July 10, 2019

  • Gold holds above the $1400 level and continues to outperform silver
  • Crude oil inventories support crude oil over the past week lifting the price above $60 per barrel on August NYMEX futures
  • The USDA will release the July WASDE report on Thursday, July 11 setting the tone for grains and agricultural futures
  • The Brazilian real continues to post gains which is supportive for coffee and sugar prices
  • Watch the inflation data in the CPI and PPI reports on Thursday and Friday for clues about the next move in the US dollar index.

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:

 

This week’s report includes the price action over the past two weeks.

 

On Thursday, June 27, markets were quiet as they awaited the end of Q2 on Friday and the trade meeting between Presidents Trump and Xi on Saturday, June 29. Natural gas futures moved over the $2.30 per MMBtu level after the EIA reported the first increase in inventories that was below 100 bcf after six consecutive weeks of triple-digit injections. Natural gas in storage across the US rose by 98 bcf for the week ending on June 21. Few other markers posted any significant gains or losses on the session.

 

On Friday, June 28, the second quarter of 2018 came to a close. Crop progress reports sent the prices of corn and wheat lower, but soybeans posted a gain. Stocks posted gains, which was likely the result of window dressing rather than any fundamental inputs as the markets await the outcome of the Trump-Xi summit on Saturday in Osaka. Corn, gold, and coffee futures put in bullish reversals on the quarterly chart in Q2, while cotton went the other way and put in a bearish reversal. Crude oil experienced selling at the end of the trading session on Friday, as the market looked towards the OPEC meeting on Monday and Tuesday. Crude oil settled June at the middle of its trading range in WTI and below in Brent futures which rolled to September on the final trading day of June.

On Saturday, June 29, President Trump and Chinese Leader Xi agreed to no new protectionist measures and restart trade negotiations that will work towards a comprehensive trade agreement between the US and China. The result of the meeting, while not earth-shattering, was a small and positive step which could inject some optimism into markets at the start of Q3.

On Sunday, June 30, during an impromptu visit to the DMZ that separates North and South Korea, US President Donald Trump shook hands with and met the leader of North Korea. President Trump became the first US leader to walk across the border and into North Korea in a sign of peace that was rich in symbolism.

 

On Monday, July 1, stock prices moved higher after China and the US declared a truce in the trade war and agreed to continue to negotiate in good faith. The dollar index rallied on the first day of Q3, which led to a selloff and correction in the gold market. Gold fell to under the $1390 per ounce level after rallying since the Fed meeting in June. The big news of the day came from the oil market, which posted a gain on the session. OPEC agreed to a “partnership” charter with the Russians when it comes to production policy. The “partnership” formalizes Russia’s dominant role within the cartel that has developed over the recent years. The cartel is attempting to strengthen its position, given the rising production of the world’s new output leader, the United States. The price of natural gas declined below the $2.30 level on July 1, and gasoline continued to display price strength. Grain prices moved lower on positive weather reports and crop progress, while coffee moved to over the $1.10 per pound level. The dollar index was 0.710 higher on the session, which weighed on precious metals and copper prices. Bitcoin tanked to the $10,500 level and closed near the lows of the day as it dropped around $2000 on the first trading day of July. US 30-Year bonds edged around 0-17 lower.

On Tuesday, July 2, stocks moved higher with the S&P 500 rising to a new record high for the second consecutive session. Gold turned around and erased Monday’s losses while the dollar index did not move all that much. Bonds rallied sharply on the session. Despite the extension of the OPEC production cut for the coming nine months, the price of oil moved lower and was trading at $2.76 per barrel lower late in the day on Tuesday. The oil market fell on slowing global demand and the prospects for rising production from the US over the coming months. At the same time, the word from Vienna was that Russia was not 100% on board with the extension of the output cuts. Grain prices were mixed with gains in wheat and corn futures and a loss in soybeans. The decline in crude oil pushed product prices lower along with the price of natural gas futures, which drifted towards the $2.20 per MMBtu level once again. While gold rallied sharply, silver only managed a marginal gain and platinum fell on the session. Palladium rose to over the $1550 per ounce level as the metal looks poised to rise to another record high above the $1600 level. Copper moved lower on the back of concerns over Chinese demand. Hog prices rose with feeder cattle while live cattle were unchanged. The price of cotton moved to the upside, but all of the other members of the soft commodities sector posted losses along with lumber despite the rally in the bond market. Finally, Bitcoin recovered to just under the $11,000 level after the heavy selling on Monday. The EU announced that Christine Lagarde will replace Mario Draghi as the President of the European Central Bank later this year. Lagarde is currently the managing director of the International Monetary Fund.

On Wednesday, July 3, stocks rose to new highs on the holiday-shortened session on July 3. Bonds also moved to the upside along with precious metals even though the dollar posted a marginal gain. Crude oil also moved higher as the API and EIA reported withdrawal from inventories. On Tuesday, the API said stocks declined by 5.0 million barrels for the week ending on June 28 while on Wednesday morning, the EIA reported a draw of 1.1 million barrels. When it comes to gasoline stocks, the API said they moved 387,000 barrels lower compared to a 1.6 million barrel decline from the EIA. Distillate products were 1.7 million barrels lower according to the API but rose by 1.4 million barrels in the EIA’s report. Production rose to 12.2 million barrels per day on June 28, up 0.1 million from the previous week.

The EIA reported an injection of 89 bcf into inventories for the week ending on June 28, which caused the price of natural gas to edge higher to the $2.29 per MMBtu level.

Grain prices moved higher on July 3, meats were mixed along with soft commodities, but coffee posted an impressive four cents per pound gain on the session. Bitcoin also moved to the upside.

On July 4, US markets were closed for the holiday. On Friday, July 5, most market participants took a long summer weekend holiday. The employment report which said the US economy added 224,000 jobs in June sent bonds and stocks lower, the dollar higher, and many commodities prices lower on the final session of the first week of Q3. The employment report was a lot more bullish for the US economy than the market had expected. In the aftermath of the jobs report, the Fed will take a closer look at the June inflation data when the PPI and CPI come out during the next week. As the Fed is data-driven, the odds of a rate cut in July declined after Friday’s economic data.

