoric between Teheran and Washington remains a clear and present danger to stability in the part of the world that is home to half the world’s crude oil supplies.” Without any incidents in the Middle East, the price of oil continued to move to the downside. The bearish reversal could attract follow-through technical selling during the early days of February.
On Tuesday, the Iowa caucuses were the first primary of the year. A slew of candidates shared the delegates, but Mayor Pete Buttigieg and Senator Bernie Sanders came out on top in the contest that was more than a problem when it came to the vote counting. The final results were still not available on Wednesday. We may not see a nominee for the opposition party emerge until the convention in the summer as at least four candidates are closely positioned at the top of the polls. I believe the big winner in Iowa was former NYC Mayor Michael Bloomberg, who did not even compete in the contest. The loser was Joe Biden who came in a distant fourth place according to the latest vote count. Perhaps the most fascinating data from the Iowa caucuses was that Senators Sanders and Warren, the two progressive candidates, together captured around 44% of the vote. The progressive agenda is not supportive of US oil and gas production via fracking.
The prospects for the future of US energy policy will hinge on the outcome of the November Presidential election. The US is currently the world’s leading producer of both crude oil and natural gas. OPEC is hoping that the US production of crude oil begins to decline in 2021. We could see the price of oil and gas start to move with the political polls in the US later this year once the Democrats decide on a challenger to President Trump and adopt the “Green New Deal” as part of the platform for the contest. The oil cartel will review its current production cut in early March. With the price of the energy commodity dropping, and below the $60 per barrel level on nearby Brent futures, OPEC is likely to keep the cuts in place throughout 2020 and may even cut deeper. Many oil ministers have said that the sweet spot for Brent crude oil is a range between $60 and $70 per barrel.
The spread between Brent and WTI crude oil futures in April fell to the $4.31 per barrel level for Brent, which was $1.20 below the level on January 29. The spread moved to a high of $6.23 on January 8 as Iranian missiles attacked Iraqi airbases that house US troops. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May. The spread found what looks like a significant bottom at $3.48 in August. Tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil remains at $50 per barrel and $66.60 on the upside. After testing the upside and falling just 95 cents short of the 2019 high on January 8, crude oil is now just above the downside level at $50 per barrel, which could become a pivot point for NYMEX futures.
US daily production remained at a record high of 13 million barrels per day as of January 24, according to the Energy Information Administration. As of January 24, the API reported a decline of 4.27 million barrels of crude oil stockpiles, while the EIA said they rose by 3.50 million barrels for the same week. The API reported an increase of 3.27 million barrels of gasoline stocks and said distillate inventories fell by 141,000 barrels as of January 24. The EIA reported an increase in gasoline stocks of 1.20 million barrels and a decline in distillates of 1.30 million barrels. Rig counts, as reported by Baker Hughes, fell by one last week to 675 rigs in operations as of January 31, which is 172 below the level operating last year at this time. The decline in the number of rigs with daily output at 13 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The inventory data from both the API and EIA continued to be mostly bearish for the price of oil as product stocks have been trending higher since October.
OIH and VLO shares moved in opposite directions since January 29. OIH rose by 4.34%, but VLO moved 3.10% lower since January 29. Strength in gasoline crack spreads over the coming weeks and months would be supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $11.54 per share level on Wednesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks continue to underperform the other oil-related equities. I will wait before adding any more shares to the position in OIH. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”
ERX was 0.15% higher since last week’s report. I continue to use tight stops on long positions in the ERX product. Oil-related equities were volatile over the past week. I have been buying ERX with very tight stops over the past week. I will continue to stop out of the leveraged product in the quest to catch an updraft. I do not view ERX as an investment position, so I would use a trailing stop and take profits on a scale-up basis if I can catch a rally.
March natural gas futures were at $1.861 on February 5, which was only 0.21% lower than on January 29. The futures contract traded to a high of $2.778 on November 5. Natural gas traded at its lowest price since 2016, when it hit $1.804 on February 4 on the March contract. In January, natural gas fell to its lowest price in twenty-one years since 1999.
Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. A recovery in natural gas is overdue, but there are only around eight weeks left until the 2020 injection season begins in late March, and the price is already reflecting injection season trading conditions.
The EIA reported a withdrawal of 201 bcf, bringing the total inventories to 2.746 tcf as of January 24. Stocks were 23.6% above last year’s level and 7.6% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019. With around eight weeks to go until inventories begin to climb, we would need to see an average withdrawal of 204.875 bcf to reach last year’s low in stockpiles, which is highly unlikely. This week the consensus expectations are that the EIA will report a withdrawal of 124 bcf from storage for the week ending on January 31. The EIA will release its next report on Thursday, February 6, 2020.
Open interest rose by 4.54% in natural gas over the past week. The metric had been rising over the past weeks as the price declined. The price action likely attracted trend-following and technical shorts to the natural gas futures market. Technical resistance is at $1.977 per MMBtu level on the March futures contract with support at $1.804. The $1.611 per MMBtu level from March 2016 stands as technical support on the continuous futures contract. Price momentum and relative strength on the daily chart are in deeply oversold conditions. The price action suggests that sellers are lurking above looking to take advantage of any attempts at a price recovery.
The GASL ETF product was trading at $5.28 per share on February 5, 4.55% higher than on January 29, after losing over 20% in each of the last two weeks. I have been on the sidelines in GASL. If I do dip a toe back into the leveraged ETF product on the long side, I would use a very tight stop and trade it like the ERX product.
February ethanol prices moved 1.31% lower over the past week on the back of weak energy prices. Open interest in the thinly traded ethanol futures market moved 10.07% higher over the past week. With only 612 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose 0.57% compared to its price on January 29, and the price of April coal futures in Rotterdam moved 2.31% higher over the past week.
Late Tuesday, the API reported a 4.18-million-barrel rise in crude oil inventories for the week ending on January 31. Gasoline stocks rose by 1.96 million barrels, while distillate stockpiles fell 1.78 million barrels over the period. The EIA said daily output dropped by 100,000 barrels to 12.9 million per day. The EIA reported a rise of 3.40 million barrels of crude oil inventories on Wednesday morning. They said that gasoline stocks fell by 100,000 barrels, while distillate inventories fell by 1.50 million barrels as of the end of last week. The API and EIA inventory reports were mostly bearish for the price of the energy commodity, but the price at around the $50 level on nearby NYMEX futures is at a level that absorbed the data.
The potential for high volatility in the oil futures market has increased in 2020. Without any fresh news from the Middle East, the price is likely to follow inventory data over the coming weeks.
In natural gas, the price action continues to be bearish for this time of the year.
As the forward curve over the coming months shows, the price at $1.861 in March on the settlement price on February 5, was 0.40 cents per MMBtu lower than on January 29. If the current trend continues, we could see a test of the $1.611 per MMBtu low. Meanwhile, the oversold condition of the market presents a chance for a technical recovery rally. We could see volatility increase over the coming weeks as the March-April spread becomes active. Since March-April represents the time of the year when withdrawals from storage end and injections begin, the spread has the nickname as “the widow maker” because of its history of extreme price volatility. The spread was trading at a 2.60 cents premium for April on February 5, down 1.80 cents over the past week.
Keep in mind that price action tends to fill the gaps created by the island reversals on the daily and weekly charts. The top end of the gaps is an eventual target for the price action, but it could be quite some time before prices reach those levels. Time is not on the side of natural gas bulls. As I wrote over the past weeks, “The longer the price takes to recover, the lower the chances of any significant move to the upside. Sellers are likely to take advantage of any price recovery over the coming days and weeks. The rise in open interest could be a sign of increasing short positions, which could lead bears to push the price of the energy commodity lower as the winter season has not come with below-average temperatures across the US.” The price action over the past week continued to be bearish, and a test of prices below the $1.80 appears to be on the horizon.
I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. Since January 29, the price of BG shares moved 6.84% higher to $54.36 per share on February 5. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.
