- Wild trading conditions in markets across all asset classes
- Coronavirus fears dominate markets
- Bernie Sanders’ rise weighed on markets- Joe Biden’s win on Super Tuesday calmed markets
- An emergency 50-basis point rate cut by the Fed- The oil market waits to see of OPEC cuts output
- Volatility should continue
The summary of trade recommendations for the coming week are as follows:
A more detailed picture is available on the spreadsheet that is linked below.
Summary and highlights:
On Thursday, February 27, things went from bad to worse in the stock market. Coronavirus, the rise of support for Democratic Socialism in the US, and a shift to overall pessimism have pushed stocks lower in an expedited fashion. The DJIA fell by over 4.4% on the session. With all of the other indices posting similar losses. Panic selling has been the hallmark of all markets this week. Sellers did not discriminate as all sectors were decimated on Thursday and throughout the week. The VIX was at the highest level since early 2018 at the 39 level on Thursday, over triple the level in January. US 30-Year Treasury Bond futures rose to a new high of 169-18, the highest since September 2016. The market now expects the US Fed to begin to cut interest rates, even though it is an election year. The March dollar index futures contract fell 0.477 to 98.461. Commodities prices move lower in risk-off conditions. Tight stops are a critical factor these days. Soybeans posted a gain on the session, but corn and what moved to the downside. Crude oil continued to evaporate with losses in products, but the heating oil crack spread recovered a bit, while the gasoline processing spread moved lower as gasoline prices underperformed crude oil. Natural gas moved to a new and lower low at $1.719 per MMBtu after the EIA told markets that stocks fell by 143 bcf for the week ending on February 21. Ethanol also fell on the session. In the risk-off environment, gold, silver, and platinum prices moved lower. Platinum slipped below the $900 per ounce level. However, palladium moved to a new record high above the $2800 per ounce level. Copper fell a bit as the red metal moved away from the $2.60 per pound level. All of the animal protein futures market fell. FCOH and cocoa posted marginal gains, but cotton, coffee, sugar, and lumber prices all fell on the session. Bitcoin edged slightly higher but remained below the $9000 per token level at $8960. If the current price carnage continues, we could see global central banks cut interest rates dramatically and start the printing presses with new quantitative easing programs. Markets are nervous, with good reason. Markets have priced three Fed rate cuts of 25 basis point each into prices, which is a sign of the carnage in markets.
On Friday, volatility continued in the stock market, but a statement from Fed Chairman Jerome Powell that the central bank was prepared to cut rates to address the volatility caused some buying to emerge by the end of the day. June 30-Year Treasury Bond futures rose 2-22 to 170-05 late in the day. The March dollar index fell to the 98.081 level. Grains were mixed with a small gain in corn and marginal losses in soybeans and wheat futures. Meanwhile, carnage continued to grip the rest of the commodities sector. Crude oil and oil products moved to new lows. Natural gas fell to $1.642 per MMBtu, a new winter low in 2020. Precious metals prices plunged with gold over $100 lower than on Monday, down around $75 on the session at the settlement price. Silver dropped over $1.25 per ounce to below $16.50, platinum was over $40 lower to under $865, and palladium tanked by around $200 per ounce. Copper was down to the $2.54 per pound level on the May futures contract. Cattle prices fell sharply, while lean hogs posted a marginal loss. Coffee and FCOJ moved higher, but sugar, cotton, cocoa, and lumber prices declined. Bitcoin futures were $245 lower to $8700 per token. Markets were nervous going into the weekend on the back of Coronavirus and the South Carolina primary on Saturday. February ended with a bearish thud in markets across all asset classes.
On Monday, the first trading day of March, G7 intentions to support markets lifted all of the leading stock indices. Former Vice President Joe Biden’s landslide victory in South Carolina over the weekend also may have contributed to the impressive recovery in the stock market. The DJIA rose almost 1300 points and closed at the highs of the session with a 5.09% gain. The S&P 500 was 4.6% higher, and NASDAQ gained 4.49% on the first trading session in March. However, with the Super Tuesday primaries just one day away, markets remained nervous. The June 30-Year US Treasury bond futures declined 0-12 points as the markets expect that interest rate cuts are on the horizon. The dollar index fell sharply and settled at the 97.319 level on the March futures contract. Corn and soybean futures moved higher, but wheat posted a marginal loss on the session. Energy, a sector that had been thumped by recent losses, posted across the board gains with crude oil, oil products, and natural gas prices moving higher. Ethanol was unchanged on Monday. Platinum edged lower, but gold, silver, and palladium prices all posted gains, and copper moved higher to over the $2.60 per pound level once again. Cattle prices recovered, while lean hogs only drifted slightly higher. Sugar and cocoa prices continued to decline, but all of the other soft commodities rose on the session. Cotton, FCOJ, coffee, and lumber all posted gains with coffee leading the way on the upside with a better than 4 cents gain on the May futures contract. Bitcoin was $275 higher to $8975 per token. Time will tell if the price action on the first day of March was a dead cat bounce in markets or the beginning of a recovery. All eyes will be watching the primary results on Tuesday to see if a progressive or moderate candidate emerges as the leader to challenge President Trump in November.
