July 17, 2019

  • Gold consolidates while silver moves to $16 per ounce
  • Crude oil and natural gas fall
  • Grains rally in post-WASDE trading and run out of upside steam
  • Bitcoin plunges on government questions over Libra- The US dollar index moves higher
  • The next big event is the July Fed meeting

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

 

Summary and highlights:

On Thursday, July 11, new highs in the stock market followed Fed Chairman Jerome Powell’s second day of testimony before Congress as he stuck to the script when it comes to cutting interest rates at the July FOMC meeting. Even though the June CPI data came in hotter than expected following on the heels of the robust employment report on July 5, it appears that any rate cut will be corrective rather than preemptive and an admission that the central bank went too far in hiking rates in 2018. Crude oil remained at over the $60 per barrel level on the August NYMEX futures contract after Iran attempted to cause problems with a British oil tanker near the Strait of Hormuz. The hurricane near Louisiana also supported the price of crude oil on Thursday. Natural gas fell back below the $2.40 level after the EIA reported that inventories rose by 81 bcf for the week ending on July 5 despite the storm near the Henry Hub. The USDA released its July WASDE report, which supported grain futures market, particularly wheat. The dollar index did not move much, and Bitcoin slipped below the $11,800 level.

On Friday, the PPI number came in at the expected level of an increase of 0.1% in June. After the hotter than expected CPI data, the PPI lit a bullish fuse under the stock market as all of the leading indices rallies. Precious metals and crude oil posted gains on the session, and natural gas rose to the $2.47 per MMBtu level given the uncertainty of Hurricane Barry over the weekend. When it comes to crude oil, market participants do not want to go home short over the weekend given the ongoing tensions around the Straits of Hormuz. The dollar index fell, and grain prices rose the day following the July WASDE report.

On Monday, stocks edged a bit higher along with the US dollar index. Crude oil slipped below the $60 per barrel level, and natural gas fell back to the $2.40 per MMBtu level. Precious metals posted gains across the board along with copper. Grains retreated after last week’s post-WASDE gains. Soft commodities were volatile with coffee trading in a wide range and closing near the highs of the session. The price of sugar declined with cocoa and FCOJ, but cotton recovered after the selling that followed last week’s WASDE report. Bitcoin dropped to the $11,000 level as Secretary of the Treasury Steve Mnuchin told the world that the US will be watching the digital currency asset class and that the government has lots of questions for Facebook and its partners when it comes to the proposed Libra token. The price of lumber futures moved lower and filled a gap on the daily chart in the now active September futures contract. Heath Tarbert was sworn in as the new Chairman of the Commodity Futures Trading Commission on Monday replacing the outgoing Chair J. Christopher Giancarlo. The rumors in the market are that Mr. Giancarlo is a candidate to succeed Mark Carney as the head of the Bank of England. The now ex-Chairman of the CFTC will likely have a better chance to get the job in London if Boris Johnson becomes the Prime Minister in the coming weeks. Meanwhile, markets had little reaction to the release of Chinese Q2 GDP data that shows that the economy grew by a record low at 6.2%.

On Tuesday, Iran continued to hurl threats at the US and Europe, but Secretary of State Mike Pompeo said that the theocracy is prepared to negotiate a new agreement with the US. Pompeo’s statement sent crude oil lower by around $2 on the session to under the $60 per barrel level on nearby NYMEX futures. Natural gas sank to $2.30 per MMBtu in the aftermath of Hurricane Barry. The dollar index moved higher to above the 97 level on September futures, sending gold lower towards the $1400 level. In a counter-intuitive move, silver climbed to a new short-term high at $15.735 and settled at $15.678, the highest price since March. After weeks of lagging gold, silver played catch-up on Tuesday. Agricultural commodities price moved lower, the lack of progress on trade between the US and China, and comments out of the White House sent November soybeans 14 cents lower on the session. Animal protein prices moved a bit lower, while coffee, sugar, cotton, and lumber all moved to the downside. Stocks posted marginal losses, but Bitcoin fell like a stone. Congressional hearings on Facebook’s Libra token made it clear that the government will put roadblocks in front of the company and the digital currency asset class. Bitcoin moved to under $10,000 after trading up to over $14,000 in late June.

