• Buy the rumor and sell the news on the July Fed meeting
  • Equities decline and the dollar rallies following the Fed meeting
  • Commodities fall after the Fed meeting
  • The market will now focus on trade and Brexit- August could be a sleepy month in markets
  • Watch gold and silver over the coming weeks

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

Summary and highlights:

 

On Thursday, July 25, ECB President Mario Draghi told markets that more accommodative monetary policy moves are in the cards for Europe. Lower interest rates and quantitative easing by the ECB could be the final factor that forces the Fed’s hand when it comes to an interest rate cut on July 31. Stocks moved lower on Thursday, and the VIX moved towards the 13 level. Precious metals edged lower on the session, but crude oil moved a touch higher. The lowest injection into inventories since early April did little to support the price of natural gas which only managed to rise to just under the $2.25 per MMBtu level on the August futures contract. Wheat futures edged a touch higher while corn and soybean market posted losses. Meats were little changed, as were most of the soft commodities. The dollar index edged higher and was not far below the level of technical resistance. Falling European rates are bullish for the dollar index as it has a 57% exposure to the euro currency. Bitcoin was trading at just below the $10,000 level on July 25 as the market awaited the second-quarter GDP number on Friday.

On Friday, GDP grew at 2.1% in the second quarter, which was slightly above consensus estimates but marked a slowdown in growth in the US. Consumer expenditures rose 4.3%, but business investment moved 5.5% lower. The GDP report likely sealed the deal when it comes to a 25-basis point cut in the Fed Funds meeting on July 31 at the FOMC meeting. The S&P 500 and NASDAQ rose to new record highs on Friday, while most other markets were quiet and await next week’s Fed meeting. The US dollar rallied on the back of the GDP data and news that the President ruled out intervention in the currency market to devalue the US dollar. While the September dollar index futures contract rose to a new contract high, it only reached 97.835, just below the May continuous contract peak at 98.26.

On Monday, stocks did not move much with a small gain in the DJIA and marginal declines in the S&P 500, NASDAQ, and Russell. The dollar index was static near the high but put in a higher high at 97.905 on the September contract before settling at 97.796. Gold, silver, oil, and copper all posted gains but moved higher after the release of settlement prices. The markets were anxiously waiting for news on trade and Wednesday’s Fed meeting. Grain prices edged higher, and natural gas fell to a new low at $2.101 per MMBtu. Platinum was a star performer in the precious metals sector as the rare metal moved towards the $890 level. Bitcoin fell to the $9530 level on the session.

On Tuesday, there was not much to say about the market action on Tuesday. The market held its collective breath for the most important Federal Market Open Committee meeting in many years. As the Fed prepares to shift the tightening credit to a more accommodative approach to monetary policy, the market continued to debate of the central bank would cut rates by 25 or 50 basis points on July 31. Gold and silver moved higher along with many other interest rate sensitive commodities on the potential for the first rate cut in ten years.

On Wednesday, the markets were quiet until the US central bank spoke. The Fed cut the Fed Funds rate by 25 basis points and ended the program of balance sheet normalization. The central bank cited low inflation and global uncertainties from China and the Eurozone as reasons for the accommodative move. Nothing else much changed from the previous month’s statement. However, the lack of clarity about the future during the press conference sent stocks lower, the dollar index higher and to a new high, and gold and other interest rate sensitive commodities prices lower. The bottom line is that the market was looking for more accommodation, and it did not get what it had expected from the central bank. During the press conference, the Chairman did not provide the level of guidance the market had hoped for when it comes to the path of short-term rates over the rest of 2019. The press conference left reporters and the markets wondering if the central bank has a consensus when it comes to the path of monetary policy. When it comes to President Trump’s reaction to the rate but, he was not happy.

Source: Twitter

The statement speaks for itself.

Stocks and Bonds

Stocks moved lower in the aftermath of the Fed meeting as the market had expected a far more accommodative message from the central bank.

The S&P 500 moved 1.3% lower over the past week, while the NASDAQ fell 1.76%. The DJIA posted a 1.49% loss since the previous report. Share prices fell from the recent record highs, and more than a few issues threaten to derail the market. Many market participants remain more bearish than bullish in the current environment.