On Tuesday, March 3, the US Federal Reserve announced the first emergency rate cut since 2008 when the central bank reduced the short-term Fed Funds rate by 50 basis points to 1.00%-1.25%. The Fed cut rates on the back of Coronavirus. Timing is everything in markets. The surprise rate reduction came on the day of the Super Tuesday primary contests. Stocks moved lower with significant losses in all of the leading indices. The DJIA fell 796 points or 2.94% while the S&P 500 and NASDAQ dropped 2.81% and 2.99%, respectively, despite the emergency rate cut. The ten-year US Treasury bond traded below the 1% level for the first time in history. The June 30-Year Treasury bond futures were trading at 172-01 up 0-30 on the session. The March dollar index futures were down 0.197 to 97.122. Grain prices edged higher across the board along with energy prices as crude oil, oil products, natural gas, and ethanol all posted gains on the session. OPEC is likely to follow the Fed rate cut with a deeper production cut when it meets on Wednesday, which supported the price of crude oil. Lower interest rates are rocket fuel for gold. The yellow metal gained just under $50 per ounce on the session, silver was 45 cents higher, and platinum gained just under $10 per ounce. Palladium fell by $40 on the June contract. Concerns over the global economy weighed on copper as the red metal fell 2.2 cents to $2.5730 per pound. Lean hogs edged higher, but live and feeder cattle posted marginal losses. Coffee continued to move to the upside with a 6.6 cents per pound gain. Cotton, FCOJ, sugar, cocoa, and lumber prices all moved to the downside. Bitcoin was $205 lower to $8770 per token. The markets waited for the results of the Super Tuesday primaries after the close.
On Wednesday, the stock market exploded higher after former VP Joe Biden won big on Super Tuesday and replaced Senator Bernie Sanders as the leader in the race for the nomination of the opposition party for the presidency. While Coronavirus remains a clear and present danger for markets, and the Fed cut rates by 50 basis points on March 3, the markets had been moving higher and lower with the primary results. Senator Sanders is no fan of Wall Street, and the feeling is mutual. The stock market does not like the prospects of Democratic Socialism. Joe Biden’s victory lifted the DJIA by 4.53%, the second-largest daily rise in history. The first was on Monday, March 2. The S&P 500 and NASDAQ posted 4.22% and 3.85% gains, respectively. The June US 30-Year Treasury bond futures contract fell 1-09 to 170-24. The dollar index rose to 97.307 on the March contract. Wheat moved lower, but soybeans and corn futures posted gains on Wednesday, Crude oil moved lower as rumors that the Saudis and Russians do not see eye-to-eye on production cuts at the OPEC meeting weighed on the price. The market expects a one million barrel per day reduction in OPEC output. Oil products drifted higher, along with natural gas. Ethanol prices fell a touch on the session. Gold was marginally lower, while silver and platinum edged higher. Copper recovered to the just below the $2.60 level, while palladium was a touch lower. Cattle and hog prices posted gains. Cotton, FCOJ, and lumber prices all rose, but coffee, sugar, and cocoa were lower on March 4. Bitcoin fell $10 to $8760 per token. The price action in stocks was a sign that US politics, rather than Coronavirus, has been the driver of volatility since February 24.
Stocks and Bonds
The price carnage that hit the stock market during the final week of February was the worst since the global financial crisis in 2008. Stocks began to plunge on Monday, February 24, and continued to post significant losses through the week. All of the leading stock indices posted substantial declines along with most markets across all asset classes as risk-off conditions gripped markets. Treasury bonds became an oasis of safety for those looking to park capital on the sidelines and wait for the dust to settle. However, stocks came roaring back, and 1000-point swings in the DJIA has become the norm over recent sessions. Stocks moved lower after Bernie Sanders won the Nevada caucus, and higher after Joe Biden’s victory in South Carolina and on Super Tuesday. The markets have been screaming that they do not like the prospects of a “Democratic Socialist” administration in Washington, DC.
At the same time, the risk-off behavior because of rising fears over the spread of Coronavirus caused the Fed to slash short-term interest rates on March 3. On Friday, February 28, the Chairman of the US Fed told markets that the central bank was ready to take action to reduce interest rates and employ other tools if necessary. On Tuesday, in an emergency move, the US central bank cut the Fed Funds rate by 50 basis points to 1.00-1.25%. The week-on-performance of the leading stock indices masks the wild volatility over since February 26.
The S&P 500 rose 0.44% since the previous report, while the NASDAQ was 0.42% higher. The DJIA posted a 0.49% gain since the last report. The stock market has not experienced the current level of price variance since the 2008 financial crisis. Chinese stocks outperformed US indices for the second consecutive week, even though China is ground zero for Coronavirus, which was a sign that fear over a Socialist in the White House was spooking market participants before a moderate candidate prevailed on Super Tuesday.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.26 level on Wednesday, which was 1.33% higher than the closing level on February 26. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which stands as technical resistance. Above that peak, the next level of resistance is at the early April high of $45.96 per share. The FXI will continue to move lower or higher, depending on developments on the spread of the virus. However, the trade deal between the US and China could support gains in Chinese stocks if the fears over Coronavirus subside.
US 30-Year bonds continued to vault higher over the past week. On Wednesday, March 4, the June long bond futures contract was at the 170-24 level, up 2.55%, adding to recent gains. Over the past two weeks, the bonds were over 5% higher. June bonds traded to a new high at 174-16 on March 3 as the Fed cut rates. The odds of any changes in Fed monetary policy in 2020 had been low as it is an election year in the US. At its January meeting, the Fed left rates unchanged. However, risk-off conditions in markets forced the central bank’s hand to come to the rescue with monetary policy accommodation. The world’s monetary authorities are addicted to low rates of interest and asset purchases to stimulate conditions by inhibiting saving and encouraging borrowing and spending. Short-term US rates stood at 1.50%-1.75% after three rate cuts in 2019. At 1.00% to 1.25% there is not all that much room to cut rates in the US unless the central bank follows Europe and takes them into negative territory. If the current environment continues, we could see a return of asset purchases via a quantitative easing program.
Open interest in the E-Mini S&P 500 futures contracts rose by 7.24% since February 25. Open interest in the long bond futures fell 21.37% over the past week after the significant rally in the bond market and as March futures rolled to June. The VIX exploded during the week as the volatility index was at the 31.99 level on March 4, 16.07% higher over the period after an increase of over 90% last week. The VIX traded to a high of 49.48 on February 28. Risk-off conditions over the past two weeks caused the volatility index to explode.