On Wednesday, freight companies warned that the slowdown in traffic is a sign of recession. Ray Dalio, the famous hedge fund manager, wrote a 5000-word piece on Linked-In, and the bottom line was a case to buy gold. The Fed released its Beige Book that told markets the economy continues to experience modest growth. The central bank is concerned about the impact of tariffs on the economy as it is creating uncertainty when it comes to input costs. At the same time, labor shortages are creating the tightest job market some districts have ever seen. Stocks moved lower, and the VIX rallied to just under the 14 level. Gold and silver rallied, with silver trading over the $16 per ounce level for the first time since February. The dollar index edged lower on the session. Grains were quiet, but crude oil and oil products fell while natural gas sat near the $2.30 per MMBtu level. Meats were mixed with small losses in cattle and a gain in the price of lean hog futures. Sugar fell to a new low for the year on the October contract, but the continuous futures contract remained well above the 2019 bottom. Bitcoin was around the $10,000 level.

Stocks and Bonds

Chairman Powell’s testimony before Congress over the past week caused stock prices to move to the upside and new highs. Lower interest rates create bullish fuel for equity prices. Meanwhile, Q2 earning reports started coming out this week and will take the center of the stage when it comes to the path of least resistance for stocks. So far, the majority of companies have beat analyst estimates. As the White House chief economic advisor Larry Kudlow said when he was a commentator on CNBC, “profits are the mother’s milk of the stock market.”

The S&P 500 moved 0.29% lower over the past week, while the NASDAQ lost 0.21%. The DJIA posted a 1.34% gain since the previous report.

A 25-basis point cut in the Fed Funds rate is already baked into stock prices, but if the Fed decided that a 50-basis point cut was in order, it would likely launch equity prices to new heights. However, I believe the Fed will act prudently and will only deliver a one-quarter of one percent cut at the end of this month.

Over the past week, Chinese stocks moved marginally lower.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.13 level on Wednesday, which was 0.12% lower than the closing level on July 10. 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 is sitting in the middle of its trading range awaiting both Chinese economic data and for the next shoe to drop in the trade dispute.

US 30-Year bonds moved 0.14% higher since the previous report. Last week I wrote, “Bonds have been moving steadily higher throughout 2019, but the Fed will need to 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.” The Powell testimony before Congress did not cause the 30-Year Treasury to rally significantly over the past week. I continue to believe that baring any significant events; we have seen the high in the bond market as a correction is underway.

Open interest in the E-Mini S&P 500 futures contracts rose by 2.92% since July 10 as stocks moved higher. Open interest in the long bond rose by 0.83% over the past week. The VIX moved higher over the past week on the back of the rise in stocks as it was at the 13.97 level on July 17, a rise of 7.21%. The volatility index remains at a higher level than in April when it fell to 11.03, the area of technical support. Even though the S&P 500 index made a new all-time high, the VIX remained above its April low, which tells us that market participants remain nervous about the future path of least resistance of the stock market.

I believe that the VIX 13.97 and VIXY at $19.17 are both in the buy-zone on dips. Since both are short-term instruments, I have been using tight stops on long positions and taking small losses. 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 continue to recommend a minimum of a 1:1 risk-reward ratio when it comes to profit targets in the volatility indices. I would only look to enter any long position on price dips. A long position in the volatility-related instruments amounts to a short position in stocks which is going against the current trend. The risk-reward in the volatility instruments favor the long side at the most recent lower price levels in the VIX and VIXY which both recovered on Wednesday.

 

The dollar and digital currencies

The dollar index rose by 0.16% on the September futures contract since July 10, but the prospects for lower interest rates in the US weighs on the dollar against other world currencies.

The Trump administration continues to advocate for a weaker dollar, which would be stimulative for the US economy as dollar weakness makes US exports more competitive on the world stage. Moreover, China and other countries manipulate their currencies, so a weaker dollar would be a tool in the ongoing trade dispute. The price action in gold and digital currencies since June is a sign that the dollar, and all fiat currencies, are declining in value. When it comes to the dollar index, we could see a significant trend shift at the end of this month when we next hear from the US Federal Reserve as a rate cut would not only put the central bank’s words into action, but it would also be the first dovish move by the central bank in many years. Since December 2015, rates have been on a one-way path higher, and a cut to the Fed Funds rate would end that trend. 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 to watch on the weekly chart are at 95.17, 94.635, and 93.395. Below 93.395, we could enter into a bear market for the dollar at a time when interest rates are moving to the downside. Lower rates and a falling dollar are highly bullish for commodities prices as we have witnessed in the gold market since June.

 

The leader of the digital currency asset traded up to a high at $14,170 on June 26, but it dropped like a stone to just below the $9,800 level over the past week. Bitcoin moved 19.42% lower since last week to the $9.771.18 level while Ethereum posted a 26.46% loss as it was at around $212.46 per token. The market cap of the entire asset class moved 19.64% lower as Bitcoin marginally outperformed the other digital currencies. The number of tokens rose by 29 since July 10. Open interest in the CME Bitcoin futures fell by 12.4% since last week.