On Monday, July 8, Morgan Stanley downgrades the outlook for stocks and layoffs at Deutsche Bank weighed on equities pushing the DJIA, S&P 500, NASDAQ, and Russell 2000 all lower on the session. The dollar index did not move much, and most markets were waiting for the CPI and PPI data later this week after the robust employment data from Friday, July 5. The action in stocks reflected the market’s concern that higher than expected inflation could cause the Fed to temper the enthusiasm it expressed the June meeting when it comes to cutting interest rates. The market continues to expect a 25 basis point rate cut at the July meeting, but higher than expected CPI and PPI data that follows on the heels of June employment growth could cause the data-driven central bank to say it wants to see more data before reducing the Fed Funds rate.

On Tuesday, July 9, stocks did not change much as the market has spent the past few days in what could only be characterized as the summer doldrums. However, markets are waiting anxiously for Fed Chairman Powell’s testimony before the Congress and Thursday and Friday’s CPI and PPI data for clues if the central bank will cut the Fed Funds rate by 25 basis points at the July meeting at the end of this month. Grain prices are waiting for Thursday’s July WASDE report. Crude oil and natural gas edged higher in quiet trading. Gold and precious metals did not have any surprises for the market, but copper fell towards the bottom end of its trading range as inventories have climbed and there was no new optimistic news on trade between the US and China. Meat prices took off to the upside led by lean hog futures that moved up the limit on the session. Cattle also posted significant gains. Soft commodities prices and lumber moved lower, except for coffee, which edged higher on the session. The dollar index moved higher, and Bitcoin was back up at the $13,000 level on Tuesday.

On Wednesday, July 10, in testimony before Congresswoman Maxine Water’s committee in the House of Representatives, Fed Chairman Jerome Powell dispelled any notion that the Fed will not cut the Fed Funds rate by at least 25 basis points at its July meeting. The testimony sent the dollar and interest rates lower while stocks and precious metals prices rallied led by gold. Crude oil moved back over the $60 per barrel level on the nearby NYMEX futures contract after a pair of bullish inventory reports from the API and EIA for the week ending on July 5. Grains were quiet as the agricultural markets are eagerly awaiting Thursday’s WASDE July WASDE report. Bitcoin was over the $12,000 level on Wednesday.

Stocks and Bonds

The stock market started the second half of 2019 with gains and new highs. A moratorium on the escalation of the trade dispute between the US and China injected some optimism into stocks while the anticipation of lower interest rates continues to be a bullish factor for the US equity market. However, Chairman Powell’s testimony before Congress on July 10 validated that the Fed plans to trim the Fed Funds rate at its July FOMC meeting.

The S&P 500 moved 2.72% higher over the past two weeks while the NASDAQ gained 3.7%. The DJIA posted a 1.22% gain since the previous report. While the market is betting that the Fed will cut the short-term Fed Funds rate by 25 basis points at its next meeting at the end of July plenty of factors continue to face the stock market that could derail the stock market and cause another correction. Each time the stock market has reached the current level since the final quarter of 2018, a correction followed. However, the latest comments from the Fed are likely to keep the bid under the stock market for the coming week.

The market will now focus CPI and PPI data later this week, which could determine how deeply the Fed is willing to cut the Fed Funds rate as inflation remains below its 2% target rate. At the same time, any developments when it comes to trade negotiations with the Chinese could cause increased volatility in the leading indices. Over the past two weeks, Chinese stocks lagged US share prices which is a sign of the “crosscurrents” and uncertainty that is driving the US central bank towards a lower short-term interest rate environment.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.18 level on Wednesday, which was 0.33% lower than the closing level on June 26. Since April 5 the FXI has traded in a range from $39.90 to a high at $45.96. Technical support is at the January 3 low at $38 per share which resistance at the April 5 peak.

FXI ticked higher following the G20 meeting on June 29 and rose to a high at $44.02 on July 1, but the Chinese stocks could not hold gains.

US 30-Year bonds moved 0.16% lower since the previous report, but the long-bond made a new high at 157-02 on the now active month September futures contract on July 5. Bonds remain strong with lower short-term rates on the horizon, and the ascent of bonds and decline in interest rates had occurred at a rapid pace, which could portend a correction. Bonds have been moving steadily higher throughout 2019, but the Fed will need be aggressive at its July meeting to avoid a decline in bonds which became overdone on the upside. However, any flight to quality over trade issues or Iran could propel the US government bond market higher and send it for a test of the 159-16 technical resistance level which was the peak from September 2017. In the meantime, the bonds and TLT ETF appear to have peaked. When markets move lower on bullish news it tends to reveal a top or underlying weakness, and that is what we could be seeing in the US bond market.

Open interest in the E-Mini S&P 500 futures contracts rose by 4.01% since June 26 after falling during the contract roll from July to September. Open interest in the long bond fell by 0.87% over the past two weeks. Rising open interest is a technical validation of the bullish price action in the stock market.  The VIX moved lower over the past two weeks on the back of the rise in stocks as it was at the 13.03 level on July 10, a decline of 19.6%. However, the volatility index remains at a slightly higher level than in April when it fell to 11.03, the next area of technical support.

I believe that the VIX at 13.03 and VIXY at $19.37 are both in the buy-zone. Since both are short-term instruments, I will be using tight stops on long positions, and re-establish on the long side if stopped over the coming week. Any position in VIX or VIXY is not an investment position, but a trading position that requires constant monitoring and adjustments in stops and profit targets based on the most recent price of these instruments. I suggest a minimum of a 1:1 risk-reward ratio when it comes to profit targets in the volatility indices. I would also look to enter any long position on a price dip, which means a new and higher high in the stock market to improve the odds of success. As of July 10, a long position in the volatility-related instruments amounts to a short position in stocks which is going against the current trend.

