• The US dollar continued to decline over the past week
  • Precious metals move mostly higher, but palladium and rhodium pull back over the recent gains
  • Crude oil recovers and outperforms product prices while natural gas and coal prices decline
  • Copper and most base metals post gains, but nickel corrects since last week
  • Hog prices decline- the price of coffee futures recover

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

Summary and highlights:

On Thursday, October 17, stocks edged higher on Thursday, but the market was quiet. The dollar index continued to decline, and the long bond remained around the 160 level. Grains moved higher, led by wheat. Crude oil moved higher despite a significant rise of 9.3 million barrels for the week ending on October 11, according to the EIA. Gasoline and heating oil futures reflected seasonal influences as gasoline moved marginally lower, and heating oil posted a small gain on the session. Natural gas was a touch higher at over the $2.30 level despite a triple-digit increase in inventories of 104 bcf as of Friday, October 11. Gold, silver, and platinum moved higher, but palladium fell a bit after reaching a new all-time peak on Wednesday. Live cattle were one-half cent higher, but feeder cattle and lean hog prices fell. Lumber and cotton were higher, while sugar, coffee, cocoa, and FCOJ moved to the downside. Bitcoin was up $110 to just over the $8000 per token level. A tentative deal to end the strike at GM was in the works on Thursday.

On Friday, stocks moved lower on bearish news from Boeing and Chinese GDP data that shows that the economy grew by 6%, which was the lowest level since 1992. All of the leading indices posted losses with the DJIA down over 250 points on the final session of the week. Wheat and soybean prices moved higher while corn declined. Crude oil and oil products edged lower, but natural gas moved to the upside. Copper was higher, but gold, silver, and palladium prices were lower. Platinum was marginally higher. Meats all posted small losses. Cotton, coffee, and sugar were higher, but FCOJ, cocoa, and lumber prices fell. The 30-Year Treasury Bond futures were around the 160 level, while the dollar index continued to slip, and was at just over 97 on the December futures contract. Bitcoin slipped below the $8,000 level as CME futures settled at $7.960 per token.

On Monday, stocks edged higher along with the dollar index, while the long bond fell below the 160 level. Grains edged lower, and so did all of the energy commodities. Gold fell a bit with platinum, but silver and palladium posted gains. Copper was a little more than a penny higher on the session. Meats did not move much on the first session of the week. Coffee and lumber were marginally higher, but all of the other soft commodities posted losses. Bitcoin was $245 high to the $8,205 level.

On Tuesday, the UK Parliament handed Prime Minster Boris Johnson another defeat as it refused to consider his Brexit deal with the EU because of a timing issue. Another general election that will serve as a second referendum on Brexit is not almost a certainty. US stocks moved marginally lower on Tuesday. The long bond future moved to the downside, and the dollar index was higher. Losses on the pound and euro currencies after the latest move on Brexit supported the dollar index as it contains a 69.5% exposure to the two European currencies. Wheat moved lower while corn and beans were up by less than a penny per bushel on the session. Energy commodities posted gains across the board on Tuesday. Oil products underperformed crude oil, causing a retreat in both gasoline and heating oil crack spreads. Gold and silver prices did not move all that much, while copper edged lower. Platinum and palladium both posted marginal gains. Hogs fell sharply to the 65.50 cents per pound level, while live cattle edged lower and feeder cattle futures posted a small gain. Coffee was the leader on the upside in the soft commodities sector with a 2.55 cents gain. The price of cotton edged higher, while sugar, cocoa, FCOJ, and lumber moved lower. Bitcoin futures settled at $8,165 per token down just $40 on the session.