Facebook’s Libra token continued to attract concerns from the official sector which sent the prices of Bitcoin lower. Members of Congress questioned Chairman Powell over his views of Facebook’s plans to roll out its token with other partners. At the same time, President Trump expressed his opposition to the token. As the digital currency market continued to make a comeback when it comes to token prices, the calls for regulation and anti-crypto voices have been rising. Governments around the world control money supply, which is the leading reason they will continue to stand in opposition to the cryptocurrency asset class. However, when countries around the world begin to issue tokens, it is likely to change the global currency markets dramatically. Change tends to attract lots of opposition in the early days, and we are witnessing a significant shift in the way that people all over the world view and use money.

 

The Canadian dollar moved 0.22% higher since last week. Open interest on C$ futures fell by 10.98% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products.

The British pound posted a 0.61% loss since the previous report as the UK waits for a decision on who will be the next Prime Minister and lead the nation to some conclusion when it comes to Brexit from the European Union. The next Prime Minister could face a general election sooner rather than later given the division in the Parliament over the path for a Brexit.

The Brazilian real posted a 0.08% loss against the dollar but it had been rallying 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. Reforms by the Bolsonaro government that deal with corruption and attract investment in Brazil are likely to bolster the value of the Brazilian real which remains at a very depressed level given the trading range between 2011 and the present time. At just under the $0.2660 level against the US dollar, the Brazilian real is far beneath the 2011 high at the $0.65 level. The real has lots of room on the upside for a recovery.

 

Gold held at over the $1400 per ounce level over the past week, which is a commentary on the value of all world currencies. Gold has been telling us that foreign exchange instruments that depend on the full faith and credit of the nations that print the legal tender is declining. The recent volatility in Bitcoin and the rest of the digital currency asset class over the past decade provides further validation that currency instruments are losing value. On Wednesday, silver began to validate the breakout in gold which could cause lots of volatility on the upside in both precious metals if silver can rise above the 2019 peak at $16.20 per ounce.

 

Precious Metals

Precious metals prices were steady over the past week with the only losses in the two metals that have posted the most significant gains. Palladium and rhodium prices corrected slightly lower after each rose to new highs over recent weeks with palladium probing above the $1600 level for the first time and rhodium trading at well over $3000 per ounce. Gold, silver, and platinum all moved just a bit higher since last week with silver finally leading the way.

Gold was 0.77% higher since July 10 while silver gained 4.89% over the same period. Platinum moved 2.06% higher over the period. The price of rhodium moved 1.02% lower while palladium declined by 2.83%. Open interest in the gold futures market moved 0.49% higher since the previous report and was at just over the 600,000-contract level. The metric moved 2.47% lower in platinum while it was only 0.02% higher in the palladium futures market. Silver open interest exploded 5.02% higher over the period. The challenge of $16 in silver could ignite the price of gold if silver can rally to a new high for 2019 and remain above the $16 level.

Gold remains in a range and was above the $1420 per ounce level on Wednesday, both gold and silver moved higher after the COMEX published settlement prices. Chairman Powell’s testimony before Congress that the Fed is likely to reduce the Fed Funds rate kept the bid under the gold market. Technical resistance for the yellow metal is at the recent high at $1442.90 per ounce on the August futures contract, the June 25 high. Silver had not displayed the same strength as gold, but the price took off on the upside and posted gains over the past four trading sessions reaching a peak at just over $16 per ounce.

The silver-gold ratio turned lower on the back of the price action in the silver futures market.

Source: CQG

The ratio was at 89.27 on the daily chart on Wednesday, 3.80 lower than the level on July 10. The long-term average for the price relationship is around the 55:1 level. The relationship had been probing 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. I view the price differential between silver and gold as a historical deviance, but as we have witnessed in the platinum-gold spread differentials in inter-commodity spreads can continue and widen for prolonged periods. Since central banks around the world hold gold and continue to be net buyers of the precious metal, gold has a prominent role in the global financial system while silver does not. The trajectory and level of the ratio had been higher as silver has lost its luster for investors and trend-following traders. As gold held above $1400, it appears to have caused increased interest in the silver market, but until the price can move above the 2019 high at $16.20, silver has the potential to fail. We could be seeing a delayed reaction in silver. A break above $16.20 could sent gold to a new high. On Wednesday, Ray Dalio made a compelling case for owning gold. The precious metals could surprise on the upside.