 

The dollar and digital currencies

The dollar index rebounded by 0.975% on the September futures contract since June 26. The index that measures the dollar against some of the other leading world currencies rose after the G20 meeting and the impromptu and symbolic brief meeting between President Trump and Kim Jong Un of North Korea. The index was around the middle of its trading range since June 18. A statement by President Trump on July 3 could have future implications for the dollar over the coming weeks and months.

Source: Twitter

The tweet could be a sign that the President is asking his Treasury Secretary to intervene in the dollar to send the currency lower. Governments typically intervene in the currency markets in a quest for stability, but the President’s latest message could message that he intends to use the dollar as a tool when it comes to trade. A weaker dollar increases the competitiveness of US exports in the global markets.

On the first trading day of Q3, the dollar corrected higher, sending the price of gold for a test below the $1400 per ounce level on the nearby August futures contract. Even though the dollar did not fall significantly after the July 1 rally, the price of gold came storming back in a sign of strength for the yellow metal since it broke out of its long-term trading range in the aftermath of the June Fed meeting. Gold has been rallying in all currency terms since the early 2000s, which is a commentary on the foreign exchange markets. Fiat currencies that have only the backing of the full faith and credit of the governments that print the legal tender have all lost value against gold, which is the world’s oldest and longest-lasting means of exchange for almost two decades. The break to the upside and a new bullish leg in the gold market in all currency terms is a message that the faith in governments that print legal tender and their credit continues to decline. Additionally, the rise in the prices of Bitcoin and the other members of the digital currency asset class is further evidence that traditional currencies are losing value in the current environment.

From a technical perspective, open interest in the dollar index futures contract, which is a microcosm of the world’s foreign exchange market, fell by 7.0% since two weeks ago. The pattern of trading in the dollar index of higher lows and higher highs remains in jeopardy after the June Fed meeting. A move below the 93 level on the dollar index could trigger lots of technical selling in the dollar. Short-term support levels on the weekly chart are at 95.17, 94.635, and 93.395.

 

The leader of the digital currency asset traded up to a high at $14,170 on June 26, but it has been volatile and pulled back over the past two weeks. Bitcoin moved 5.73% lower since last week to the $12,125.71 level while Ethereum posted a 14.75% loss as it was at around $289 per token. The market cap of the entire asset class moved 8.25% lower as Bitcoin outperformed most of the other digital currencies. The number of tokens rose by 32 since June 26. Open interest in the CME Bitcoin futures rose by 0.90% since last week.

The rise of Bitcoin and digital currency prices together with Congress’ response to Facebook’s proposed Libra token is a sign that governments intend to fight the cryptocurrency markets. Countries around the world do not want to lose control of money supply, which could happen if the cryptos make a series challenge to traditional foreign exchange instruments. Congress has requested that Facebook provide more information on its plans for Libra and that the company does not take further steps to release the token in the market. Christine Lagarde will take over at the helm of the European Central Bank when Mario Draghi steps aside in October. She was the managing director of the International Monetary Fund when it made supportive comments about the emergence of digital currencies. However, any adoption of cryptos in the future will likely come from those central banks that decide to introduce tokens that will remain under the control of governments. Meanwhile, many proponents of Bitcoin and the other currencies argue that the leading benefit is that they operate independently of government control and are free-market means of exchange. I believe that governments will make a significant attempt to both introduce tokens and increase regulation of the current digital currencies if they continue to appreciate over the coming months and years.

 

The Canadian dollar moved 0.33% higher since last week. Open interest on C$ futures fell by 24.12% reversing the recent gains. 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 1.48% loss since the previous report as the UK waits for a decision on who will be the next Prime Minister. The odds continue to favor Boris Johnson, the ex-Mayor of London and former Foreign Secretary under Prime Minister Theresa May. The pound is likely to become volatile as the issue of a hard Brexit, a deal with the EU for Brexit, no Brexit, or another extension takes center stage as the October deadline approaches. Johnson favors exiting the EU by the deadline with a deal or not, which could trigger a general election in the UK and lots of volatility in the pound. The price action in the pound since the Brexit referendum tells us that a hard Brexit would likely be highly bearish for the value of the pound while a deal or decision to remain within the EU would cause the pound to rally against the dollar. Even if the Tory party selects Johnson as the next leader, a general election is highly possible given the division in the Parliament. Nothing has changed from two weeks ago, but if Mr. Johnson becomes Prime Minister, we could see some action in the pound against other world currencies.

The Brazilian real posted a 2.33% gain against the dollar and has been rising slowly since May 20. The Brazilian currency is a substantial factor for the price direction of commodities where Brazil is a dominant producer and exporter in the world like coffee, sugar, and other agricultural products. Brazilian stocks had posted significant gains since late May, and the price of coffee has also moved substantially higher from the April and May low at under 87 cents per pound on the nearby ICE futures contract.

 

Gold continued to shine over the past two weeks as it held most of the recent gains and remained above the $1400 level. The ascent of gold and break to the upside has not been just in dollar terms, but in all currency terms. Gold is telling us that the value of all world foreign exchange instruments continues to decline.

 

Precious Metals

Gold and silver prices edged marginally lower over the past two weeks, but the yellow metal remained over the $1410 level. The June employment report and moratorium on an escalation of the trade dispute between the US and China weighed on gold and silver prices, but Chairman Powell’s testimony on July 10 erased most of the losses. Palladium and rhodium posted gains over the period, and palladium is moving towards the all-time high from March of this year at just under the $1600 per ounce level. Platinum also moved to the upside since the previous report.

Gold was 0.21% lower since June 26 while silver lost 0.61% over the same period. Palladium gained 4.09% over the period while the price of rhodium moved 15.68% higher. Platinum posted a 1.18% gain compared to its closing price on June 26. Open interest in the gold futures market moved 3.7% higher since the previous report. The metric moved 10.59% lower in platinum while it was 10.24% higher in the palladium futures market. Silver open interest slipped by 4.6% over the period.