I had been advocating buying the VIX and VIX-related products when volatility is low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies has been the optimal approach over the past months. I have only traded these products from the long-side and sold all positions after the explosive move in the VIX. The gains in the volatility instruments covered many losses in other markets over the recent sessions. At the 31.99 level, the VIX is not at a level that offers any value and is in the sell than the buy zone. I took profits on VIX-related instruments on a scale-up basis.
The dollar and digital currencies
The dollar index fell by 1.63% since the previous report. While the index was down, the dollar turned in a mixed performance against most currencies but was lower against the euro. Since the euro accounts for 57.6% of the dollar index, the rise in the European currency pushed the index lower over the past week. An unwind of the carry trade where market participants were long dollars and short euros because of interest rate differentials and the strength of the dollar in the currency pair is the reason for the move to the upside in the euro currency. In risk-off conditions, market participants have been liquidating the carry trade.
The dollar index traded to its lowest level since July 2019 when it fell to 96.02 on December 31, which is now the technical support level, there is short-term support at 96.875. Technical resistance on the continuous contract stands at the 99.815 level with medium-term support at 95.365. The dollar index was at 97.307 on March 4 as it pulled back from the recent new high. Coronavirus and the US election could cause lots of volatility in the currency markets over the coming weeks and months. Last Friday, Fed Chairman Jerome Powell said the US central bank was ready to use its monetary policy tools to counter the recent risk-off activity in markets, and he followed through with an emergency cut on March 3. However, it is doubtful that falling interest rates will do much to address fears associated with the spreading virus. Slashing interest rates has become the go-to tool for central banks in the post-2008 financial crisis environment. Since the stock market action since February 24 was the most volatile since 2008, we are likely to see the Fed and other central banks resort to easing, but there are no guarantees that it will produce the desired effect. On the day of the rate cut, which was also Super Tuesday, stocks dropped sharply. It is possible that the decline in the stock market was a result of fears that Senator Sanders would win the most delegates. When that did not occur, stocks rallied sharply on Wednesday. The rate cut appeared to take the back seat to the primaries on Tuesday and Wednesday of this week.
The euro currency was 2.15% higher against the dollar since February 26 on the March futures contract. The euro versus the dollar currency pair had moved steadily lower throughout February, but it bounced over the past week on the back of an unwind of the carry trade. The pound moved 0.36% lower against the US currency. Short-term technical support is now at the $1.2732 level against the dollar. I continue to believe that the pound below the $1.30 level is in the buy zone against the US dollar, but it continued to make lower lows over the past week.
Bitcoin and the digital currency asset class weakened in the risk-off environment over the past two weeks. Bitcoin was trading at the $8,741.95 level as of March 4, as it fell 0.85% compared to the value on February 26 after an over 9% decline last week. The cryptocurrency failed at over the $10,000 level, as all asset prices dropped. Ethereum moved lower by 2.92% after an over 13% fall last week and was at $222.49 per token on Wednesday. The market cap of the entire asset class moved 0.29% lower as it outperformed the price action in Bitcoin. The number of tokens increased by 15 to 5161 tokens since February 26. The rise in the number of digital currencies over the past year continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $249.753 billion. Open interest in the CME Bitcoin futures fell by 16.44% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign. As I have been writing, “an ETF product in 2020 could cause even more attention and higher prices for the digital currency asset class. The Chinese government cracked down on the asset class over the past months, but these days it has its hands full with Coronavirus.” Bitcoin appears to be back in the buy-zone at below $9000, but I would only take a long position with a very tight stop in the digital currency.
The Canadian dollar moved 0.62% lower since last week on the back of weakness in the price of oil. Open interest in C$ futures fell by 4.92% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Weakness in commodities prices accounted for the lower level of the C$ over recent weeks.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 0.88% since the February 26 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline.
The British pound posted a 0.36% loss since the previous report. Since the euro was higher against the US dollar, the pound posted a far more significant decline against the European currency since February 26. While Brexit is now in the market’s rearview mirror, the UK will need to establish trade protocols and treaties with nations around the world, which could account for the volatility in the British pound over recent weeks.
The Brazilian real continued to hit new lows against the dollar, as it moved 4.78% lower since last week. The Brazilian currency was trading at the $0.21425 level after falling to a new low at $0.21760 during the week. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. I continue to believe that the real will eventually appreciate against the US dollar, but so far, I have been wrong, and the currency made another new low over the past week. Risk-off conditions and a strong dollar have weighed on emerging market currencies. While a lower low has occurred, I continue to believe that the upside potential for the Brazilian currency is far greater than the downside risk at the current exchange rate. No recovery has yet to develop in the Brazilian currency, which could spark problems with the Trump administration over the coming weeks and months.
The low level of the currency makes Brazilian exports more attractive in the global market and has supported the prices of shares of companies in the South American country. US President Trump is likely to put pressure on Brazil to raise the level of its currency based on trade imbalances over the coming months if the real continues to slip lower. While the Brazilian currency looks ugly at new lows, I continue to believe that a recovery will eventually occur.
Precious metals prices moved lower over the past week. The final day of February was ugly in the sector.
The risk-off activity in markets across all asset classes became too much for the precious metals sector. On the final day of February, waves of selling hit the market as gravity took the prices of gold, silver, platinum, palladium, and rhodium appreciably lower. All of the precious metals posted losses over the past week, but gold was only marginally lower after snapping back from a $75 per ounce loss on the final day of February.
Gold fell only 0.04% since last week, while the more volatile silver futures market moved 3.73% to the downside. April gold futures were at the $1643 per ounce level on Wednesday, while March silver was just below $17.25 per ounce. Open interest in the gold market fell by 5.59% as market participants liquidated long positions, perhaps because of margin calls in other markets.
April gold futures reached a peak at $1691.70 on February 24, and May silver rose to $19.005 before the price suffered a substantial correction. Gold continues to outperform silver. I continue to believe that the current environment is favorable for the two precious metals.