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 0.77% higher, the GDX was 3.4% higher since July 10 while GDXJ moved 5.01% to the upside. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. I continue to rate both ETFs as a hold. The moves in GDX and GDXY are highly support of more gains in gold which would drive the mining shares even higher. We are also long SLV, the silver ETF product which posted a 4.77% gain since July 10 as it marginally underperformed the price action in the silver futures market.

Platinum and palladium moved in opposite directions since July 10. October platinum futures rose by 2.06% to the $847.10 per ounce level. Palladium posted a 2.83% loss as of the close of business on July 17 and was at the $1543.20 per ounce level. Palladium recently rose to a new record high at $1600.50 per ounce. Palladium was trading at a premium over platinum with the differential at the $696.10 per ounce level on Wednesday which narrowed over the past week from a new record level. October platinum was trading at a $576.20 discount to August gold at the settlement prices on July 17 which narrowed over the period. The price of rhodium which does not trade on the futures market moved $35 lower over the past week and was at $3,395 per ounce on Wednesday.

We are long the PPLT platinum ETF product which moved 1.98% higher since July 10. 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.

Gold will continue to follow the path of the US dollar and expectations for interest rates over the coming week. The other members of the sector are industrial and precious metals, which could mean that trade issues with China and news on the global economy will impact prices. Time will tell if the move in silver over the past four trading sessions is the start of a significant move in the metal. A recovery rally in the silver market is long overdue as it remains around $5 below its 2016 peak while gold is above that level.

 

Energy Commodities

The energy sector of the commodities market moved lower as oil, oil product, and natural gas prices all fell over the past week. Comments by Secretary of State Mike Pompeo that Iran may be ready to negotiate a deal with the US sent oil lower. As Hurricane Barry passed over Louisiana without massive damage, the price of natural gas fell.

August NYMEX crude oil futures fell by 6.04% while September Brent futures moved 4.95% lower since July 10. Gasoline was 6.31% lower, and the processing spread in August posted a 6.47% loss since July 10 after recent gains. Heating oil futures fell 4.94% since the previous report, and the heating oil crack spread fell by 1.38% since last week. Crude oil failed at over the $60 per barrel level on nearby NYMEX futures. Crude oil open interest rose by 4.5% since last week, which could be a sign that shorts will attempt to push the price lower.

The spread between Brent and WTI crude oil futures in September moved higher to the $6.81 per barrel level for Brent, which was 28 cents above the July 10 level. The Middle East continues to be a flashpoint for the crude oil market that could cause sudden rallies. Last week, an Iranian attempt to hijack a British oil tanker failed, but we could see more military actions or incidents over the coming week as the economic noose tightens around the Iranian leadership’s neck. Iran has been stepping up uranium enrichment, which could lead to more sanctions or even military action in the region. The situation in the Middle East is likely to keep a bid under the price of crude oil over the coming week. However, if Iran and the US begin to negotiate it could continue to weigh on the price of oil. Iran told the world that they demand that the US stops selling arms to nations in the region in return for concessions. The prospects for volatility in the oil market remains high.

US daily production stood at 12.00 million barrels per day as of July 12 according to the Energy Information Administration, which is 0.30 million barrels below the previous week’s level. Crude oil inventory data continued to support the price at the beginning of July. As of July 5, the API reported a decline of 8.129 million barrels of crude oil stockpiles while the EIA said they fell by 9.5 million barrels for the same week. The API reported a drop of 257,000 barrels of gasoline stocks and said distillate inventories rose by 3.69 million barrels as of July 5. The EIA reported a decline in gasoline stocks of 1.5 million barrels but an increase in distillates of 3.7 million barrels. Rig counts, as reported by Baker Hughes, fell by four last week to 784 rigs in operations as of July 12, which is now 79 below the level operating last year at this time.

OIH and VLO shares declined from their prices last week. OIH was 7.49% lower, and VLO dropped by just 0.19% since July 10. I have not purchased either the oil services ETF or the refining stock. The oil services companies continue to experience significant selling.

August natural gas futures attempted to move to the $2.50 level over the past week as Hurricane Barry approached Louisiana, but the price only made it to a high at $2.489 per MMBtu. 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 as injections have been falling given the increased demand for cooling and the start of the 2019 hurricane season. After Hurricane Barry passed, the price of natural gas fell.  The August futures were at $2.304 on July 17, which was 5.73% lower than on July 10. The support level at just above $2.50 per MMBtu is now technical resistance. Last week, the EIA said an injection of 81 bcf into storage brought the total amount of gas in storage to 2.471 tcf as of July 5. 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 than last year.