Gold corrected down to a low at $1384.70 as the price remained above the $1377.50 break out level, which was an encouraging sign for the yellow metal.

The next level on the upside for the yellow metal is now at the recent high at $1442.90 per ounce, the June 25 high. Gold broke out of a $331.30 range that had been in place since 2014. So far, price dips have been a buying opportunity in the gold market; the precious metal will now be moving with economic data until the July Fed meeting at the end of July. A 25-basis point reduction in the Fed Funds rate could cause a new wave of buying in the gold market. Silver continues to lag gold, which sent the price relationship between the two metals to a new high above the 1990 peak on the quarterly chart over the past two weeks.

The silver-gold ratio that divides the price of gold by the price of silver is approaching its all-time high as silver continues to lag gold on a percentage basis.

Source: CQG

The ratio was at 94.79 on Wednesday, 2.16 higher than the level on June 26. The long-term average for the price relationship is around the 55:1 level. The relationship moved above the all-time 1990 high at the 93:185 level from a quarterly perspective. However, on the monthly chart the high was at 98.72 in February 1991, and at 101.422 on the weekly chart, so there could be more room on the upside, which is a warning sign for the price of silver. The platinum-gold spread stands as an example that historical price deviance can move to extended levels for prolonged periods. A shift in market sentiment is necessary to inject bullish life back into the silver market, which continues to refuse to sustain rallies. While gold broke above the 2016 peak, silver has not even challenged the 2019 high at $16.20 per ounce. In 2016, silver reached a high at $21.095 per ounce, so the price action in gold’s little brother has been extremely weak.

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 0.21% lower, the GDX was 2.66% higher since June 26 while GDXJ moved 3.04% 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. We are also long SLV, the silver ETF product which posted a 0.42% loss since June 26 as it marginally outperformed the price action in the silver futures market.

Platinum and palladium moved higher since June 26. October platinum futures rose by 1.18% to the $811.40 per ounce level. Palladium posted a 4.09% gain as of the close of business on July 10 and was at the $1588.10 per ounce level. The next level to watch in the palladium market is the March record high at $1599.10 per ounce. Palladium was trading at a premium over platinum with the differential at the $758.10 per ounce level on Wednesday which widened over the past two weeks to a new record level. October platinum was trading at a $582.50 discount to August gold at the settlement prices on July 10 which narrowed since the previous report but remained near a record level. The price of rhodium which does not trade on the futures market screamed $465 higher over the past week and was at $3,430 per ounce on Wednesday.

We are long the PPLT platinum ETF product which moved 1.49% higher since June 26. 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. Meanwhile, with palladium and rhodium prices strong, platinum remained weak and a laggard when it comes to price performance.

The price action in the silver market has been disappointing as precious metal has not taken off on the upside even though gold held around $1400 per ounce. The dollar and US interest rates are likely to guide the price of gold, but I continue to believe that the breakout to the upside over the 2016 high was a significant event. Moreover, with gold rallying in all currencies since the early 2000s, the next leg in the bull market has taken gold to a new multiyear high and time will tell if we are just at the start of a move that will take it appreciably higher from the $1400 level or if a period of price consolidation is necessary. Gold tends to move more like currencies than commodities then it comes to price variance, therefore without any significant events on the economic or geopolitical fronts, we will likely see tame price action in the gold market. So far, all dips have been buying opportunities, but gold has been following the moves in the dollar index like an obedient puppy.

The price of silver could be waiting for more confirmation from gold before making a significant move. Any further new highs in gold have the potential to launch the price of silver, but so far that has not occurred. I remain bullish on both of the leading precious metals. One suggestion for those looking for a limited risk way to buy silver is Endeavour Silver Corporation (EXK). The stock outperformed silver from 2008 through 2011 when the price of silver rose from $8.40 to $49.86 per ounce. While silver rose by almost six-fold, EXK shares moved nearly 19 times higher. The most from the late 2015 low to the 2016 high in silver that took the price just under 55% higher took the shares of EXK almost five times higher. At $1.86 per share, I look at Endeavour Silver Corp. as a call option on silver with no expiration date.

Palladium looks set to put up a new record high as the metal is on a course for the $1600 level. Rhodium continues to work its way higher as a deficit created by platinum’s low price and output declines at South African mines created the current shortage of the rare platinum group metal. The bottom line in the platinum market is that a sustained and explosive recovery is long overdue in the metal that was formerly “rich person’s gold.” I continue to favor long positions in all of the precious metals for the coming week but would only add to existing positions or establish new ones during periods of price weakness.

 

Energy Commodities

In the aftermath of the OPEC meeting on July 1 and 2, the price of oil and oil products moved lower initially and then turned higher. Over the past two weeks, natural gas and coal prices recovered while ethanol posted a loss. OPEC waited until after the trade summit at the G20 meeting to convene in Vienna, Austria. The continuation of the 1.2 million barrel per day production cut came as no surprise to the markets since the price of both Brent and WTI has slipped since April. The cartel told the world that the current quota level would remain in place into 2020. At the same time, OPEC agreed to a “partnership charter” with Russia to formalize the role of one of the world’s three leading oil-producing nations when it comes to participation in future decisions on production policy. The truth is Russia has had a dominant position within OPEC since 2016 when the price of oil dropped to below the $30 per barrel level. OPEC needed to bring Russia more into the fold to bolster the cartel’s position given the rising production of the United States, which is now the world’s leading oil producer. Economic concerns over the trade dispute between the US and China on the one hand and sanctions and retaliation by Iran on the other are pulling the price of the energy commodity in opposite directions over the recent weeks. The Saudi oil minister told the world that the sweet spot for the price of Brent crude oil is between $60 and $70 per barrel. At $67.05 per barrel on the September Brent futures contract on July 10, the price of oil is trading within the Saudi’s desired range.