The price of April platinum fell by 4.33% lower since February 26, after an almost 9% loss last week. Platinum continues to be the laggard in the precious metals sector. April futures were at the $875.20 per ounce level. The level of technical resistance is at $1,021 on the April futures contract as platinum continued to struggle with the $1000 level. Support in platinum is now at $846.20 per ounce. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium fell over the past week to a midpoint price of $10,750 per ounce on March 4, down $1,050 from the level of February 26. Palladium moved lower by 10.41% since the previous report. The price traded to a new peak at $2815.50 on February 27 on the March futures contract, which rolled to June and settled at the $2402.70 per ounce level on Wednesday. As I had been writing over recent weeks, “The risk of significant volatility in palladium and rhodium rises with the prices of the metals, and we should expect a continuation of wide price ranges over the coming weeks.” Palladium fell by over $400 per ounce from the February 27 peak.
Open interest in the gold futures market moved 5.59% lower over the past week. The metric moved 15.95% lower in platinum as those holding long positions scrambled for an exit. The total number of open long and short positions fell 18.49% after a 25.48% decline last week in the palladium futures market. Silver open interest dropped 17.60% over the period. The bullish trend in the precious metals sector hit a speed bump as risk-off conditions cast a dark cloud over all asset classes. The decline in open interest reflects that market participants moved to the sidelines.
The silver-gold ratio rose significantly since February 26, as gold outperformed silver.
The daily chart of the price of April gold divided by May silver futures shows that the ratio was at 95.16 on Wednesday, up 3.45 from the level on February 26. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level and near the historical high. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. I had written that “The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets, which is a warning sign that we could be in for a bumpy ride in the gold and silver markets.”
We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price action in gold and followed the volatility in the stock market since the last report.
Gold moved down by 0.04%, while the GDX was 2.48% lower since February 26, and GDXJ fell by 5.88% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold, which turned out to be a sign of a correction. The mining stocks suffered from a combination of falling gold and stock prices. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 3.54% loss since February 26, which outperformed the percentage decline in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for periodic corrections increases with prices. In silver, a rally to challenge the 2016 high at $21.095 is necessary to light a bullish fuse under the sleeping silver market. Speculators and trend-following traders would likely flock to the silver market if it can muster the strength to break out to the upside above the $21 level.
Platinum and palladium prices moved significantly lower since February 26. June Palladium was trading at a premium over April platinum with the differential at the $1527.50 per ounce level on Wednesday, which narrowed since February 26. April platinum was trading at a $767.80 discount to April gold at the settlement prices on March 4, which widened since the previous report.
The price of rhodium, which does not trade on the futures market was at $10,750 per ounce on Wednesday, down $1,050 per ounce on the week after trading above the $12,000 level. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. The price has moved higher from a low at $575 per ounce in 2016.
We are long the PPLT platinum ETF product, which moved 3.81% lower since February 26 as it outperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis. Platinum continues to disappoint as it failed again at an attempt above the $1000 level.
We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $9.42 on March 4, down 9.51% since the last report as mining shares underperformed the silver futures market.
I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” I am tempted to add to long positions after the recent correction. While I will maintain the core long exposure to the sector, I would put a tight stop on any additional purchases over the coming week.
Risk-off conditions impact all markets. The recent price action likely caused weaker longs to exit positions. Falling interest rates in the US and around the world are supportive of gains in the precious metals sector. If the trend of recent years continues, central banks around the world are likely to take advantage of the lower gold price to step up buying and add to reserves. Falling rates are bullish fuel for the gold market. I remain bullish on the yellow metal, and silver, gold’s little brother.
Energy commodities were volatile over the past week. The prices of crude oil and oil products slumped to new lows and recovered a bit. WTI fell more than Brent over the past week. NYMEX crude oil came close to the December 2018 support area at $42.36 per barrel. Crude oil underperformed gasoline and heating oil since last week. Natural gas also fell to a new bottom for the year as it approaches the March 2016 support level at $1.611 per MMBtu, but it recovered as risk-off conditions likely prompted short covering. Ethanol moved to the downside, but coal recovered. OPEC is meeting on Thursday and Friday to discuss the current production cuts. The market expects a further one million barrel per day output. While Saudi Arabia is advocating to reduce production, Russia has not agreed to any further output cuts as of Wednesday. The path of least resistance of the crude oil market depends on the outcome of this week’s OPEC decision.
April NYMEX crude oil futures fell 4.00% since the previous report after an almost 9% decline last week. After putting in a bearish reversal on the monthly chart in January, the price has made lower lows. If nearby futures settle below the $50.99 per barrel level at the end of March, they will put in a bearish reversal trading pattern on the quarterly chart. The price was well below that level on Wednesday.
May Brent futures moved 3.12% lower since February 26 after a more than 9.5% loss last week. April gasoline was 0.58% lower, so the processing spread in March posted a 8.66% gain since the previous report as gasoline outperformed the price of crude oil over the period. April heating oil futures moved 2.39% higher from the last report moving the heating oil crack spread 23.05% higher since February 26.
Technical resistance in the April NYMEX crude oil futures contract is at $54.66 per barrel level with support at the late 2018 low at the $42.36 level on the continuous contract. The low over the past week was at $43.32 per barrel. Crude oil open interest rose by 0.75% over the period. The bears have been in control since January 8. Iran remains a potential source of supply concerns that could send the price of oil higher if another round of hostilities breaks out or the theocracy in Teheran undertakes further provocative actions. OPEC will determine the short-term price path of the energy commodity. However, economic weakness in China because of Coronavirus and its spread continues to increase fears of a global slowdown, which weighs on the price of crude oil futures. At the same time, US production continues to rise to new record levels, with inventories increasing. Crude oil continued to fall over the past week as risk-off conditions gripped markets across all asset classes.
Oil equities continue to lag the price of petroleum, and the sector remains in a significant bearish trend.