Source: EIA

As the chart shows, stockpiles of natural gas are 12.5% above last year’s level but were still 5.4% under the five-year average as of July 5. Last week’s injection was again lower than the 100 bcf level, which held the price steady at until the hurricane passed. This week, I expect the EIA to report an injection of around 67 bcf as the heat in July is increasing demand for cooling, limiting the amount of natural gas flowing into storage across the United States. Open interest rose by 1.34% over the past week. While buy stops are likely around $2.55 per MMBtu in the August futures, the price of natural gas could not even rise to the level as Hurricane Barry approached the Louisiana Coast, which is the home of the delivery point for NYMEX natural gas at the Henry Hub in Erath. I view the lack of significant upward movement going into the storm as a bearish factor for the price of the energy commodity. If the next injection is below the 70 bcf level and natural gas cannot moved higher, it will be a validation of the bearish tone in the futures market.

With approximately 18 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 43.2 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 85 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. Over the past week, the lowest injection since early April could not cause the price to move above the $2.50 per MMBtu level, which was a bearish sign for the price path of the energy commodity. The moment of truth may come on Thursday after the EIA reports the latest injection as of the end of last week.

August ethanol prices were volatile over the past week but would up down 2.26%. The price of July futures traded to a high at $1.645 on June 17. August futures traded in a range from $1.474 to $1.602 over the past week and closed on Wednesday at the low. Ethanol rallied alongside corn after the release of the July WASDE report on July 11, but both the grain and the biofuel ran into selling. Open interest in the thinly-traded ethanol futures market rose by 9.43% over the past week. The KOL ETF product moved 1.31% lower compared to its price on July 10, and the price of August coal futures in Rotterdam fell 1.94% after last week’s better than 14% gain. The price of coal in Rotterdam had been declining before last week’s double-digit price recovery, but it declined since July 10 in sympathy with oil and gas prices.

On Tuesday, the API reported that oil inventories fell by 1.401 million barrels for the week ending on July 12 and the EIA said they decreased by 3.10 million barrels on Wednesday. Analysts had expected a decline of 2.69 million barrels for the API report. When it comes to products, the API reported a fall in gasoline inventories of 476,000 barrels and an increase in distillate stocks of 6.226 million barrels. On Wednesday, the EIA said that gasoline stocks rose by 3.6 million barrels and distillate inventories rose by 5.7 million barrels for the week ending on July 12. The inventory data did little to support the prices of crude oil and oil products. 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, the price reaction to Hurricane Barry as it moved towards the Louisiana Coast was a sign of weakness as the price could not make it over the $2.50 per MMBtu level even in the face of the uncertainty surrounding the storm. The price action was bearish as technical resistance held in the aftermath of the hurricane when the futures market opened last Sunday evening. The decline to the $2.30 level could be a sign that we will see lower prices, but the price action after the next EIA release is likely to guide prices for the coming week.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.709 in January. I would consider buying call options at the end of July or in August for December through February at much 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.  Nothing has changed since last week.

I have been tracking the price action in BG shares because of the volatility in the price of ethanol. Bunge is an ethanol refiner with interests in Brazil as the company processes sugarcane into the biofuel. Since July 10, the price of BG shares moved 2.66% lower to $55.67 per share on July 17. I suggested a long position in BG in last week’s report and the shares opened at $57.40 on July 11. The long position moved 3.01% lower since the opening last Thursday. I will stop out of this position at $51.47 per share on the downside while looking for at least an equal profit on the upside depending on the price action. I will continue to post weekly updates on this position.

I continue to favor trading crude oil from the long side of the market, given the potential for incidents in the Middle East triggered by Iranian retaliation to US sanctions. I think it would be a miracle if the US and Iran can agree on any deal. In natural gas, I remain on the sidelines. Stops are above the $2.55 per MMBtu level, so I would be a better seller or buyer of the DGAZ ETN product on a short-term basis with a tight trailing stop.

Given my bullish stance on Brazil, last week I suggested a long position in PBR, Petroleo Brasileiro SA. The shares opened on July 11 at $16.42 per share. The company is one of my best bets in the energy sector, given its exposure to the Brazilian real. 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, and it was trading at the $16.16 per share level on July 17, down 1.58% from the execution price on July 11. I continue to rate PBR as a buy.

 

Grains                                                             

The USDA released its July World Agricultural Supply and Demand Estimates report on July 11, and the prices of grains all moved higher in the aftermath of the WASDE.

The full report is available through this link:

 

https://www.usda.gov/oce/commodity/wasde/wasde0719.pdf

 

After initial rallied, all of the leading grain futures ran out of buying over the recent sessions. New crop November soybean futures moved 1.34% lower since the previous report. Open interest in the futures market decreased by 0.93% over the past week. The USDA told the oilseed market that global ending stocks declined compared to the June report sending the price of soybean futures higher.