The Fed cut interest rates on July 31 by 25 basis points. The central bank also ended the balance sheet normalization program accelerating the end for September to August. While the move was accommodative, the reaction from the stock market was to sell the news of the rate cut.

Over the past week, Chinese stocks underperformed US stocks as negotiators continued to discuss the terms for a trade agreement in Beijing.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.10 level on Wednesday, which was 3.2% lower than the closing level on July 24. 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 with resistance at the April 5 peak.

FXI was drifting towards the bottom end of its trading range.

US 30-Year bonds moved 0.52% higher since the previous report. Bonds recovered as stocks fell.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.06% since July 24. Open interest in the long bond increased by 0.64% over the past week. The VIX moved higher as stocks declined over the past week. The volatility index was at the 16.12 level on July 31, a rise of 35.6%.

I have been buying the VIXY and other VIX related products and was stopping out for small losses until Wednesday. I will continue to look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market as we witnessed following the July Fed meeting.  The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.

 

The dollar and digital currencies

The dollar index rose by 0.83% and made a new high since July 24. The dollar rose in the aftermath of the July 31 Fed meeting. The market was disappointed with the Fed which sent the dollar to the highest level since May 2017 at 98.445 on the September futures contract.

ECB President Mario Draghi told markets that central bank on the other side of the Atlantic is likely to cut short-term interest rates and employ quantitative easing to stimulate the sluggish economy. The ECB’s continued dovish approach to monetary policy put additional pressure on the US Fed to cut the short-term Fed Funds rate this week. The euro currency was 0.58% lower since last week’s report.

The dollar rallied after news that President Trump rejected a proposal from Peter Navarro, his chief trade advisor. Mr. Navarro favors devaluing the US currency via intervention in the foreign exchange market and other operations. While the President continues to criticize other countries around the world for currency manipulation, he sided with his Treasury Secretary and Chief Economic Advisor who believe that pushing the dollar lower would not be advisable at this time. The dollar moved higher on the back of the decision, but the President did not rule out future moves to cause the dollar to weaken. A strong dollar makes US exports less competitive in global markets and weighs on the profits of US multinational corporations. At the same time, when the dollar rises, it makes it more of a challenge for trade negotiators attempting to level the playing field with countries like China. As the President has made a case for a weaker dollar since his 2016 campaign, his decision to not intervene in the foreign exchange market at this time provided support for the greenback. Moreover, the ECB’s dovish guidance caused the value of the euro currency to sink. Since the euro is 57% of the dollar index, the US currency moved to a new high on September futures and to within striking distance of the continuous contract high at 98.26 late last week. After the Fed meeting, the index rose above that level.

 

The leader of the digital currency asset class was trading around the $10,000 level as of July 31. This year, we have witnessed lots of volatility in Bitcoin and the other cryptocurrencies. Bitcoin moved 3.67% higher since last week to the $10,011.98 level while Ethereum posted a 1.64% gain as it was at around $216.08 per token. The market cap of the entire asset class moved 2.75% higher as Bitcoin outperformed the other digital currencies. The number of tokens rose by 17 since July 24. Open interest in the CME Bitcoin futures fell by 12.7% since last week.

Bitcoin and the other cryptocurrencies ran into selling after the US Congress asked Facebook to delay the introduction of its Libra token. Governments around the world control their money supply, and it is unlikely that they would allow the rise in any token without strict regulations and transparency. At the same time, custody issues continue to prevent SEC approval of any ETF products that replicate the price action in Bitcoin or any of the other digital currencies. I believe that when governments get behind digital currencies, the market will become a significant asset class. The market could be waiting for the first country to step up to the plate and issue a token that central banks around the world accept. Until then, we are likely to see a continuation of price volatility.

 

The Canadian dollar moved 0.38% lower since last week. Open interest on C$ futures fell rose by 2.63% 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 2.59% loss since the previous report as Prime Minister Boris Johnson has told the citizens of the UK that he will lead the nation out of the European Union by the October 31 deadline even if it means a hard Brexit.

The Brazilian real posted a 0.13% gain against the US dollar since last week and has been rallying slowly since May 20. Reforms by the Bolsonaro government that deal with corruption and attract investment in Brazil are likely to continue 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 the $0.26555 level against the US dollar, the Brazilian real is far beneath the 2011 high at the $0.65 level. I continue to be bullish on the real as the currency has lots of room for a significant recovery.