On Wednesday, stocks moved a bit higher on the session, while bonds and the dollar index did not move all that much. Wheat posted a small gain, but corn and soybean prices were marginally lower. Crude oil and products posted gains on the back of a bullish inventory report from the EIA. Gasoline was the strongest oil product despite the offseason for demand. Natural gas edged higher but remained below the $2.30 per MMBtu level. Gold, silver, and platinum prices moved to the upside, while palladium fell even though it remained above the $1700 per ounce level. Meats were higher across the board. Sugar and coffee prices slipped, but cotton, FCOJ, cocoa, and lumber moved higher. Bitcoin fell $700 per token to $7,465, which is the lowest level since June. Bitcoin traded to a low at $7245 on the session. Facebook’s founder Mark Zuckerberg’s testimony before the US Congress on the Libra token and other issues weighed on the price of cryptocurrencies on Wednesday. The US legislators do not seem likely to allow Libra or another token to come on the scene and challenge the dollar or other world currencies.

Stocks and Bonds

Stocks did not move much over the past week. Chinese GDP at 6% was the lowest level since 1992, which was a reminder that the trade war continues to weigh on the global economy. However, progress on both trade and a resolution to the Brexit issue could lead the Federal Reserve to pause at the October 30 meeting. The market continues to expect a 25-basis point reduction in the Fed Funds rate. If the Fed does not live up to market expectations, we could see selling in the stock market at the end of this month. The recent selling could be the result of some market participants closing risk positions in case the Fed decides to pause because of the easing in some of the “crosscurrents” facing markets.

 

The S&P 500 rose by 0.50% since the previous report, while the NASDAQ moved 0.05% lower. The DJIA posted a 0.62% loss since the last report. Trade, Brexit, impeachment, and the Middle Many issues continue to face markets over the coming weeks and months. However, if the Fed leaves rates unchanged at its October 30 meeting, it could trump optimism on trade and Brexit.

Chinese large-cap stocks kept pace with US stocks over the past week as the weakest GDP data since 1992 weighed on stocks.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.26 level on Wednesday, which was 0.63% lower than the closing level on October 16. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. The path of least resistance for FXI will depend on the progress of trade talks between the US and China.

US 30-Year bonds did not move much since the last report. Volatility has been the hallmark of the bond market over recent months, but the price action has calmed around the 160 level. The nearby long-bond futures contract traded to a new high at 167-18 in late August. The December contract rose to a high at 166-25 on August 28 and fell to a low at 157-17 on September 13. On Wednesday, it was at the 160-02 level as it moved only 0.16% lower since the previous report. The long bond fell as the Fed minutes highlighted the division within the voting members of the FOMC when it comes to further rate cuts. Additionally, the de-escalation of the trade war was a welcome sign when it comes to global economic growth sending the bonds lower.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.24% since October 15. Open interest in the long bond increased by 2.76% over the past week. The VIX moved a touch higher as volatility in the stock market was mixed over the past week. The volatility index was at the 14.01 level on October 23, 2.41% higher over the period.

I will continue to buy the VIXY and other VIX related products and stop out for small losses. I will 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 over the past weeks and months.  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 potential for two-way price variance in the stock market remains high for the coming weeks and months. Optimism has returned to the market over trade and Brexit. However, the Fed meeting at the end of the month now looms large. The FOMC could throw a monkey wrench into the stock market if the central bank decides to pause and not reduce the short-term Fed Funds rate.

 

The dollar and digital currencies

The dollar index continued to decline over the past week as it posted its third consecutive week of losses after rising to a slightly lower peak at 99.305 on October 1. The December dollar index futures contract posted a 0.50% loss over the period. The index made a new and higher high at 99.33 on September 4 on the continuous contract. Optimism over trade weighed on the dollar index. At the same time, as the UK moved closer to a deal on Brexit with the EU, the pound and euro appreciated sending the dollar index lower. Meanwhile, the gap between the US and other interest rates is a supportive factor for the greenback. The next level of technical support for the December dollar index stands at 96.60, the early August low on the December futures contract, and at 95.365, the June bottom on the continuous contract.

The euro currency was 0.45% higher against the dollar since last week’s report. Falling interest rates, Brexit, and the sluggish pace of growth in Europe continues to be the most significant factors for the path of least resistance of the euro.