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. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities.
We are holding 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 0.42% higher over the past two weeks at $14.43 per share. I will add another unit at a much lower price to lower the average cost of the long position.
The trend in the oil market remains lower as it is now around the $50 per barrel level. Natural gas continues to experience selling pressure with more sellers lurking above the market. However, Iran continues to be a danger to supplies in the Middle East and could cause buying to come back to the oil market in the blink of an eye. In natural gas, the market is ripe for a recovery, but the timing is a problem as we are past the halfway mark in a warmer-than-average winter season in the US. I believe the odds of increased price volatility in both oil and gas markets remain high over the coming weeks. The trend in both energy commodities remains lower, for now. Nothing has changed since last week other than lower lows in both oil and gas futures markets.
Grain prices moved lower across the board since January 29, as the economic weakness caused by Coronavirus in China weighed on soybean, wheat, and corn prices. The USDA will release its February World Agricultural Supply and Demand Estimates report on Tuesday, February 11 at noon EST.
March soybean futures declined by 1.46% over the past week and was at $8.8000 per bushel on February 5. Open interest in the soybean futures market rose by 5.07% since last week. Price momentum and relative strength indicators on the daily chart remained in oversold conditions on February 5 but were crossing higher.
The March synthetic soybean crush spread fell over the past week and was at the 96.75 cents per bushel level on February 5, down 8.50 cents since January 29. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread is a confirmation of the current bearish trend. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets.
March corn was trading at $3.8075 per bushel on February 5, which was 0.91% lower on the week. Open interest in the corn futures market rose by 2.53% since January 29. Technical metrics were in oversold territory in the corn futures market on the daily chart as of Wednesday. The price of March ethanol futures fell by 1.31% since the previous report on the back of weakness in energy and corn futures. March ethanol futures were at $1.3520 per gallon on February 5. The spread between March gasoline and ethanol futures narrowed to 13.43 cents per gallon on February 5, down 3.65 cents since last week.
March CBOT wheat futures were only 0.04% lower since last week. The March futures were trading $5.6200 level on February 5. Open interest rose by 3.84% over the past week in CBOT wheat futures. The metric rose in all of the leading grain futures markets as they prepare for the 2020 planting season. The rise in the total number of long and short positions an increase in hedging activity. Technical metrics in CBOT wheat were in oversold territory on Wednesday but were attempting to cross higher. Wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over recent sessions.
As of Wednesday, the KCBT-CBOT spread in March was trading at an 88.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 2.00 cents since January 29. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” The spread continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts.
I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus has been a bearish factor for the grain markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I would be a scale-down buyer of beans, corn, and wheat on price weakness. I viewed the recent selloff as an opportunity as the 2020 planting season begins in late March.
The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage. Farmers are now watching the spread to determine how best to utilize their acreage during the upcoming 2020 planting season.
The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.3446:1 level on February 5, down 0.0058 since last week. The ratio is below the long-term norm. The beginning of the year is an excellent time to put the corn-bean ratio on your radar as any significant moves in the spread could provide clues about the path of least resistance for the prices of the grain and the oilseed futures markets. On February 5, the spread was at a level that provides a clue about farmers planting behavior in the coming months. If it continues to decline, farmers would likely increase corn crops at the expense of soybeans when it comes to the planting season in the early spring below the 2.4:1 level.
The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could create a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies.
Copper, Metals, and Minerals
The Coronavirus in China continued to weigh heavily on the prices of base metals and industrial commodities, before they staged a bit of a recovery. Since China is the demand side of the equation in the raw materials asset class, the prices of all of the base metals, except nickel, that trade on the LME, iron ore, and the Baltic Dry Index continued to move lower since January 29. Copper on COMEX, lumber and uranium prices moved higher over the period along with LME nickel. The one-day lag in LME prices depressed some of the prices.