 

As we head into August, markets tend to take a breather as market participants tend to take vacation during the month, and many parts of Europe virtually shut down. As the market digests the Fed rate cut and most recent guidance from the ECB, all currencies around the world continue to lose value compared to the world’s oldest means of exchange, gold. While the kneejerk reaction to the Fed meeting was to sell gold, the yellow metal came nowhere near the $1400 level on the downside.

 

Precious Metals

Most precious metals prices held steady over the past week, but three of the four metals that trade on the NYMEX and COMEX exchanges edged lower. The only gains in the sector came in gold which edged a few bucks higher and rhodium since last week’s report based on the settlement prices. Gold and silver moved lower in the aftermarket following Wednesday’s Fed meeting.

Gold was 0.18% higher since July 24 while silver fell 1.33% over the same period. The prices of both metals were lower late Wednesday. The price of platinum moved 0.25% to the downside. Rhodium gained 5.09% while palladium declined by 0.92%. Open interest in the gold futures market moved 8.7% lower since the previous report to below the 565,000-contract level. The metric moved 0.88% lower in platinum while it was 2.05% higher in the palladium futures market. Silver open interest rose 1.84% over the period. The falling open interest in gold as the prices consolidate is not a bearish technical signal for the two leading precious metals.

Gold remained around the $1425 per ounce level on Wednesday as the price continues to consolidate after breaking to the upside in the aftermath of the June Fed meeting. After the close the price fell as low as $1411.20 on the August futures contract. Gold has been moving higher in all currency terms, which is a sign of overall strength for the yellow metal and weakness for fiat foreign currency instruments.

The silver-gold ratio moved higher over the past week but remained below the recent highs.

Source: CQG

The daily chart of the price of nearby gold divided by silver futures shows that the ratio was at 87.60 on the on Wednesday, 1.92 higher than the level on July 24. The long-term average for the price relationship is around the 55:1 level. The relationship had probed above the all-time 1990 high at the 93:185 level on the quarterly chart. The recent break to the upside in silver caused the ratio to decline, which is a bullish sign for the two precious metals based on historical price patterns.

Central banks have been net buyers of gold over the past years, and investor and speculative demand seem to be increasing as the price has moved higher. Several high-profile market participants including, Paul Tudor Jones and Ray Dalio, have expressed bullish views on the price path of the yellow metal. Technical support for the gold market is at the breakout level at $1377.50. If silver continues to make progress on the upside, it will send a positive technical signal for the gold market.

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. Since gold fell after the close and stocks remained open, the gold mining stocks fell more than the gold futures on a settlement basis. While gold moved 0.18% higher, the GDX was 5.90% lower since July 24 while GDXJ moved 5.99% to the downside. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. I continue to rate both ETFs as a hold. The moves in GDX and GDXY since June have been supportive of more gains in gold, which could drive the mining shares even higher if gold moves to a higher high. We are also long SLV, the silver ETF product which posted a 2.0% loss since July 24 as it underperformed the price action in the silver futures market. Gold and silver remain in bullish price patterns but have corrected over the past week and are consolidating above technical support levels.  The reaction to the Fed meeting which led to new highs in the dollar threatens a to push prices lower over the coming week. However, I would view any downside action as a buying opportunity.

Platinum and palladium moved lower since July 24. October platinum futures fell by 0.25% to the $878.90 per ounce level. Palladium posted a 0.92% loss as of the close of business on July 31 and was at the $1524.40 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 $645.50 per ounce level on Wednesday, which narrowed slightly over the past week. October platinum was trading at a $547.20 discount to August gold at the settlement prices on July 31 which widened slightly over the period. The price of rhodium which does not trade on the futures market moved $170 higher over the past week and was at $3,510 per ounce on Wednesday.

We are long the PPLT platinum ETF product which moved 1.38% lower since July 24. I continue to believe that platinum offers the best value proposition in the precious metals sector given its discount to gold, palladium, and rhodium, and its position as a rare precious metal with a myriad of industrial applications. A significant upside correction is long overdue in the platinum futures market.