 

The leader of the digital currency asset class moved lower and was trading at the $7,546.83 level as of October 23. Bitcoin fell by 5.69% since last week, while Ethereum posted a 7.23% loss as it was at around $161.92 per token. The market cap of the entire asset class moved 5.12% lower as it outperformed Bitcoin and Ethereum. The number of tokens rose by 36 since October 9 to 3025 tokens. The consistent rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures fell by 10.19% since last week. The metric has declined over recent weeks with the price of Bitcoin.  Mark Zuckerberg’s testimony before the US Congress weighed on digital currency prices on October 23.

The Canadian dollar moved 0.88% higher since last week. Open interest in C$ futures rose by 14.24% 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. The Canadian dollar rallied as the incumbent Prime Minister won re-election on October 21.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 1.31% since last week’s report. Optimism over progress in trade negotiations between the US and China was a supportive factor for the Australian dollar.

The British pound posted a 0.50% gain since the previous report. Prime Minister Boris Johnson had a deal in hand with the EU at the end of last week. However, the UK Parliament refused to approve the agreement during a rare Saturday session last weekend. The Parliament is now forcing the Prime Minister to request an extension for Brexit until at least the end of January 2020. However, the Prime Minister has refused. The standoff between the leader of the UK and the legislature was ongoing on Wednesday and could keep the value of the pound volatility over the coming week. It appears that a general election is on the horizon. The sitting Prime Minister is leading in the political polls.

The Brazilian real moved higher since October 16 as it rose by 3.21%. Despite the bounce, the real remains not far above its lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks.

 

Gold was exceptionally quiet over the past week as the price continued to consolidate and was at just below the $1500 per ounce level.

 

Precious Metals

Gold and silver prices edged marginally higher since last week but remained within their respective consolidation ranges. Platinum rallied but palladium corrected a bit after moving to a new high last week. Rhodium was lower but is still at an elevated level.

Gold was 0.11% higher since last week, and silver rose 0.88%. The price of December gold was just above the $1495 per ounce level on Wednesday, while silver was at $17.58. After December gold reached a peak at $1566.20 on September 4, and December silver climbed to $19.75 on the same day, both metals turned to the downside and have been consolidating and digesting their gains. While gold broke out to the upside above the 2016 high, silver did not make it to the milestone.

The price of platinum rose by 3.56% since last week. The level of technical resistance is now at the September 5 high at $1000.80 on September 5. January platinum futures were around the $922.40 level on Wednesday. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium declined by 2.99% since the previous report. The midpoint price of the metal was at $5190 per ounce on October 23. Palladium was 1.18% lower on the week as the price traded to a new peak at $1750 on October 17 and closed at the $1714.60 per ounce level on Wednesday.

Open interest in the gold futures market moved 2.99% higher over the past week. The metric moved 0.68% higher in platinum while it was 2.62% higher in the palladium futures market. Silver open interest increased by 1.71% over the period. Investors and market participants appear to be buying the dip in the precious metals sector.

Gold and silver have taken a rest as optimism over both trade and Brexit eased some of the uncertainties in markets. Even though the dollar index is declining, the two precious metals did not move all that much.

The silver-gold ratio moved lower since the last report as silver gained more than gold.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 85.17 on Wednesday, 0.56 lower than the level on October 16. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, but it had been playing catchup over recent weeks. The ratio had declined to a low at 79.30 on September 4 when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 0.11% higher, the GDX was 0.37% higher since October 16, and GDXJ appreciated by 0.38% 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. The price action over the past week reflected the continued consolidation in the gold market. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.80% gain since October 16, marginally underperforming the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels and will continue to appreciate given the path of global interest rates.

Platinum group metals moved in opposite directions since October 16 as platinum rose, and palladium fell. December Palladium was trading at a premium over January platinum with the differential at the $792.20 per ounce level on Wednesday, which narrowed from a new record level last week. January platinum was trading at a $573.30 discount to December gold at the settlement prices on October 23, which narrowed since the previous report. The price of rhodium, which does not trade on the futures market, moved $160 lower over the past week and was at $5,190 per ounce on Wednesday. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is double the current price. However, markets rarely move in a straight line. Rhodium has been then best-performing precious metal since 2016.