Over half the world’s crude oil reserves are in the Middle East. Political instability in the region always has the potential to impact the price of the energy commodity. Meanwhile, technological advances and regulatory reforms in the US has made the world’s leading economy independent when it comes to energy supplies. With 13.10 million barrels per day of output, the US produces more oil than either Saudi Arabia or Russia. The Trump administration has encouraged oil and gas production over the past four years. However, the 2020 Presidential election will be a referendum on the future of energy policy as the opposition party has embraced the “Green New Deal” that would reduce fracking and energy output when it comes to fossil fuels. The potential for a dramatic shift in US energy policy could cause lots of price volatility in the oil and gas market during the second half of 2020 as the prices could begin to move higher and lower with the political polls in the US. In November, the world’s largest energy-producing nation will decide if it continues to produce or if new regulations cause a sudden decline in output beginning in 2021. The Democrats are in a tight race between the moderate and progressive wing of the party to nominate a challenger to President Trump. Bernie Sanders and Joe Biden have each had victories. Senator Sanders got out to an early lead with a virtual tie in Iowa and won in New Hampshire and Nevada. Last weekend, former Vice President Joe Biden staged a comeback victory in South Carolina. The Super Tuesday results this week favored Joe Biden, but the race will continue to be tight with a chance that the final decision will not come until the convention. The strength of the progressive wing of the party means that many of its initiatives will be included in the platform, which could impact the futures of US energy policy even if the moderate candidate from the opposition party prevails in November. We could see lots of volatility in the oil and gas markets based on political polls as the incumbent President is an advocate for the status quo, and the Democrats favor a significant shift in energy production in the US.
The spread between Brent and WTI crude oil futures in May rose to the $4.21 per barrel level for Brent, which was $0.23 above the level on February 26. The May spread moved to a high of $5.40 in early January as tensions between the US and Iran flared in the Middle East. The most recent peak was at $5.15 on February 19. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. Tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks.
US daily production moved to a new record high 13.10 million barrels per day level as of February 21, according to the Energy Information Administration. The level of output was unchanged from the previous week. As of February 21, the API reported an increase of 1.30 million barrels of crude oil stockpiles, while the EIA said they rose by 500,000 barrels for the same week. The API reported a rise of 74,000 barrels of gasoline stocks and said distillate inventories fell by 706,000 barrels as of February 21. The EIA reported a decrease in gasoline stocks of 2.7 million barrels and a drop in distillates of 2.1 million barrels. Rig counts, as reported by Baker Hughes, fell by one last week to 678 rigs in operations as of February 28, which is 165 below the level operating last year at this time. The inventory data from both the API and EIA took a backseat to risk-off conditions in markets over the past week.
OIH and VLO shares continued to fall with the volatility in the stock market since February 26. OIH declined by 6.23%, and VLO moved 10.56% to the downside since last week. Eventual strength in crack spreads would be supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $8.73 per share level on Wednesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will add to the position at a lower level. Oil services stocks continue to underperform the other oil-related equities. I will purchase another unit at $7 per share if the OIH reaches that level.
We are short the $80 put option on VLO for $3.65 or higher per share.
If the shares are below the $80 level, we will assume a long position in VLO shares at $76.35.
Last week, I recommended averaging down on the position with the sale of a $70 put option for the same expiration date for $4.00 or higher. The puts opened at $6.28 the following day. A link to the option is below:
If the price of VLO shares is below $70 on May 15, we will be long the stock at $63.72 per share on this position, and an average of $70.04 per share on the two positions. VLO was trading lower at $64.15 per share on Wednesday. As I wrote, “If you are not comfortable assuming this level of risk, please do not follow this recommendation.” I continue to believe that VLO shares will eventually recover. The company pays a 6.08% dividend at its closing price of $64.15 per share on March 4. We are coming into a time of the year where gasoline demand tends to rise, putting upward pressure on refining spreads. The position in VLO is not a long position on crude oil or gasoline, but on the margin for processing the energy commodity into oil products.
I will add another short put option at the $60 strike for the May expiration if the price of the stock declines over the next week to continue building a long position via collecting premium on a scale-down basis. Please remember that when selling these puts, you must be prepared to purchase the stock on the expiration day at the strike prices of the put options. The net purchase price is the strike price minus the premium received.
I have been watching the ERX product, which was 8.86% lower since last week’s report after a 35% loss in the previous report. I will continue to be a bit more aggressive with this product at the current levels, with very tight stops in a quest to catch an updraft. I do not view ERX as an investment position, so I would use a trailing stop and take profits on a scale-up basis if I can catch a recovery rally. So far, I have stopped out a few times for marginal losses.
April natural gas futures rallied to a high of $2.024 on February 20 and ran out of steam on the upside. Last week, the price fell to a lower low. Nearby April futures were at $1.827 on March 4, which was 0.54% lower than on February 26. The April futures contract traded to a high of $2.447 on November 5. Natural gas traded at its lowest price since 2016, when it hit $1.642 on February 28 on the April contract.
Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. The recent recovery in natural gas was overdue but ran out of buying as there are only around four weeks left until the 2020 injection season begins in late March, and the price has reflected injection season trading conditions throughout the entirety of the peak season.
The EIA reported a withdrawal of 143 bcf, bringing the total inventories to 2.200 tcf as of February 21. Stocks were 40.8% above last year’s level and 8.9% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019. With around four weeks to go until inventories begin to climb, we would need to see an average withdrawal of 273.3 bcf to reach last year’s low in stockpiles. This week the consensus expectations are that the EIA will report a withdrawal of 126 bcf from storage for the week ending on February 21. The EIA will release its next report on Thursday, March 5, 2020.
Open interest rose by 2.64% in natural gas over the past week. The metric rose as the price declined, which is a bearish sign for the futures market. Technical resistance is at $2.024 per MMBtu level on the April futures contract with support at $1.611 per MMBtu, the low from March 2016, which stands as technical support on the continuous futures contract. Price momentum and relative strength on the daily chart crossed higher in oversold territory and were just below neutral conditions as of Wednesday. The price action continues to suggest that sellers are lurking above looking to take advantage of any attempts at a price recovery as we move towards the injection season. However, risk-off conditions could cause short covering if speculators decide to move to the sidelines.