Precious metals prices remained strong despite the corrections over the past week. A continuation of the recent price consolidation with declining open interest could lead to more gains in the coming weeks. The trend is your friend, and it remains higher in the gold market, which is the leader of the pack. If the reaction to the July Fed meeting leads to more selling, it may present another opportunity to purchase gold and silver. The bottom line is that while the Fed may have disappointed the markets, the central bank cut interest rates and ended the program of quantitative tightening on Wednesday, which is not bearish for precious metals prices.

 

Energy Commodities

The energy sector moved higher over the past week, with gains in crude oil and oil products, and a small increase in the price of natural gas after it fell to a lower low. Ethanol and coal prices moved to the downside since last week’s report.

September NYMEX crude oil futures rose by 4.83% while September Brent futures rolled to October and moved 3.45% higher since July 24. Larger than expected inventory draws were supportive of the price of the energy commodity. September gasoline was 3.24% higher, but the processing spread in September posted a 1.0% loss since July 24. The gasoline market will soon focus on the end of the peak driving season. September heating oil futures moved 2.79% higher since the previous report, and the heating oil crack spread fell by 1.79% since last week. Technical resistance in the September NYMEX crude oil futures contract is at just above the $60 per barrel level. Crude oil open interest rose by 0.76% since last week. While the price action has been quiet, we could see a return of volatility to the crude oil market in the blink of an eye given the ongoing tensions in the Middle East.

The spread between Brent and WTI crude oil futures in October fell to the $6.36 per barrel level for Brent, which was 65 cents below the July 24 level. The spread is a barometer of the political risk in the Middle East as well as a measure of US versus OPEC and Russian production. Brent versus WTI is a location and a quality spread in addition to a political risk metric. Two-thirds of the world’s crude oil use the Brent benchmark, which is the pricing mechanism for oil from Europe, Africa, and the Middle East. Brent has a higher sulfur content, which makes it more appropriate for refining into distillate products.

Meanwhile, WTI is lighter and sweeter with less sulfur making it easier to refine into gasoline. The Brent-WTI tells us a lot about the fundamental equations for both crude oil production and demand. These days, it is highly sensitive to the situation in the Middle East as WTI represents the price for US crude oil. Supply concerns surrounding the Middle East should keep a bid under the Brent premium.

US daily production stood at 12.2 million barrels per day as of July 26 according to the Energy Information Administration, which is 0.900 million barrels below the previous week’s level. The decline to 11.3 million last week was the result of the storm that hit Louisiana. Crude oil inventory data has been supportive of the price of the energy commodity over the recent weeks. As of July 19, the API reported a decline of 10.961 million barrels of crude oil stockpiles while the EIA said they fell by 10.80 million barrels for the same week. The API reported a rise of 4.436 million barrels of gasoline stocks and said distillate inventories rose by 1.420 million barrels as of July 19. The EIA reported a decrease in gasoline stocks of 200,000 barrels and an increase in distillates of 600,000 barrels. Rig counts, as reported by Baker Hughes, fell by three last week to 776 rigs in operations as of July 26, which is 85 below the level operating last year at this time. The reduction in the number of rigs, daily output, and lower oil stocks helped the price recover over the past week.

OIH and VLO shares moved lower since last week. OIH fell by 1.57%, and VLO moved 1.07% lower since July 24. Last week, I suggested purchasing the OIH ETF as it has been under significant pressure, is at a very low level, and should be ripe for a recovery. OIH opened at $14.72 on July 25 and closed on Wednesday at $14.42 per share. I remain a buyer of the oil services ETF product and will watch the price action over the coming week before establishing risk and reward parameters for the long position.

September natural gas futures experienced an increase in two-way volatility over the past week. The September futures were at $2.233 on July 24, which was 0.95% higher than on July 24. However, it fell to a new low at $2.101 on July 29 before recovering. Natural gas could not make it to the technical resistance level at above the $2.50 level as the recent hurricane approached the Louisiana coast, which was a bearish sign for the energy commodity. The reaction to the latest inventory data was also revealing as the energy commodity moved lower in the face of falling injections compared to past weeks because of sweltering temperatures over vast areas of the United States that increased the demand for cooling. At the same time, temperatures in Europe have risen to record levels. Last week, the EIA said an injection of 36 bcf into storage brought the total amount of gas in storage to 2.569 tcf as of July 19. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November is likely to be higher than last year. However, the rate of injections has slowed significantly over the past weeks.