August NYMEX crude oil futures rose by 1.77% while September Brent futures moved 2.07% higher since June 26. Gasoline was 3.84% higher, and the processing spread in August posted a 10.65% increase since June 26 after a 20.5% increase from June 19-26. Heating oil futures gained 0.65% since the previous report, and the heating oil crack spread fell by 1.61% since last week. The product prices continue to reflect the loss of the Philadelphia refinery, and seasonal factors as we are now in the very heart of the summer vacation and peak driving season. It is likely that markets will soon begin to turn the attention to the post-summer season, which could weigh on gasoline prices over the coming weeks.

The spread between Brent and WTI crude oil futures in September moved lower to the $6.53 per barrel level for Brent, which was 50 cents below the June 26 level. Any hostilities in the Middle East could cause periods of extreme price volatility in the oil futures market. The tension between Iran and the US is likely to keep a bid under the price of oil over the coming week. The Strait of Hormuz continues to be ground zero, given the military buildup in the region.

US daily production stood at 12.20 million barrels per day as of June 28 according to the Energy Information Administration, which is 0.10 million barrels above the previous week’s level and 0.20 million under the most recent record high. Crude oil inventory data was supportive of the price at the beginning of July, which likely prevented further losses. As of June 28, the API reported a decline of 5.0 million barrels of crude oil stockpiles while the EIA said they fell by 1.1 million barrels for the same week. The API reported a drop of 387,000 barrels of gasoline stocks and said distillate inventories fell by 1.70 million barrels as of June 28, the EIA reported a decline in gasoline stocks of 1.6 million barrels but an increase in distillates of 1.4 million barrels. Rig counts, as reported by Baker Hughes, fell by five last week to 788 rigs in operations as of July 5, which is now 75 below the level operating last year at this time.

OIH and VLO shares moved in opposite directions from their prices two weeks ago. OIH was 3.43% higher, and VLO declined by 1.8% since June 26. I have not purchased either the oil services ETF or the refining stock.

August natural gas futures recovered from the move to below $2.20 per MMBtu as the market ran out of selling and injections dropped below the 100 bcf level over the past two weeks. Six consecutive weeks of triple-digit injections took the price of August futures to a low at $2.134 on June 20, but the price recovered when the injection number was 98 bcf for the week ending on June 21.  The August futures were at $2.444 on July 10, which was 7.76% higher than on June 26 as the price recovered towards the $2.50 level, which was a critical technical level for natural gas on the downside. The support level at just above $2.50 per MMBtu has now become technical resistance and could attract selling if the price of August futures continues to work its way higher over the coming sessions. Last week, the EIA said an injection of 89 bcf into storage brought the total amount of gas in storage to 2.390 tcf as of June 28. 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 almost certain to be higher and was rising at a rate that could surpass the four trillion cubic feet level. However, the decline in injections over the past two weeks was enough to lift the price of August futures.

Source: EIA

As the chart shows, stockpiles of natural gas are 11.6% above last year’s level but were still 6.0% under the five-year average as of June 28. Last week’s injection was again lower than the 100 bcf level, which caused buying to return to the market and lifted the price to above the $2.40 per MMBtu level. This week, I expect the EIA to report an injection of around 73 bcf as the heat of summer is increasing demand for cooling, limiting the amount of natural gas flowing into storage across the United States. Open interest increased by 0.13% over the past week. We will soon find out if selling returns to the natural gas market or if it has the demand and sustained buying to push it through the technical resistance area at just above the $2.50 level. Buy stops are likely building at around $2.55 per MMBtu.

With approximately 19 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 45.2 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 84.8 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. I will be watching these numbers closely over the coming weeks as they are likely to influence the short-term price direction of the natural gas futures market.

August ethanol prices edged corrected lower by 4.68% since last week. The price of July futures traded to a high at $1.645 on June 17. August futures were trading at $1.5080 per gallon on Wednesday. Ethanol will be taking direction from the prices of corn and gasoline over the coming week. The KOL ETF product moved 1.14% lower compared to its price on June 26, but the price of August coal futures in Rotterdam recovered by 14.23% after an extended period of losses.

On Tuesday, the API reported that oil inventories fell by 8.129 million barrels for the week ending on July 5 and the EIA said they decreased by 9.5 million barrels on Wednesday. Analysts had expected a decline of 3.081 million barrels for the API report. When it comes to products, the API reported a fall in gasoline inventories of 257,000 barrels and an increase in distillate stocks of 3.69 million barrels. On Wednesday, the EIA said that gasoline stocks fell by 1.5million barrels and distillate inventories rose by 3.7 million barrels for the week ending on July 5. The inventory data was bullish for the prices of crude oil and oil products and pushed the price of August NYMEX futures above the $60 per barrel level. Iran and events in the Middle East, together with economic data, will be the guiding factors for the price of crude oil and oil products over the coming week.

In natural gas, a significant test at just above the $2.50 per MMBtu level will set the tone for the trading until the end of the summer when the market turns its focus to the 2019/2020 peak season of demand which gets underway in November.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price. this coming winter was at $2.835 in January. While the nearby August futures contract moved 7.76% higher since June 26, the January 2020 futures contract only posted a 5.5% gain over the past two weeks. If natural gas fails again at the $2.50 level and the prices of nearby and January futures fall to a new low, I would consider buying call options at the end of July or in August for December through February at lower prices. 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.

I have been tracking the price action in BG shares because of the rise in the price of ethanol. Bunge is an ethanol refiner with interests in Brazil as the company processes sugarcane into the biofuel. Since June 26, the price of BG shares moved 2.8% higher to $57.19 per share on July 10. I suggest a long position in BG with a tight stop or the purchase of call options as BG could also be a candidate for a takeover. Last year, Glencore expressed interest in buying the company that has a market cap of under $8 billion. BG pays a 3.51% dividend at the current share price.

As there are bullish and bearish factors at play in the crude oil market, trading rather than investing is likely to yield optimal results over the coming week. We could see the market sentiment shift back and forth from concerns about demand and rising inventories to events in the Middle East. There is no change when it comes to my approach to crude oil and products from the last report. I am a buyer of dips, a seller of rallies, but I am more concerned over the potential for a price spike to the upside because of events surrounding the Iranians over the coming weeks.