Meanwhile, the higher price after the report weighed on the economics for crushing soybeans into products as the prices of meal and oil underperformed the raw oilseed.

Source: CQG

The December synthetic soybean crush spread was at the $0.9875 per bushel level on July 17 which was 1.25 cents lower than on July 10. 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. When beans rallied late last week, the crush fell to a low at 92 cents which was a sign that the soybean market would run out of buying.

New crop December corn was trading at $4.4150 per bushel on July 17, which was just 0.46% higher on the week after failing at a higher level. Open interest in the corn futures market rose by 0.96% since July 10. The USDA told the corn market that late planting continues to pose a problem when it comes to the 2019 crop. However, the WASDE left foreign corn stocks unchanged and increased ending US sticks from the June report on lower usage. The uncertainty to total planting, which will become the focus of the August WASDE report, lifted the price of corn futures in the aftermath of the July 11 release. The rise in the price of corn over the past week pushed ethanol futures higher. As selling hit the corn futures, the price of ethanol plunged from over $1.60to under $1.50 per gallon on the August futures contract. The weakness in gasoline added pressure to the biofuel. The spread between August gasoline and ethanol futures was at 40.47 cents per gallon on July 17, down 9.25 cents since July 10 as corn was marginally higher and the price of gasoline fell over the past week.

September CBOT wheat futures moved 0.15% higher since last week. The September futures were trading $5.055 level on July 17. Open interest rose by 2.39% over the past week in CBOT wheat futures. The USDA told the wheat market that hot and dry conditions in Europe are affecting the crop, and while they reduced global ending stocks, the projection is still for a new record high in inventories. A continuation of drought conditions in Russia and Europe could become a problem for wheat supplies resulting in higher prices.

As of Wednesday, the KCBT-CBOT spread in September was trading at a 63.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 0.5 cents higher than on July 10 and is 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.

I traded back and forth in the grain markets over the past week following the July WASDE report, 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. Trade, the US dollar, and most importantly, the weather, will determine the path of least resistance for soybean, corn, and wheat prices over the coming week. We are still at a time of the year where price volatility is typically higher given the uncertainty of the condition and amount of crops that will feed the world when the fall harvest season rolls around. I remain cautiously bullish on grain prices as global population growth increases the demand side of the equation each day.

 

Copper, Metals, and Minerals

 

The prospects for lower interest rates and a higher dollar supported the prices of LME metals over the past week. The five of the six metals that trade on the London Metals Exchange posted gains over the period. Only tin moved marginally lower since the past report. Uranium moved higher, but some uranium-producing stocks moved sharply lower, which I believe is an opportunity to buy or add to long positions. The price of lumber dropped dramatically over the period. The Baltic Dry Index continued to move higher over the past week as new regulations will require cleaner fuels leading to higher shipping costs for ocean transport. The price of iron ore continued to move to new highs. In the LME metals, nickel was the leader of the pack as the nonferrous metal moved over 10% higher over the week.

Copper moved 0.82% higher on COMEX, while the red metal posted a 2.71% gain on the LME over the past week. Open interest in the COMEX futures market moved 0.55% higher as the price edged over 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. Over the past weeks, copper inventories on both the LME and COMEX had moved appreciably higher, but since last week there were no significant changes in stocks that impacted the price.

LME lead moved higher by 4.09% since July 10, and the price of nickel gained 10.66% over the past week. Tin posted a 1.37% loss since the previous report. Aluminum was 1.89% higher on the week. The price of zinc gained 3.89% since July 10.

Lumber futures fell to the $327.10 level, down 10.87% since July 10. The price of uranium moved 5.79% higher since last week. The Baltic Dry Index was 14.33% higher as it rose to the 2011 level, as the requirements for lower sulfur fuels will increase the price tag for shipping products by ocean vessels. August iron ore futures posted a 0.55% gain compared to the price on July 10 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 1.91% over the past week and has dropped sharply since early June.

LME copper inventories moved 1.05% lower to 292,925 metric tons since last week. COMEX copper stocks increased 6.04% since last week to 37,229 tons. The increase in stockpiles of the leader of the nonferrous metals over recent weeks had been a negative factor for the price of the red metal. Lead inventories on the LME rose by 0.04%, while aluminum stocks rose by 4.79%. Aluminum stocks have been falling steadily for years from over five million to under one million tons. Zinc stocks dropped 5.61% since the previous report, after declining by over 20% in last week’s report. Tin inventories moved 0.39% higher after a significant rise over the past weeks. Nickel inventories were 3.10% lower compared to the level on July 9. Falling stocks have supported the price of nickel and pushed the price of the base metal to almost $14,000 per ton. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. The 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. A 50-basis point decline could light a bullish fuse under the sector.