Source: EIA

As the chart shows, stockpiles of natural gas are 13.2% above last year’s level but were still 5.6% under the five-year average as of July 19. Last week’s injection was lower than the market had expected. This week, I expect the EIA to report another small injection of around 40 bcf as the hot conditions in July continued to increase the demand for electricity to power air conditioners, limiting the amount of natural gas flowing into storage across the United States. Open interest rose by 2.47% over the past week, a sign of an increase in the number of speculative short positions as the price approached the previous low, which was the lowest level since 2016. The falling level of injections because of above-average temperatures should have supported the price of natural gas, but the price action over recent weeks is a sign of the bearish tone in the futures market. Time will tell if the bounce on Tuesday and Wednesday will continue, but the bearish trend will remain intact so long as the price remains below the $2.50 level. The roll from August to September is a reminder that the market is preparing for the upcoming peak season for demand, which will begin in November.

With approximately 16 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 42.4 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 89.5 bcf per week is needed to push the supplies over the four tcf level at the start of the 2019/2020 peak season for demand. The average amounts have risen over the past week, given the low level of the previous injection data. I would not be surprised if natural gas tests the recent low at $2.101 per MMBtu on the nearby futures contract. $2 is likely to be the first target on the downside if natural gas moves to a lower low and the March 2016 bottom at $1.611 per MMBtu is the level of critical technical support for the energy commodity.

September ethanol prices moved 3.53% lower over the past week. Pressure in the ethanol futures market has come from selling in the corn market. Open interest in the thinly-traded ethanol futures market fell by 26.53% over the past week. The decline to 770 contracts in the thinly-traded biofuel is a sign that the few risk positions have moved to the sidelines. The KOL ETF product fell by 4.56% compared to its price on July 24, and the price of October coal futures in Rotterdam declined 4.94% over the past week. We could find a bottom in the price of coal over the coming weeks as the market begins to look past the hot summer season.

On Tuesday, the API reported that oil inventories fell by 6.024 million barrels for the week ending on July 26 and the EIA said they decreased by 8.50 million barrels on Wednesday. Analysts had expected a decline of 1.818 million barrels for the API report. When it comes to products, the API reported a decline in gasoline inventories of 3.135 million barrels and a decrease in distillate stocks of 890,000 barrels. On Wednesday, the EIA said that gasoline stocks fell by 1.8 million barrels and distillate inventories fell by 900,000 barrels for the week ending on July 26. The inventory data was bullish for the price of crude oil and products. When it comes to crude oil, the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming week.

In natural gas, the price action continues to be bearish even though the price rose slightly over the past week.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.641 in January, which was one cent per MMBtu higher than last week. I would consider buying call options for December through February at lower prices but will wait for mid to late August to make any decisions. I am not anxious to purchase the options as I would prefer to wait to avoid paying elevated levels when it comes to the time value for the options. I will continue to watch the action in the forward curve over the coming weeks for buying opportunities in limited risk options.  Nothing has changed since last week as the price of the energy commodity continued to make lower lows over the past week. While the market ran out of selling at the $2.101 per MMBtu level, the price action has been less than inspiring. Natural gas will have to rise to over the $2.50 level to change the tone of the market.

I have been tracking the price action in BG shares because of the volatility in the price of ethanol. Bunge is an ethanol refiner with interests in Brazil as the company processes sugarcane into the biofuel. Since July 24, the price of BG shares moved 2.74% higher to $58.43 per share on July 31. BG’s earnings were above expectations causing buying in the shares. I will stop out of this position at $51.47 per share on the downside on a closing basis while initially looking for at least an equal profit on the upside depending on the price action. I will continue to post weekly updates on this position.

I continue to favor trading crude oil from the long side of the market, given the potential for incidents in the Middle East triggered by Iranian retaliation to US sanctions. A deal between the US and Iran is unlikely given the history between the two nations dating back to the late 1970s. The inventory data over the recent weeks has been supportive of the price of oil. In natural gas, I continue to favor the short side of the market using the DGAZ ETN product with tight stops and limited time horizons on positions. I am on the sidelines as of Wednesday.