In natural gas, while I am on the sidelines. A recovery is underway that could take the price to the $2.50 per MMBtu level or higher but given the recent price action selling is likely to return to the market at higher levels. A failure at or below $2.50 would put the market on the defensive once again and could test the lower end of the trading range below the $2.20 level.

The energy sector of the commodities market always has the potential for lots of volatility. I would keep stops on all positions tight, and risk-reward ratios on all positions at above the even money level. Trading rather than investing is likely to be the optimal approach to oil and gas over the coming week. I am not buying OIH or VLO shares at the current price levels but would consider a long call option position in BG shares or a purchase with a tight stop of around 10% from the current price.

Given my bullish stance on Brazil, I favor a long position in PBR, Petroleo Brasileiro SA at $16.28 per share. The company is one of my best bets in the energy sector given its exposure to the Brazilian real.

Source: Barchart

PBR has been trending higher throughout 2019, and reforms from the Bolsonaro administration could keep the current trend intact. I believe that this stock has the potential to double in value from its closing price at $16.28 on July 10.

 

Grains                                                             

Tomorrow, on July 11 at noon EST the USDA will release its July World Agricultural Supply and Demand Estimates report. The July WASDE will update the markets with the USDA’s latest snapshot of crop progress and demand data at the height of the growing season. Over the past two weeks, the prices of all of the leading grains moved lower as farmers across the fertile plains of the US caught up with planting and the weather conditions were seasonal and supportive of crop growth.

New crop November soybean futures moved 0.60% lower since the previous report. Open interest in the futures market declined 3.46% after falling by over 15% during the roll from July futures which occurred in June.

As we go into the July WASDE, the economics for crushing soybeans into products remained stable as the prices of meal and oil followed the raw oilseed.

Source: CQG

The December synthetic soybean crush spread was at the $1.00 per bushel level on July 10 which was only 1.25 cents lower than on June 26. The crush rose to a peak at $1.3650 on May 30, which was supportive of the price of the oilseed futures. However, since then, as beans moved to the upside, meal and oil products lagged which was a sign of lower demand which contributed to the decline from the recent high in the new crop soybean futures contract which fell from a high at $9.48 per bushel on June 18. The WASDE report has the potential to move the soybean futures market tomorrow, but it will be the weather conditions over the next few weeks that determine the size of the 2019 crop.

New crop December corn was trading at $4.3950 per bushel on July 10 after trading at a low at $3.6375 per bushel on May 13 and a high at $4.7300 on June 17. Corn was 3.3% lower on the week. Open interest in the corn futures market rose by 1.08% over the past two weeks after the roll from July futures ended. The decline in the price of corn over the past week pushed ethanol futures 4.68% lower since the previous report. The spread between August gasoline and ethanol futures was at 49.72 cents per gallon on July 10, up 14.82 cents since June 26 as gasoline rallied and corn fell. Ethanol has been following corn, and the rally that took the price of the grain to the high in mid-June pushed the price of the biofuel to $1.645 per gallon, the highest level since August 2017. The WASDE report is likely to cause an increase in volatility in both the corn and the ethanol futures markets.

September CBOT wheat futures moved 7.64% lower since last week. The September futures were trading $5.0475 level on July 10 after falling to a low at $4.2725 on May 13, the day they put in a bullish reversal on the daily chart. The most recent high was at $5.5725 on June 27. Open interest declined by 4.48% over the past two weeks in CBOT wheat futures. Over the past three weeks, the drop in open interest of over 20% was because of the futures roll from July to September.

As of Wednesday, the KCBT-CBOT spread in September was trading at a 63.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 1.25 cents lower than on June 26 but remains at an elevated historical level. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The level of the spread contributed to the decline in the price of wheat and is still telling us that there is a danger of lower prices in store for the CBOT wheat futures contract. In wheat, the weather around the world across the northern hemisphere in critical growing regions will dictate the size of the 2019 crop, so the coming weeks are likely to be a crucial time for the futures market.

I did not do any buying in the grain markets over the past week and have only tiny core long positions after taking profits by scale-up selling during the rally that peaked in mid to late June in the three primary grain markets. I will watch the price action after Thursday’s WASDE report if prices decline sharply, I will likely do some buying after they find a level where calm returns to the market. However, on significant spikes to the downside, I will be looking to pick up some bargains. If the prices move higher, I will hold onto the small core long positions. We are at a significant time of the year for crops, but as the period of uncertainty over the crop is coming to an end, I will be taking less risk in this sector over the coming weeks. Once the 2019 harvest becomes clear, the impact of trade between the US and China will begin to affect the prices once again, but for the coming weeks, it continues to be all about Mother Nature and the weather conditions.

 

Copper, Metals, and Minerals

 

The one-day lag between LME and COMEX settlement prices distorts the weekly results as COMEX copper futures and other base metals recovered after Chairman Powell’s testimony that sent the dollar lower and increased the prospects for an interest rate cut in the coming weeks. Aluminum and nickel prices posted marginal gains over the past two weeks, but the other metals that trade on the LME moved lower. Uranium edged lower while lumber fell. The Baltic Dry Index exploded higher since the previous report, and the price of iron ore posted a substantial percentage gain. The moratorium on new protectionist measures between the US and China and pledge to continue negotiations on trade was not enough to foster any significant increases in the prices of the base metals. Copper is the leader of the nonferrous metals, and its price action set the tone for most of the other LME metals since the previous report.

Copper moved 0.72% lower on COMEX, while the red metal posted a 3.03% loss on the LME over the past week because of the one-day price lag. Open interest in the COMEX futures market moved 8.6% higher as selling returned to the market raking the price below the $2.70 per pound level on the active month September futures contract. Copper continues to be a barometer when it comes to the trade negotiations between the US and China. Copper needs to see more meat on the bone when it comes to progress on trade and signs of economic stability or growth in China for its price to move higher. Over the past two weeks, copper inventories on both the LME and COMEX moved appreciably higher, which also weighed on the price of the red metal.