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 and other and some of the other uranium stocks dropped sharply over the past week, and UUUU was trading at $2.03 on Wednesday as the volatile stock was $1.02 per share lower on the week. UUUU declined because of what appeared to be negative news from the Trump administration. UUUU and another company asked the government to impose a quota requiring that at least 25% of all uranium used in the US come from US producers. Currently, only 7% of US uranium requirements come from US production. The shares dropped as it appeared that the Trump administration would decline to set any quota. I continue to believe UUUU is an attractive stock and suggest doubling the position on the opening of business on July 18 at prices just over $2 per share. UUUU was trading at $2.03 on Wednesday, which would make our average price $2.55 per share. I would keep the stop in at a close below the $1.49 per share level.

We own the $25 and $19 call options in US Steel (X). US Steel shares moved to $14.55, which was $1.08 higher than last week’s level. The call options limited the losses on the stock. The $25 call and $19 call will 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 $3.75 on July 17. 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 $11.06 on July 10, 11 cents higher over the past week. 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. This week, Q2 Chinese GDP data showed that growth was at 6.2%, which was a record low which is a warning sign for copper and base metals as China is the world’s leading consumer of the industrial metals. 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. As base metals prices are facing bearish economic data from China on the one hand, and the prospects for lower US interest rates and a weaker dollar on the other, we could see increase price variance over the coming weeks. I am proceeding with caution in this sector. The drop in UUUU shares was a surprise, but at just over $2, I believe the shares offer a buying opportunity, and that is why I suggest doubling the current long position.

 

Animal Proteins

In the July WASDE report, the USDA told the animal proteins markets that 2019 production of beef edged lower from the June report on lighter carcass weights and lower steer and heifer processing while it increased its projected production of pork. The USDA raised its 2020 production forecasts in the report. Price forecasts for 2019 and 2020 were lowered for both cattle and hogs. You can view the entire WASDE report via this link:

 

https://www.usda.gov/oce/commodity/wasde/wasde0719.pdf

 

Meanwhile, the market had expected the projections, and the prices of cattle and hogs were stable in the aftermath of the July 11 WASDE report. August live cattle futures were trading at $1.081250 per pound level up 0.47% from last week. 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 to overbought territory on the daily chart.

Open interest in the live cattle futures market moved 2.41% lower since the last report.

August feeder cattle futures underperformed live cattle again last week as they fell by 1.25% since last week. August feeder cattle futures were trading at the $1.40575 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 fell by 2.79% 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. Time will tell if the latest WASDE report will push prices lower, but the price action in the days that followed the release has been supportive, so far.

Lean hog futures moved marginally higher over the past week. August lean hogs were at 82.00 cents on July 17, which was 0.34% higher after a gain of over 8% in the previous report. The open interest metric fell by 4.64% from last week’s level. Price momentum and relative strength were near neutral territory on July 17.

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, but it shifts back to contango until from August through 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 week, the spread between the two meats moved higher.

Source: CQG

Based on settlement prices, the spread was at 1.3186:1 compared to 1.3169:1 in the previous report. The spread increased by just 0.0017 towards the historical norm. The continuing problems caused by African swine fever in Asia could cause an increase in demand for US pork, but the USDA did not address the potential of more exports, perhaps because of the trade dispute.

Animal proteins face a Labor Day deadline for the end of the peak season for demand in the United States. Cattle and hog prices have a habit of falling in the months following the summer. However, ongoing trade dispute and lower supplies of pork in China because of African swine fever could cause more volatility in the pork market. At the same time, news of a new outbreak of mad cow disease in the UK where the disease could be dormant may be a timebomb that impacts the global demand for beef. We could see lots of volatility in beef and hog markets if African swine fever and fears over mad cow disease grow over the coming weeks. Any further news on mad cow disease could cause demand to fall dramatically, taking prices lower. I suggest extra caution when it comes to any positions in the animal protein sector over the coming weeks.

Soft Commodities

Sugar, cocoa, cotton, and FCOJ futures all moved to the downside over the past week while coffee futures were a bit higher. Cotton fell to a new low on July 12 in the aftermath of the July WASDE report.