I continue to favor a long position in PBR, Petroleo Brasileiro SA. PBR had been trending higher throughout 2019, and reforms from the Bolsonaro administration could keep that trend intact. I believe that this stock has the potential to double in value but moved lower over the past week and was trading at the $15.05 per share level on July 31, down 5.11% from last week’s level. I continue to rate PBR as a buy. I would add to this position on further price weakness over the coming weeks. I also favor the OIH ETF product at $14.40 per share.

Iran will be the primary issue for the crude oil market over the coming weeks. While a price bounce in natural gas was overdue, the price continues to trend lower. In crude oil, another significant decline in inventories this week caused the price to move back towards the $60 per barrel level as supply data has been supportive of the energy commodity.

 

Grains                                                             

Grain prices moved lower over the past week as corn led the way on the downside.  New crop November soybean futures moved 2.95% lower since the previous report. Open interest in the futures market decreased by 9.08% over the past week. While US and Chinese trade negotiators meet in Beijing this week, both sides appear to be far away from any agreement.

Source: CQG

In a sign of some support for the soybean futures market at the $9 per bushel level in the new crop November futures contract, the December synthetic soybean crush spread was at the $1.01 per bushel level on July 31 which was 4.25 cents higher than on July 24. A rise in the value of the spread that represents the economics of crushing the raw oilseed into soybean meal and oil is a sign of demand for the products. Rising processing spreads often translate into support for the underlying commodity. When it comes to the soybeans futures market, any news that China will purchase US beans over the coming weeks as a good-faith gesture could lift the price of the November futures contract. While the price of soybean oil has been steady, soybean meal has been declining on the back of falling demand for animal feed because of African swine fever in China.

New-crop December corn was trading at $4.1000 per bushel on July 31, which was 4.82% lower on the week. Open interest in the corn futures market fell by only 0.08% since July 24. The decline in the price of corn over recent weeks kept the pressure on ethanol prices, which are at the $1.45 per gallon level. The spread between September gasoline and ethanol futures was at 41.28 cents per gallon on July 31, up 11.15 cents since July 31 as the price of corn weighed on the biofuel compared to the rise in the price of gasoline futures.

September CBOT wheat futures moved 2.11% lower since last week. The September futures were trading $4.8725 level on July 31. Open interest fell by 0.90% over the past week in CBOT wheat futures. The weather conditions in Europe and Russia will determine the path of wheat prices over the coming weeks as the USDA continued to project that Russia will be the leading exporter of wheat to the world in 2019. Now that we are moving into August, the harvest season is approaching fast.

As of Wednesday, the KCBT-CBOT spread in September was trading at a 64.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 6.25 cents lower than on July 24 and remained at an elevated historical level. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that could weigh on the price of the grain as it is a sign that consumers have no concerns over wheat prices or availabilities over the coming months.

My positions in the grain markets continue to be very small, given the time of the year and the recent price volatility. I have very small long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move towards the harvest season, the less active I will be when it comes to trading. However, a continuation of excessively hot temperatures could provide a chance for profit-taking on existing long positions in the grains. At the same time, the trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. For the coming week, the price volatility is likely to be a function of the weather forecasts in the US grain belt and the growing region in the northern hemisphere when it comes to wheat. The next significant event for the futures market will be the release of the monthly World Agricultural Supply and Demand Estimates report from the US Department of Agriculture on August 12. The August report will shed light on crop progress and the impact of trade on export demand.

 

Copper, Metals, and Minerals

 

Only one of the LME metals posted a gain over the past week. The price of zinc moved to the upside while the other nonferrous metals all posted marginal losses. The reaction to the Fed meeting on Wednesday could send prices lower given the new highs in the US dollar.  The price of uranium edged marginally lower over the past week. The price of lumber did not move over the past week, and the Baltic Dry Index corrected below the 1900 level since the previous report. The price of iron ore moved higher as the shortages from Brazil continue to cause price strength in the primary ingredient in steel.

Copper moved 1.7% lower on COMEX, while the red metal posted a 0.55% loss on the LME over the past week. Open interest in the COMEX futures market moved 1.73% higher as the price fell below the $2.70 per pound level on the active month September futures contract. Copper is one of the leading barometers when it comes to the trade negotiations between the US and China. Over the past weeks, copper inventories on both the LME and COMEX moved higher.