The GASL ETF product was trading at $2.04 per share on March 4, 17.74% lower than on February 26, after an over 44.5% loss last week. I have been on the sidelines in GASL. If I do dip a toe back into the leveraged ETF product on the long side, I would use a very tight stop and trade it like the ERX product. I did not take any positions in GASL over the past week but may dip a toe in on the long side at just below the $2 per share level.
April ethanol prices moved 1.31% lower over the past week on the back of weakness in crude oil. Open interest in the thinly traded ethanol futures market moved 1.70% lower over the past week. With only 462 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose 2.46% compared to its price on February 26, after a more than 10% loss last week. The price of April coal futures in Rotterdam moved 2.10% higher over the past week.
Late Wednesday, the API reported a 1.70-million-barrel rise in crude oil inventories for the week ending on February 28. Gasoline stocks fell by 3.90 million barrels, while distillate stockpiles fell 1.70 million barrels over the period. The EIA said crude oil stocks rose 800,000 barrels. Gasoline inventories were 4.30 million barrels lower, while distillate stocks fell 4.00 million barrels. The API and EIA inventory reports were modestly bullish for the price of the energy commodity, but the market has been highly sensitive to risk-off conditions because of Coronavirus.
In natural gas, the price came close to the 2016 low at $1.611 per MMBtu.
As the forward curve over the coming months shows, the price at $1.827 in April on the settlement price on March 4, was 1.0 cent per MMBtu lower than on February 26. The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we head into the 2020 injection season.
I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. We were long the stock but stopped out of our position over the past week as the price dropped below $49.49 per share. I will be watching the stock over the coming days and weeks to look to re-establish the long position.
I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities.
We are holding a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 1.75% lower over the past week at $12.33 per share. I will add another unit at a much lower price to lower the average cost of the long position. Weakness in crude oil and the Brazilian real weighed on PBR shares. I will wait for the $10 to $11 level to add another one or two units to this position. We are currently long two units meaning we purchased twice. I leave it up to subscribers to determine individual risk levels when it comes to volumes of shares in a unit.
Coronavirus and the potential for a shift in US energy policy continued to put pressure on the prices of energy commodities and related shares over the past week. Many of the members of the energy sector had been falling knives. The next significant event will be the OPEC meeting today and tomorrow. A further reduction in output could cause a relief rally in the price of oil. When it comes to natural gas, the trend remains lower, and we could see a $1.50 handle for the first time this century. However, risk-off conditions can push markets in either direction. The bearish sentiment in natural gas could cause another recovery rally prompted by short covering if volatility in markets continues. I will approach the sector with extreme caution over the coming week in the current environment.
Soybean and corn prices posted gains, while wheat continued to move lower over the past week. Coronavirus continued to weigh on prices of all assets, despite the uncertainty of the annual crop at the start of the 2020 planting season. From 2013 through 2019, bumper crops of grains satisfied global demand. In 2018 and 2019, the trade war between the US and China weighed on prices. At the start of the 2020 crop year, Coronavirus replaced trade as the leading issue impacting grain prices. Meanwhile, rising population around the globe continues to underpin the prices of the commodities that are essential for nutrition. The weather conditions across the fertile plains of the US and in the northern hemisphere around the world over the coming months will be the most significant factor when it comes to the path of prices.
The USDA will release its next WASDE report on Tuesday, March 10, at noon EST.
May soybean futures rose by 1.71% over the past week and was at $9.0725 per bushel on March 4. Open interest in the soybean futures market fell by 3.14% since last week. Price momentum and relative strength indicators were trending towards overbought readings on Wednesday in the daily chart.
The May synthetic soybean crush spread rose over the past week and was at the 99.50 cents per bushel level on March 4, up 11.25 cents since February 26. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread since late January was a confirmation of the recent bearish trend. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets. As I have written in previous reports, I believe soybean futures were in the buy-zone at prices below $9 per bushel. The action in the crush spread was bullish over the past week.
May corn was trading at $3.8500 per bushel on March 4, which was 2.80% higher on the week. Open interest in the corn futures market fell by 5.28% since February 25. Technical metrics were rising above neutral readings in the corn futures market on the daily chart as of Wednesday. The price of April ethanol futures fell by 1.31% since the previous report on the back of crude oil prices. April ethanol futures were at $1.2840 per gallon on March 4. The spread between May gasoline and May ethanol futures was virtually unchanged at 23.92 cents per gallon on March 4, up only 0.01 cents or one tick since last week.
May CBOT wheat futures were 3.27% lower since last week. The May futures were trading $5.1825 level on March 4. Open interest fell 8.48% over the past week in CBOT wheat futures. We should expect to see open interest rise in all of the grain markets over the coming weeks as farmers hedge the 2020 crops. However, risk-off in markets may be causing hedging activity to slow. Technical metrics in CBOT wheat were at oversold readings on Wednesday. March wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over the past weeks. The first level of support is at the $5.1250 per bushel level.
As of Wednesday, the KCBT-CBOT spread in May was trading at an 65.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 11.50 cents since February 26. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” The spread continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. However, the spread moved towards the long-term average over the past week, which could signal a bottom for wheat futures sooner rather than later.
I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus has been a bearish factor for the grain markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I am a scale-down buyer of beans, corn, and wheat on price weakness, leaving plenty of room to average down in the current environment.
The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage. Farmers are now preparing how best to utilize their acreage during the upcoming 2020 planting season.
The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.3787:1 level on March 4, down 0.01250 since last week. The ratio is below the long-term norm. On March 4, the spread was at a level where farmers would likely plant a bit more corn than soybeans crops when it comes to the planting season in the early spring at under the 2.4:1 level.