Copper rose only 0.80% on COMEX, while the red metal posted a 1.39% loss on the LME since the last report. Open interest in the COMEX futures market moved 6.06% higher since January 28. March copper was trading at $2.5745 per pound level on Wednesday after trading to a low of $2.4875 over the past week. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. The outbreak of Coronavirus has weighed on Chinese economic growth. At the same time, the Lunar New Year holiday and vacations in China led to lower prices. Copper is a leading indicator in the base metals sector. Coronavirus has caused risk-off conditions across a host of markets. The increase in stockpiles over the past weeks have weighed heavily on the price of the red nonferrous metal. This past week, copper inventories declined a bit.
Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January, which could mean that follow-through selling in February will threaten the low and technical support at $2.4675 per pound. So far, the low was only two cents above that level.
The LME lead price moved lower by 2.95% since January 28. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel rose by only 0.23% over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal. Tin fell 0.64% since the previous report. The illiquid metal fell to the $16,195 per ton level. Aluminum was 2.67% lower since the last report. The price of zinc was down 1.86% since January 28. Zinc was just above the $2200 level on February 4. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The path of least resistance of the US dollar could also impact prices. The current level of global interest rates is supportive of the prices of nonferrous metals, but the Coronavirus is a negative factor as it weighs on Chinese economic growth. Base metals prices have moved to, and in some cases below, the bottom end of their trading ranges.
March lumber futures were at the $428.30 level, up 0.07% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed left interest rates unchanged at its recent January meeting. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The price of uranium for March delivery was up 1.43% at $24.85 per pound. The volatile Baltic Dry Index fell another 19.96% since January 29 to the 453 level as shipping demand from China has ground to a halt and because of seasonal factors during the winter months. June iron ore futures fell 5.13% compared to the price on January 29. Open interest in the thinly traded lumber futures market increased by 2.82% over the period.
LME copper inventories moved 3.76% lower to 178,325 metric tons since last week after a series of significant increases over the past weeks. COMEX copper stocks fell by 9.68% from January 28 to 30,373 tons. Lead stockpiles on the LME were unchanged, while aluminum stocks were 1.25% higher. Aluminum stocks rose to the 1,257,950-ton level. Zinc stocks moved 1.29% lower since the last report. Tin inventories moved 2.40% lower since January 28 to 6,705 tons. Nickel inventories were 4.48% higher compared to the level on January 28. The export ban from Indonesia took effect on January 1.
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. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector but concerns over coronavirus have overwhelmed the markets over the past weeks and caused risk-off conditions in industrial commodities and markets across all asset classes, until buying emerged this week.
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 $1.73 per share on Wednesday, up 26 cents over the past week. Low uranium prices continue weighed on the share prices of most producers over recent weeks.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 52 cents on February 5, down 3 cents since last week despite reasonable earnings from US Steel. The company beat fourth-quarter estimates by 47 cents per share but still lost 64 cents per share during the final quarter of 2019, sending the stock lower. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level for the next twelve months. The details for the call option are here:
US Steel shares were at $9.49 per share and moved 1.82% higher since January 29.
We own two units of FCX shares at an average of $10.56. The stock was trading at $12.41 on Wednesday, $1.12 higher since the previous report. I will maintain a small long position in FCX shares.
The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China over the coming months. However, the most significant factor will continue to be the progress of Coronavirus and its impact on the Chinese economy.
I remain cautiously bullish on the prospects for base metals and industrial commodities prices in 2020, but this is a time for caution. I would be a buyer on price weakness, leaving plenty of room to add at lower prices in all of the industrial commodities. A program of cautious scale-down buying with lots of room to build positions could wind up being the optimal approach to the current risk-off period in the industrial commodities sector of the raw materials asset class.
The risk-off behavior in all markets over the health emergency in China continued to take its toll on the animal protein sector over the past week. The prices of live and feeder cattle futures were on either side of unchanged after the recent losses. The lean hog futures posted a double-digit percentage loss since the previous report. Live cattle and lean hog futures rolled to April contracts. The USDA will release its February WASDE report on Tuesday, February 11, at noon EST, which will provide the latest data on supply and demand for beef and pork markets.