LME lead moved lower by 0.77% since July 24, while the price of nickel lost 0.63% over the past week. Tin posted a 0.40% loss since the previous report. Aluminum was 0.77% lower on the week. The price of zinc rose 1.68% since July 24.

September lumber futures were at the $343.90 level, at the same price as on July 24. The price of uranium for December delivery fell by 0.39%. The Baltic Dry Index was 12.29% lower as it fell to the 1899 level. The BDI had been rallying over the past weeks on the back of new regulations for low-sulfur fuels that increase the cost of ocean shipping. September iron ore futures posted a 3.6% gain compared to the price on July 24 on the back of shortages from Brazil. Open interest in the thinly-traded lumber futures market rose by 1.88% over the past week.

LME copper inventories edged 0.30% lower to 292,500 metric tons since last week. COMEX copper stocks increased 3.18% since last week to 39,602 tons. The LME is now considering a rule to make stocks more transparent by requiring the larger traders to disclose stocks held in private storage. A more complete picture of global stocks would reduce market manipulation by those who routinely take metal out of LME storage facilities and return it at later dates to influence prices.

Lead inventories on the LME rose by 14.89%, while aluminum stocks rose by 6.63%. Aluminum stocks had been falling steadily for years, but they rose from 960,175 to 1,023,875 tons over the past week. According to sources, there are over 3.5 million tons of aluminum held by the world’s leading merchants and consumers in private storage locations outside of China. If the LME changes reporting requirements, we could see significant changes in the impact of stock changes on prices.  Zinc stocks dropped 5.95% since the previous report, which likely supported the price. Tin inventories moved 8.11% lower since last week. Nickel inventories were 1.83% lower compared to the level on July 23. Falling stocks have supported the price of nickel and pushed the price of the base metal to over $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 market appeared to be disappointed to the 25-basis point move by the Fed on Wednesday, which could cause some selling in the base metals over the coming days as the dollar index rose to a new high.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.49 and have an initial profit target at $6 per share. I will keep the stop at $1.49 on close over the coming week. UUUU was trading at $1.82 per share on Wednesday.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $3.90 on July 31. 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 31, 88 cents lower over the past week. I will maintain a small long position in FCX shares and would only add if the price drops appreciably from the current level.

As we move into August, the market could quiet down in the industrial commodities sector unless there is any significant news on trade. Many Europeans take summer vacation in August, so price volatility tends to decline. However, the rising dollar could cause selling over the coming week.

 

Animal Proteins

The prices of live and cattle futures posted losses over the past week while lean hogs fell by over 12% since July 24. August futures have rolled to October, which is now the active month. We are currently in the final month of the 2019 grilling season for the meat futures markets, and prices tend to move to the downside during the fall season. However, trade and a continuation of African swine fever in the hog market could cause volatility to continue over the coming months.

October live cattle futures were trading at $1.07650 per pound level down 2.09% from last week. Technical resistance is at $1.10600 which was the July 29 peak on the October contract.  Technical support stands at $1.03175 per pound level, which was the low from May 31. Price momentum and relative strength indicators are falling from neutral territory on the daily chart. Open interest in the live cattle futures market moved 0.81% lower since the last report.

October feeder cattle futures outperformed live cattle again last week as they fell by just 0.33% since last week. October feeder cattle futures were trading at the $1.42550 per pound level with support at $1.39350 and resistance at $1.44425 per pound which were the recent high and low. Open interest in feeder cattle futures fell by 0.80% 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 are trading in narrow ranges.

Lean hog futures were the worst performer in the sector over the past week. October lean hogs were at 71.00 cents on July 31, which was 12.43% lower on the week. The open interest metric rose by .032% from last week’s level. Price momentum and relative strength were falling on July 31 after the recent price failure.

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 this August 2020 through December 2020. The Feeder cattle forward curve is relatively flat from August 2019 through May 2020, but a backwardation developed from October 2019 through March 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 significantly higher in the October futures contracts over the past week.

Source: CQG

Based on settlement prices, the spread was at 1.5162:1 compared to 1.3562:1 in the previous report. The spread increased by 16 cents and cattle are now historically expensive compared to hogs. The move reflects the end of the peak season of demand, which is on the horizon but does not account for the continuation of African swine fever, which is still impacting global supplies. We could see lots of volatility in the spread over the coming week.