The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could create a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. I believe that any weakness in grains could offer some of the most compelling buying opportunities in the commodities asset class over the coming weeks.
Each year is a new adventure in the agricultural commodities that feed the world. The beginning of spring is the time of the year when uncertainty can lead to increased price variance. I view the current price levels as areas to establish long positions, leaving room to add on further price weakness. The next significant event will be the USDA WASDE report on March 10.
Copper, Metals, and Minerals
Risk-off conditions in all markets translated to volatility in the prices of copper, base metals, and all industrial commodities over the past week. In an environment where prices were imploding one day and exploding the next, the snapshot of industrial commodity prices compared to last week shows mostly higher levels. Zinc and lumber posted losses since the previous report. The prices of all of the other members of the sector moved higher since last Wednesday’s report.
Copper rose 0.49% on COMEX, while the red metal posted a 0.05% gain on the LME since the last report. Open interest in the COMEX futures market moved 6.84% lower since February 25. May copper was trading at $2.5860 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. The outbreak of Coronavirus has weighed on Chinese economic growth. Over the past week, LME stockpiles rose substantially.
Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January. A close below $2.5150 per pound at the end of March would put in the same bearish price reversal pattern on the quarterly chart. Copper was above the level that would create bearish reversal on the long-term chart on Wednesday.
The LME lead price moved higher by only 0.05% since February 25. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel edged 0.32% higher over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 0.81% since the previous report. Aluminum was 0.94% higher since the last report. The price of zinc fell 2.91% since February 25. Zinc was at the $2000 level on February 25. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The US dollar index fell over the past week, which likely provide some support for the metals.
May lumber futures were at the $410.80 level, down 7.69% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed left interest rates unchanged at its recent meeting but slashed the Fed Funds rate by 50 basis points on March 3 in an emergency move. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The current environment forced the Fed’s hand and pushed rates lower despite the election year. The price of uranium for April delivery was down 0.40% at $24.75 per pound. The volatile Baltic Dry Index gained 8.07% since February 26 to the 549 level after significant losses throughout the winter months. June iron ore futures were 2.07% higher compared to the price on February 26. Open interest in the thinly traded lumber futures market plunged 23.26% over the period. After consistent increases over the past weeks, risk-off conditions weighed on the price of lumber futures, causing a decline to the $400 level.
LME copper inventories exploded 31.81% higher to 211,225 metric tons since last week. COMEX copper stocks fell by 0.74% from February 25 to 28,744 tons. Lead stockpiles on the LME were up 1.48%, while aluminum stocks were 4.84% lower. Aluminum stocks fell to the 1,061,375-ton level. Zinc stocks fell 0.23% since the last report, after a significant rise in inventories in recent weeks. Tin inventories rose by 1.57% since February 25 to 7,460 tons after a recent significant increase. Nickel inventories were 2.17% higher compared to the level on February 25. The export ban from Indonesia took effect on January 1.
The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy will have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector but concerns over Coronavirus have overwhelmed the markets over the past weeks and caused risk-off conditions in industrial commodities and markets across all asset classes until some light buying stabilized prices.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 29 cents on February 26, down eight cents since last week. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level until early 2021. The details for the call option are here:
US Steel shares were at $8.05 per share and moved 2.54% lower since last week.
We own two units of FCX shares at an average of $10.56. The stock was trading at $10.45 on Wednesday, $0.01 lower since the previous report. I continue to maintain a small long position in FCX shares.
The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China over the coming months. However, the most significant factor will continue to be the progress of Coronavirus and its impact on the Chinese economy.
I would widen out any buying scales in the current environment, given the potential for extreme levels of price volatility.
Risk-off behavior in all asset classes weighed on meat prices over the past week as cattle and hog prices posted declines. However, beef and pork prices rebounded from lows during the week. The USDA will release its March WASDE report on Tuesday, March 10, at noon EST, which will supply the market with the latest fundamental data. We are coming into the time of the year where the animal protein sector shifts focus to the 2020 grilling season, which begins on the Memorial Day weekend in late May.
April live cattle futures were at $1.112750 per pound level down 0.96% from February 26 after a 7% decline last week as the price of beef fell to a new low for 2020. Technical resistance is at $1.21175 per pound. Technical support stands at around $1.1000 per pound level. Price momentum and relative strength indicators were rising from deeply oversold readings on Wednesday. Open interest in the live cattle futures market moved 0.67% lower since the last report.
April feeder cattle futures outperformed live cattle as they declined by 0.31% since last week. April feeder cattle futures were trading at the $1.35550 per pound level with support at $1.31475 and resistance at $1.4000 per pound level. Open interest in feeder cattle futures fell by 6.73% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.
Lean hog futures marginally underperformed the live cattle futures since the previous report. The active month April lean hogs were at 64.300 cents on March 4, which was 1.31% lower from the level on February 26. Price momentum and the relative strength index were trending higher below neutral readings on Wednesday. Support is at 61.00 cents with technical resistance on the April futures contract at 68.25 cents per pound level.
The forward curve in live cattle is in backwardation from April 2020 until June 2020, and the market shifts to contango from June 2020 through April 2021. Backwardation returns until August 2021. The Feeder cattle forward curve is in contango from March 2020 through January 2021.
In the lean hog futures arena, there is contango from April 2020 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021 when a slight backwardation returned until July 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months now that the trade war de-escalated. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The Coronavirus could increase demand for pork from China as the country is banning the consumption of other meat products, which could be the source of the virus. However, the kneejerk reaction to the virus had caused significant selling and risk-off conditions in the lean hog futures arena. Lean hog futures were mostly steady over the past week.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the April futures contracts moved a touch higher as the price of live cattle outperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.73060:1 compared to 1.72450:1 in the previous report. The spread increased by 0.610 cents as live cattle became slightly more expensive than lean hogs over the past week. The spread moved away from the historical norm on the April futures contracts.