LME lead moved lower by 0.11% since June 26, but the price of nickel moved higher by 2.69% over the past two weeks. Tin posted a 3.82% loss since the previous report as the recent stock increases continue to weigh on the price of the thinly traded metal. Aluminum was only 0.11% higher on the week. The price of zinc lost 6.22% since June 26, making it the worst-performing LME metal over the period.

Lumber futures fell to the $367 level, down 4.4% since June 26 as July futures rolled to September. The price of uranium moved 0.60% lower since June 26. The Baltic Dry Index exploded 37.42% higher as it rose to the 1759 level, which is both seasonal and a positive sign for the demand for dry bulk commodities in China. August iron ore futures posted a 9.03% gain compared to the price on June 26 as shortages from Brazil continue to cause concerns about global availability for the primary ingredient in steel. Open interest in the thinly-traded lumber futures market continued to move lower by 8.3% over the past two weeks and has dropped by over 40% since early June.

LME copper inventories moved 21.88% higher to 296,025 metric tons since last week. COMEX copper stocks increased 11.35% since last week to 35,109 tons. The increase in stockpiles of the leader of the nonferrous metals is weighing on the price of copper and sending a signal to the other LME metals. Lead inventories on the LME fell by 5.5%, while aluminum stocks fell by 5.82% to below 950,000 tons. Zinc stocks dropped 12.37% since the previous report, but that did little to support the price which posted the most substantial percentage loss over the period. Tin inventories moved 2.9% higher after a significant rise over the past month. Nickel inventories were 8.41% lower compared to the level on June 25, which likely accounted for the rise in the price of nickel. 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 next significant event is likely to be the Fed meeting at the end of this month. A 25-basis point decline in the Fed Funds rate would likely provide some support for the prices of the nonferrous metals. This week’s CPI and PPI data should offer some guidance on if the Fed will act or delay an interest rate cut until they can collect and analyze additional data. However, economic reports out of China are likely to have the most substantial impact on base metals prices as the Asian nation is the leading consumer of the building blocks for the construction of infrastructure.

We own Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium. We are working a stop at $1.49 and have an initial profit target at $6 per share but will likely move these levels over the coming weeks and months. UUUU was trading at $3.05 on Wednesday as the volatile stock was 12 cents per share higher on the week.

We also own the $25 and $19 call options in US Steel (X). US Steel shares declined to $14.75, which was $0.50 higher than last week’s level. The call options limited the losses on the stock. The $25 call and $19 call will likely expire worthless on July 19. The January 2021 $15 call which has a longer duration. We own this option at $3.30 per share, and it was trading at $2.82 on July 10. 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 $10.95 on July 10. I continue to be cautious with this position given the rise in copper stocks, the ongoing trade dispute, and recent robust economic data in the US that could cause the Fed to reconsider a July cut to the Fed Funds rate. Additionally, weak economic data from China is a danger sign for copper. I will maintain a small long position in FCX shares and would only add if the price drops appreciably from the current level.

Base metals and industrial commodities prices are highly sensitive to global economic conditions. While the US economy is doing well, Asia and Europe are a different story. For the coming week, I will be keeping my eyes on the price action but will remain mostly on the sidelines unless there are any significant price moves.

 

Animal Proteins

Animal protein prices moved higher across the board over the past two weeks as the cattle and hog markets prepared for data from Thursday’s WASDE report from the USDA.

 

August live cattle futures were trading at $1.076250 per pound level up 2.14% from two week’s ago. Technical resistance is at $1.09925 which was the May 10 peak on the August contract.  Technical support stands at $1.01975 per pound level, which was the low from June 24. Live cattle futures bounced from just above the $1 per pound level. Price momentum and relative strength indicators have risen on the daily chart.

Open interest in the live cattle futures market moved 4.06% lower since the last report.

August feeder cattle futures outperformed live cattle again last week as they rose by 4.8% since last week. August feeder cattle futures were trading at the $1.42350 per pound level with support at $1.30950 and resistance at $1.48100 per pound which was the May 10 peak. Open interest in feeder cattle futures rose by 0.27% 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. Both feeder cattle and live cattle futures appear to have found at least short-term bottoms but await the fundamental guidance from the July WASDE report tomorrow.

Lean hog futures recovered over the past two weeks. August lean hogs traded to a low at 73.95 cents per pound on June 24 after the outbreak of African swine fever in China pushed the price to a high at $1.02975 per pound in late March. Since then, the price had been trending lower despite the spread of the problem throughout Asian countries bordering on China. Over the past two weeks, the price bounced from June 24 low. Support is now at 73.95 cents per pound with resistance at 85 cents on the August lean hog futures contract. Lean hogs were at 81.725 cents on July 10, which was 8.28% higher than the level two weeks ago. The open interest metric fell by 2.9% from the previous report. Price momentum and relative strength were rising from the neutral territory on July 10.

The forward curve in live cattle is in contango from August 2019 until April 2020. From April 2020 until August 2020 a backwardation or tight market returns to the forward curve for live cattle until August 2020, but it shifts back to contango until December 2020. The Feeder cattle forward curve is relatively flat from August 2019 through May 2020.

In the lean hog futures arena, there is a backwardation from August until December 2019 after which contango returns until June 2020. There is a backwardation from June through December 2020. The forward curves reflect the seasonal trading patterns in the meat 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 two weeks, the spread between the two meats did not move much.

Source: CQG

Based on settlement prices, the spread was at 1.3169:1 compared to 1.3962:1 in the previous report. The decrease of 0.07930 away from the historical norm was the result of the explosive recovery in the lean hog futures market. African swine fever in China had caused the spread to move to the downside as the trade dispute weighs on cattle prices and the outbreak of the disease provides support for the price of pork. The global supply issues are likely supporting the price of the hog futures and causing the spread to fall from the historical norm once again.