Animal protein futures can be highly volatile. As the summer is ending next month, we are seeing price weakness in both the cattle and hog futures arena.

Soft Commodities

Sugar was the only soft commodity that posted a gain last week, and the move to the upside was marginal. All of the other commodities in the sector experienced price declines with cocoa futures falling almost 5% compared to last week. While coffee fell by just over 1.3% on the week, cotton and OJ futures fell by under 1% as it was a quiet period for most of the soft commodities.

The October sugar futures remained at just above the 12 cents per pound level after putting in a bullish reversal on July 23 on elevated volume. October sugar futures posted a 1.24% increase 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. Sugar traded in a narrow range over the past week after probing below the 12 cents per pound level. 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 moved to the downside over the last week and was at the $0.26555 level against the US dollar, which was $0.00035 higher. The rise in the Brazilian currency is supportive of the price of sugar. The recent Unica report said that sugar production in Brazil’s Center/South experienced lower output than last year during the first half of July. Lower production likely caused the price to bounce back over the 12 cents per pound level.

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

September coffee futures declined by 1.34% since last week’s report and were trading on either side of the $1 per pound level. Short-term support is at the June 19 low at 96.25 cents on the September futures contract.  I continue to favor coffee on the long side.  The first level of technical resistance on the upside is at the July 15 high at $1.1065 per pound. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $33.83 on Wednesday. Open interest in the coffee futures market rose by 3.41% since last week. Coffee needs to remain above the 96.25 cents per pound level on the September futures contract to keep the bullish price pattern since May intact. Coffee has been a frustrating trade on the long side of the market, but I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle.

Cocoa futures corrected to the downside over the past week, and I believe that the soft commodity is back in the buying zone. On Wednesday, September cocoa futures were at the $2345 per ton level, 4.79% lower than last week. Open interest fell by 2.56%. Relative strength and price momentum are falling towards oversold territory.  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 recently, which is now the upside target for cocoa futures. The price of cocoa posted gains over the past five consecutive months and had close above the $2307 per ton level at the end of July to avoid a bearish reversal on the long-term chart. 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 and put in a new and higher high above the $2600 level. I favor buying cocoa on a scale-down basis over the coming week.

December cotton was sitting at the 63.84 cents per pound level on Wednesday, as the fiber futures fell by 0.75% over the past week. 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 the recent low at 61.66 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 0.13% since July 23. Trade with China and the weather across growing regions will be the primary drivers of the price of the fiber over the coming weeks. The mid-August WASDE report will be the next significant event for the cotton market if there is no news on trade with China over the coming weeks.

Meanwhile, price momentum and relative strength metrics crossed to the upside in oversold territory on the daily chart. The slow stochastic has risen into overbought territory, but relative strength was neutral on Wednesday. The metrics remain in oversold conditions on the weekly and monthly charts. I continue to believe cotton is in the buying zone and that a correction to the upside will eventually occur from above the 60 cents per pound level.

September FCOJ futures fell over the past week but remained above the $1 per pound level. On Wednesday, the price of September futures was trading around the $1.0345 per pound level. FCOJ nearby futures moved 0.43% 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 fell by only 0.01% since July 16.

The prices of sugar and coffee could be sensitive to any moves in the US dollar versus the Brazilian real currency relationship over the coming week. Meanwhile, all of the members of the soft commodities sector except for cocoa remain close to the bottom end of long-term pricing cycles at current prices.

 

A final note

The dovish moves by the ECB and US Federal reserve are a continuation of the monetary accommodation that began eleven years ago after the 2008 global financial crisis. I continue to believe that unprecedented levels of liquidity will eventually stoke inflationary pressures, which will cause the purchasing power of currencies to decline. The gold market had been rallying against all of the world’s fiat currencies since the early 2000s. The next leg to the upside appears to have started in June. Gold could be signaling that the commodities asset class will move to the upside over the coming months, and perhaps years. The bearish reaction to the Fed meeting could be a temporary phenomenon. The market was disappointed by Chairman Powell’s comments and the rise in the dollar index to a new high. However, the move was dovish, and the central banks of the world continue to follow accommodative paths, which is not bearish for commodities prices.

August tends to be a quiet month in commodity markets, but the many issues facing the world could provide surprises and volatility in the blink of an eye.

 

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.