April live cattle futures were at $1.19175 per pound level down 0.87% from January 29 as the selling continued over the past week. Technical resistance is at $1.28550 and $1.3000 per pound. Technical support stands at around $1.15000 per pound level. Price momentum and relative strength indicators were at oversold readings on Wednesday. Open interest in the live cattle futures market moved 7.20% lower since the last report. The total number of open long and short positions in the live cattle futures market had been moving higher since mid-October, but the falling price caused longs to exit to risk positions over the recent weeks.
March feeder cattle futures outperformed live cattle as they rose by 0.52% since last week. March feeder cattle futures were trading at the $1.35675 per pound level with support at $1.3000 and resistance at $1.47750 per pound. Open interest in feeder cattle futures rose by 6.53% 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.
Lean hog futures underperformed the cattle futures and continued to plunge since the previous report. The active month April lean hogs were at 61.875 cents on February 5, which was 10.10% lower from the level on January 29. Price momentum and the relative strength index were at deeply oversold readings on Wednesday. Support is at 59.30 cents with technical resistance on the April futures contract at 76.525 cents per pound level, the January 8 high.
The forward curve in live cattle is in backwardation from February 2020 until August 2020, and the market shifts to contango from August 2020 through April 2021. Backwardation returns until June 2021. The Feeder cattle forward curve is in contango from March 2020 through November 2020, and there is a small backwardation from November 2020 through January 2021.
In the lean hog futures arena, there is contango from February 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months now that the trade war de-escalated. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The Coronavirus could increase demand for pork from China as the country is banning the consumption of other meat products, which could be the source of the virus. However, the kneejerk reaction to the virus has caused significant selling and risk-off conditions in the lean hog futures arena. Lean hog futures were a falling knife over the past week.
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 in the April futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.92610:1 compared to 1.74680:1 in the previous report. The spread increased by 17.93 cents as live cattle became far more expensive because of the carnage in the lean hog futures market. The spread moved far away from the historical norm on the April futures contracts, which could prompt some mean reversion price activity.
Soon the markets will turn their focus to the upcoming 2020 grilling season of peak demand in the US, which begins in late May and runs through early September. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. Over the past weeks, both currencies have continued to decline. Any rise in the Brazilian real and Argentine peso could provide some support for meat prices. Lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline, as we have witnessed. Grain prices over the coming weeks could also impact the path of least direction for the prices of meat futures. Lower grain prices over recent weeks make animal feed prices lower and weigh on meat prices. We could see two-way price volatility increase as the winter season ends in the US.
I continue to believe we will see recoveries in cattle and hog prices, the COW ETN product tends to move with the prices of the meats, but it suffers from limited liquidity because of its small net asset base.
The prices of three of the five soft commodities that trade in the futures market on the Intercontinental Exchange moved lower over the past week. FCOJ posted a loss over the period. Coffee posted the most significant decline, and cotton prices fell. Cocoa and sugar moved higher. The Brazilian real continued to trade towards its multiyear low putting pressure on oranges, coffee, and sugar prices.
March sugar futures rose 1.66% since January 29, as the price of the sweet commodity was around the 14.73 cents per pound level. Technical resistance is at 15.13 cents with support at 14.05 cents. Sugar made a new high at 15.13 cents on February 4. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is a critical level of longer-term support. The value of the January Brazilian real against the US dollar continued to decline over the past week and was at the $0.23560 level against the US dollar on the February contract, down 0.36% over the period. The Brazilian currency remains near its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency remained above the critical support level at $0.23040 since 2015, during the extended period of weakness, but it is moving towards that area of support. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were just above neutral territory as of February 5. The metrics on the monthly chart crossed higher from a neutral condition and are headed for overbought territory. Sugar made a new high above its 2019 peak, and the next significant target on the upside is the early 2018 high at 15.49 cents per pound. Open interest in sugar futures was 2.33% higher since last week. Open interest had been rising with the price, which continues to be a bullish technical factor for the sweet commodity. Sugar has rallied to new highs as drought conditions in Thailand have created supply concerns over the past weeks.