The October sugar futures moved lower since the last report and below the 12 cents per pound level. October sugar futures posted a 5.68% loss over the period. Open interest moved 2.73% higher since the previous report. The level to watch on the downside is at 11.36 cents per pound, which was the late May low on the continuous futures contract. Over the past week, the price traded as low at 11.76 cents. Support is now at the late May low. Technical resistance is at the June 28 peak at 12.84 cents. The value of the Brazilian real against the US dollar declined slightly over the last week and was at the $0.26575 level against the US dollar, which was $0.00020 lower. The real had been rallying since late May. 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 which weighed on the sweet commodity as selling hit the energy commodities. 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. Over the past week, it moved to the lower end of its trading range. So far, in 2019, the price range in nearby sugar futures has been from 11.36 to 13.50, which are the levels of support and resistance in the soft commodity.

Price momentum on the daily sugar chart is now in oversold territory. The metric on the weekly and monthly charts are in neutral territory. If sugar falls substantially, I would look to add to long positions.

September coffee futures rallied by 1.42% since last week’s report. On Monday, July 15, the September coffee futures contract put in a bullish reversal pattern on the daily chart, but it has yet to follow through on the upside.  I continue to favor coffee on the long side.  The first level of technical resistance on the upside is at the July 5 high at $1.1565 per pound. Short-term support is at the bottom of the July 15 trading range at the $1.0445 level. 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 $36.82 on Wednesday. Open interest in the coffee futures market rose by 2.45% since last week. Coffee can be a bucking bronco with lots of price volatility. We have witnessed widening trading ranges over the recent sessions.

Cocoa futures reached a new high on July 8 and have moved straight down since, in a corrective move. On Wednesday, September cocoa futures were at the $2424 per ton level, 3.39% lower than last week. Open interest rose by 0.96%. Relative strength and price momentum crossed lower and are heading for oversold territory on the daily chart.  The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton last week before running out of steam on the upside and correcting. The price of cocoa has posted gains over the past five consecutive months, but it will have to close above the $2583 per ton level at the end of July to keep the streak going. The first level of technical support stood at the June 27 low at $2420 per ton on the September futures contract. On July 16 September futures fell to a low at $2391 per ton. The next level on the downside is at the June 4 low at $2321. Cocoa has been making higher lows and higher highs since mid-March. To keep that trend intact, the price will need to remain above $2321 per ton.

The price of cotton futures fell in the aftermath of the release of the June WASDE report that told the market that inventories rose. The USDA’s fundamental data on cocoa in the July report is available through this link:

https://www.usda.gov/oce/commodity/wasde/wasde0719.pdf

December cotton futures fell to a new low and closed 2.08% lower since the previous report.

December cotton was sitting at the 62.49 cents per pound level on Wednesday. The first significant target on the upside 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 Wednesday’s low at 62.32 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 2.34% since July 10. Hurricane Barry that dumped vast amounts of rain on Louisiana and the Mississippi delta could have done lots of damage to the cotton crop. At the same time, we are only at the start of the Hurricane season. Since the US is the world’s third-largest producer of the fiber, we could see lots of volatility if storms continue to move up the east coast of the US and through the Gulf of Mexico over the coming weeks.

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. Cotton bounced from the post-WASDE low and then fell to a lower low, but time will tell if a correction is in the cards for the fiber.

September FCOJ futures moved lower over the past week but remained above the $1 per pound level. On Wednesday, the price of September futures was trading around the $1.0305 per pound level. FCOJ nearby futures moved 0.19% lower over the past week. Support is at the 98.85 cents level with technical resistance at the early June high at $1.1530 per pound. Open interest rose by 0.40% over the past week.

Soft commodities can be one of the most volatile sectors of the raw materials asset class. Four of the five members of the soft sector are a lot closer to the bottom end of their pricing cycles than the top which presents opportunities when it comes to the risk-reward profiles of the sugar, coffee, and cotton markets. FCOJ is also in that class, but the limited liquidity is a reason to be highly cautious when dipping a toe into the orange juice.

 

A final note

The markets will now wait for the Fed meeting at the end of this month. While the central bank is more than likely to cut the Fed Funds rate by 25 basis points, a 50-basis point cut would send a message and cause the dollar to weaken, gold to fly higher, and commodities prices to rally. President Trump is hoping that the Fed will make a corrective move because they over-tightened credit in 2018. However, a 50-basis point cut is the low odds bet since the Fed wants to provide stability to markets.

We are in the heart of the summer season, so it is possible that markets will quiet down over the coming weeks. Meanwhile, Iran continues to present significant problems in the Middle East, and the ongoing trade war between the US and China has the potential to cause sudden bouts of price volatility. China’s latest GDP data was another reminder that the tariffs and protectionist measures are weighing more on the Chinese than the US economy.

I am doubling up on our UUUU position this week but will keep the stop on close at $1.49 per share. I will re-examine this position in next week’s report.

 

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.