Soon the markets will turn their focus to the upcoming 2020 grilling season of peak demand in the US, which begins in late May and runs through early September. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. Over the past weeks, both currencies remained weak. Any rise in the Brazilian real and Argentine peso could provide some support for meat prices. Lower values for the South American currencies weigh on futures prices as they cause production costs to decline. Grain prices over the coming weeks could also impact the path of least direction for the prices of meat futures. Lower grain prices make animal feed prices lower and weigh on meat prices. We could see two-way price volatility increase as the winter season ends in the US. Over the past weeks, the input has been all negative for the prices of the meats.
I continue to believe we will eventually see recoveries in cattle and hog prices, and the COW ETN product, as we move closer to the season of peak demand. The trade agreement between the US and China could boost US exports of beef and pork to China. The next test will come on March 10 in the upcoming USDA report. Any significant further price weakness could offer an opportunity for some bargains in the beef and pork markets. I would continue to use wide scales for any buying to leave lots of room on the downside.
Three of the five soft commodities posted losses over the past week. Coffee and FCOJ moved higher since the previous report. Cotton, sugar, and cocoa futures prices all fell in a continuation of the price action from last week. The soft commodity sector was not immune to the effects of Coronavirus on markets as market participants liquidated risk positions.
May sugar futures declined 7.36% since February 26, as the price of the sweet commodity was around the 13.47 cents per pound level on the active month futures contract. Technical resistance is at 15.29 cents with support at 13.20 cents. Sugar made a new high at 15.90 cents on February 12 on the continuous contract. Nearby sugar futures traded to a low at 13.20 cents on January 2, which is a critical level of short-term support. The value of the January Brazilian real against the US dollar continued to fall over the past week and was at the $0.214250 level against the US dollar on the March contract, 4.78% lower over the period. The Brazilian currency recently fell below its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency fell through the critical support level at $0.23040 and moved to a new low of $0.21760 as the slow descent continued. Coronavirus has weighed on emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were trending lower in oversold territory as of March 4. The metrics on the monthly chart crossed higher from a neutral condition and were threatening to cross lower in the upper region of neutral territory. Sugar made a new high above its 2019 peak, and the next significant target on the upside could be the 20 cents per pound in the volatile sugar futures market if a deficit develops in the sweet commodity. However, risk-off conditions threaten the recent rally. Open interest in sugar futures was 5.27% lower since last week. Open interest had been rising with the price, which was a bullish technical factor. Sugar rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. The recent correction in sympathy with the risk-off conditions came as open interest edged lower, which could be a sign that sugar will find a bottom at a higher low.
May coffee futures moved 7.00% higher since February 26 after a significant correction from the December 2019 high. May futures were trading at the $1.18400 per pound level. The first level to watch on the downside is $1.0480. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is at $1.2245 on the nearby May contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. 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 $37.03 on Wednesday. Open interest in the coffee futures market was 3.67% lower since last week. I am holding a long position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market. I began buying as the price fell below the $1 per pound level. I started selling on a scale-up basis at around $1.10 but will continue to hold a small core long position.
Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were above neutral levels on Wednesday. On the monthly and quarterly charts, the price action was neutral to positive, given the recent rebound. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.” Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Risk-off conditions could impact the coffee market if they continue.
The price of cocoa futures fell over the past week. On Wednesday, May cocoa futures were at the $2626 per ton level, 4.13% lower than on February 26. Open interest fell by 4.03%. Relative strength and price momentum were falling in oversold territory on March 4 as the price correction continued after recent gains after the soft commodity ran out of buying at just below the $3000 level. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. We are long the NIB ETN product at $25.76. NIB closed at $31.00 on Wednesday, March 4. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is now at $3000 per ton. On the downside, short-term technical support now stands at $2600 per ton.
May cotton futures fell 3.80% over the past week after a decline of 6% last week on the back of continued concerns about the Chinese economy. May cotton was trading at 62.98 cents on March 4. On the downside, support is at 60.18 cents per pound. Resistance stands at 65.07 cents per pound. Open interest in the cotton futures market rose by 3.51% since February 25. Price momentum and relative strength metrics were in oversold territory on Wednesday. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy grinds to a halt, the demand for cotton suffers. The spread of the virus continued to weigh on the price of the fiber.
May FCOJ futures posted a gain since last week. On Wednesday, the price of May futures was trading around 98.40 cents per pound. FCOJ nearby futures moved 1.29% higher over the past week. Support is at 92.15 cents level. Technical resistance is at $1.0275 per pound, where there is a double top formation on the daily chart. Open interest fell by 2.38% since February 25. The Brazilian currency weighed on the FCOJ futures. $1 per pound continues to be a critical point for the OJ futures.
Risk-off conditions threaten to weigh on the prices of the soft commodities. The falling Brazilian real is also a risk factor for sugar, coffee, and FCOJ prices over the coming week. Soft commodities can be highly volatile, but the prices cotton and FCOJ are close to the bottom ends of their respective pricing cycles. Coffee recovered, but the risk of another selloff remains high. Sugar has come off the recent highs and could fall further along with cocoa. However, I would expect the sweet commodity and primary ingredient in chocolate confectionery products to find support at higher lows.
A final note
The volatility in the stock market has been the most violent since the 2008 financial crisis. While stocks and many commodities suffered declines during the final quarter of 2018, the current environment is different. Dealing with the unknown of a virus that could evolve into a pandemic has injected fear and uncertainty into markets. During risk-off periods, the prices of all assets tend to decline. Approach markets with a plan for risk-reward, making sure that the level of risk is commensurate with the profit targets. While risk-off periods could create ugly periods in markets, it also offers the opportunity to pick up bargains for the medium to long-term. The high level of the VIX makes selling options more attractive than buying puts and calls in the current environment. Be careful out there. If you are worried about the current level of risk in markets, there is nothing wrong with moving to the sidelines and waiting for the dust to settle.
As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report soon. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.
Until next week,
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.