March coffee futures fell below the $1 per pound level over the past week as they fell 4.21% since January 29. March futures were trading at the 97.75 cents per pound level. The first level to watch on the downside is 95.80 cents. Below there, support is at around 92.20 cents on the continuous futures contract. Resistance is now at $1.0000 on the nearby contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market. 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 $31.75 on Wednesday. Open interest in the coffee futures market rose by 8.37% since last week. I am holding only a small long core position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market.
Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears have subsided causing the price of the soft commodity to decline. Coffee had made higher lows since reaching 86.35 cents in mid-April. The ultimate upside target is the November 2016, high at $1.76 per pound. Coffee had moved into overbought territory on the short-term chart and crossed lower. Price momentum and relative strength continued to display deeply oversold readings on Wednesday. On the monthly and quarterly charts, the price action is threatening to turn bearish again as the metrics are crossing lower. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.” I continued rebuilding a long position over the past week and will add on further price weakness leaving plenty of room for lower prices. Coffee can be a wild bucking bronco when it comes to the price of the soft commodity.
The price of cocoa futures posted the most significant gain in the sector over the past week. On Wednesday, March cocoa futures were at the $2790 per ton level, 2.31% higher than on January 29. Open interest rose by 2.10%. Relative strength and price momentum were just above neutral territory on February 5. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2859 per ton on the March contract on January 22. We are long the NIB ETN product at $25.76. NIB closed at $32.32 on Wednesday, February 5. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is at $2914 per ton. On the downside, short-term technical support now stands at $2673 per ton.
March cotton futures fell 3.64% lower over the past week on the back over concerns about the Chinese economy. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 67.51 cents on February 5. On the downside, support is at 65, 61.73, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market fell by 5.78% since January 29. Price momentum and relative strength metrics were falling in oversold readings on Wednesday. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy grinds to a halt, the demand for cotton suffers.
March FCOJ declined since last week. On Wednesday, the price of March futures was trading around 93.75 cents per pound. FCOJ nearby futures moved 3.45% lower over the past week. Support is at 91.60cents level. Technical resistance is at 98 cents per pound. Open interest rose by 3.41% since January 28. The Brazilian currency continued to weigh on the FCOJ futures. $1 per pound could become a critical pivot point for the OJ futures. The steady increase in open interest since late December could mean a move is on the horizon. Given the low price of FCOJ, the odds favor the upside in the soft commodity, but the price continued to decline over the past week.
Chinese economic weakness and the low level of the Brazilian real have been bearish for sugar, coffee, and FCOJ prices. Cotton is particularly sensitive to events in China, while cocoa will move based on weather conditions in West Africa. The one thing all of the soft and agricultural commodities have in common is that the addressable consumer markets continue to rise by around 20 million people per quarter, and supplies must increase to keep pace with demand. Periods of price weakness could be excellent opportunities for long positions given the demand side of the fundamental equation in the commodities that feed, and in the case of cotton, clothe the world.
A final note
Action in the crude oil and copper markets over the past week, and the pair of bearish reversals on the monthly charts, were signs of risk-off behavior on the back of the spread of Coronavirus in China. Expect markets to continue to focus on the number of cases and spread of the illness over the coming week. Gold has displayed incredible strength during the recent period, but the price corrected this week. I view the decline in open interest in the gold futures market as a significant event. The lower number of open positions as the price falls could be a healthy sign during the current correction.
In the agricultural sector, we are likely to see an increase in volatility in grain markets as the 2020 planting season approaches. Price weakness because of risk-off conditions could provide an opportunity for scale-down buying as uncertainty over the 2020 crop is likely to cause two-way price volatility over the coming weeks and months. Natural gas looks headed for a test of the 2016 low at $1.611, but the market is in severely oversold territory at its current price level.
Volatility is the mother’s milk of opportunity for traders with a close eye on risk-reward. Keep stops tight, take profits when they are staring you in the face. Do not be afraid of missing an opportunity. Increased price variance in markets means that another trade is just around the corner.
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.