Animal protein prices had been weak since April, but as the July WASDE approached prices rebounded. Given China’s appetite for pork and the problems with supplies, it is possible that export demand will return to the pork market despite the ongoing trade dispute between the US and China. The moratorium on any new protectionist measures and a return to the negotiating table could cause some exports of pork from the US to China to rise given the shortages. The WASDE report is likely to provide some direction to meat prices as the sector is now looking past the peak season that will end on the Labor Day weekend in early September.

Soft Commodities

The price of cotton moved lower over the past two weeks, but the USDA WASDE report tomorrow is likely to move the price of the fluffy fiber futures as it will provide the market with the latest fundamental snapshot. When it comes to the other members of the soft commodities sector, prices were relatively steady with cocoa leading the way on the upside since the June 26 report.

The October sugar futures edged higher over the past two weeks, but the price action remained quiet. October sugar futures posted a 1.46% gain over the period. Open interest moved 2.26% lower since the previous report. The level to watch on the downside is at 11.82 cents per pound, which was the late May low on the October futures contract. Short -term support is at 12.25 cents, the July 2 low. Technical resistance is at the June 14 peak at 12.95 cents. The value of the Brazilian real against the US dollar increased since last week and was at the $0.265950 level against the US dollar, which was $0.00605 higher. The real remains not far from its lows, but it continued to make upside progress. The real has lots of technical room on the upside to continue its recovery. Support is at the August 2018 low at $0.23625 level with resistance at the 2019 high at $0.27475. Since domestic costs in Brazil are in the local currency, a weak real weighs on the price of commodities like sugar that come from the South American nation. Sugar is also sensitive to the price of crude oil and oil products. Brazil processes sugarcane into ethanol for domestic use, which impacts the amount of the sweet commodity available for exportation to the rest of the world. The sugar futures market continues to consolidate. There was no change from the last report in the sugar futures market as the price of October futures has been in a 12-13 cents per pound range since May 28.

Price momentum on the daily sugar chart is flatlining in the lower region of neutral territory. The path of least resistance of sugar will likely continue to follow the Brazilian currency-US dollar currency pair.

September coffee futures moved just 0.15% lower since last week’s report. September coffee futures rose to a high at $1.1565 on July 5, before trading at $1.0590 per pound level on Wednesday, July 10.  I continue to favor coffee on the long side.  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 $36.40 on Wednesday. Open interest in the coffee futures market fell by 4.63% since last week. Support for September coffee is at the June 19 low at 96.25 cents with resistance at the recent high at $1.1565 per pound.

Like sugar, the price of coffee is likely to follow the Brazilian real barring any fundamental changes from Brazil or other leading producing nations.

Cocoa producers in West Africa are working with consumers to develop a price floor for the primary ingredient in chocolate confectionery products. The move lifted the price of cocoa futures over the past two weeks, with cocoa rising by over $100 per ton on Monday, July 8. On Wednesday, September cocoa futures were at the $2509 per ton level, 1.95% higher than two weeks ago. Open interest rose by 5.58%. Relative strength and price momentum are in neutral territory.  The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at over the $2600 per ton level. The price of cocoa has posted gains over the past six consecutive months. The first level of technical support stands at the June 27 low at $2420 per ton on the September futures contract. Below there, the June 4 low at $2321 is the next level of support on the downside. An attempt to install a price floor and global demand for chocolate confectionery products continue to rise, which are supportive for the price of cocoa futures. Cocoa has been making higher lows and higher highs since mid-March.

The price of cotton futures fell below the bottom of the recent trading range over the past week. December cotton futures declined by 3.87% since the previous report as the USDA report on Thursday will provide fundamental guidance for the fiber futures.

December cotton was sitting at the 63.82 cents per pound level on Wednesday. The first target is technical resistance at 68.35 cents; above there, the next level on the upside is at the 70 cents per pound level on the December contract. On the downside, support is at the recent low at 63.06 cents, 60 cents, and the March 2016 low at 55.66 cents stand as support levels for the fiber futures. Open interest in the cotton futures market rose by 6.29% since June 26. We could see lots of volatility in the cotton market over the coming week if the USDA report differs from the June WASDE.

Meanwhile, price momentum and relative strength metrics are in oversold territory on the daily chart, and the metrics remain in oversold conditions on the weekly and monthly charts. I continue to believe cotton is in the buying zone, but the fiber futures could experience a sudden move higher or lower following the WASDE report. If the price drops to 60 cents or lower, I will look to add to the existing long position in the BAL ETN or the cotton futures market.

September FCOJ futures moved higher over the past two weeks. On Wednesday, the price of September futures was trading around the $1.0325 per pound level. FCOJ nearby futures moved 1.18% higher over the past week. Support is now at the 98.85 cents level with technical resistance at the early June high at $1.1530 per pound. Open interest rose by 1.99% over the past two weeks. Like in the sugar and coffee markets, the world’s leading producer of oranges is Brazil. The Brazilian currency influences the prices of sugar, coffee, and FCOJ futures.

I continue to believe that risk-reward favors the upside in this sector of the commodities market. Keep an eye on the cotton market after the release of the July 11 WASDE report.

 

A final note

The inflation data when it comes to CPI and PPI this Thursday and Friday could tell us if the Fed will be as aggressive as Chairman Powell led the market to believe in his testimony on July 10. Any uptick in inflation would likely cause the central bank to limit the number of Fed Funds rate cuts after last week’s employment data. Additionally, the moratorium on any new tariffs between the US and China and a return to the negotiating table could reduce the “crosscurrents” that concerned the central bank at the June meeting. Therefore, the CPI and PPI data could move markets at the end of this week.

The WASDE report comes at a time when agricultural markets are at the height of the growing season in the US. The data from the USDA on Thursday has the potential to move grains and other agricultural commodity prices if there are any significant changes from the June report.

I will be approaching markets with caution over the coming week considering the potential for volatility based on the inflation data. I continue to favor gold as uncertainty is gold’s best friend, and it was the term used most often by the Fed Chairman during his testimony on July 10.

 

 

 

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.