We are long the PPLT platinum ETF product, which moved 3.24% higher since October 16. 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 above the $1000 and $1200 resistance levels to break to the upside on a technical basis. Platinum seems to be in a holding pattern with a midpoint at the $900 per ounce level.

Nothing changed much over the past two weeks when I wrote, “I remain bullish on the precious metals sector and believe the recent price dips in gold, silver, and platinum futures markets are buying opportunities. Global currencies have lost value against gold since the beginning of this century, which is a trend that I expect to continue. Monetary policy accommodation by the world’s central banks is bullish for gold and silver, as they are the oldest forms of money. Governments can print legal tender to their heart’s content, but they cannot print more of the precious metals. When it comes to the PGMs, platinum continues to offer the most compelling value proposition, and palladium and rhodium prices continue to exhibit strength. Price consolidation in the markets is a healthy sign so long as they remain below their respective recent lows.”

 

Energy Commodities

Crude oil prices recovered over the past week. Crack spreads had been strong over recent weeks while the price of oil was falling, which was a sign of strength for the oil patch. Over the past week, processing spreads reflected seasonal trends and both the gasoline and distillate cracks moved lower. Natural gas edged lower, while ethanol recovered. The price of coal in Rotterdam posted a loss since the previous report.

November NYMEX crude oil futures rolled to December and rose by 5.45% over the past week. December Brent futures moved 2.98% higher since October 16. December gasoline was 2.50% higher, but the processing spread in December posted a 9.15% loss since last week as gasoline underperformed the price of crude oil over the period. Since early December, the gasoline crack spread had been moving steadily higher even though it is the seasonally weak time of the year. December heating oil futures moved 1.66% higher since the previous report, but the heating oil crack spread fell by 5.33% since the last report.

Technical resistance in the December NYMEX crude oil futures contract is at $59.11 per barrel level, the high from September 23, with support at the $50.89 level. Crude oil open interest fell by 2.59% over the period. Trade and Iran continue to be the drivers of the path of least resistance for crude oil prices over the coming days and weeks. The de-escalation in the trade war between the US and China is a supportive factor for the price of the energy commodity. An overabundance of shorts in the oil market could cause the price to climb.

The spread between Brent and WTI crude oil futures in
December edged lower to the $5.22 per barrel level for Brent, which was $0.75 below the October 16 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the December contract reached a high at a lower level at $7.39 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.47 on August 19. The rising tensions in the Middle East should keep a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil is at $50 per barrel.

US daily production stood at 12.6 million barrels per day as of October 18, according to the Energy Information Administration, which was at the record peak for daily output. As of October 11, the API reported an increase of 10.45 million barrels of crude oil stockpiles, while the EIA said they rose by 9.30 million barrels for the same week. The API reported a decline of 934,000 barrels of gasoline stocks and said distillate inventories fell by 2.862 million barrels as of October 11. The EIA reported a fall in gasoline stocks of 2.6 million barrels and a decrease in distillates of 3.80 million barrels. Rig counts, as reported by Baker Hughes, rose by one last week to 713 rigs in operations as of October 18, which is 160 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.6 million barrels per day level is a sign of the efficiency of the oil business in the US. As the rig count continues to drop, it could eventually weigh on production and provide some degree of support for the price of oil. However, that has yet to materialize. Record US production eased the blow when it comes to the loss of output from Saudi Arabia in mid-September. President Trump said that he would release oil from the US strategic stockpiles to offset the impact of any hostilities in the Middle East. Iran continues to stand as the issue that could cause wide price variance in the crude oil market throughout the rest of 2019 and into 2020.

OIH and VLO shares moved higher since last week. OIH rose by 5.03%, and VLO moved 5.34% higher since October 16. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks. I will wait before adding any more shares to the position in OIH, given the price action last year at this time.

November natural gas futures hit a low so far in 2019 on August 5 at $2.135 per MMBtu while the continuous contract fell to $2.029. The November futures were at $2.282 on October 23, which was 0.91% lower than on October 16. Last week, the EIA reported an injection of 104 bcf into storage, bringing the total amount of gas in storage to 3.519 tcf as of October 11. 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. As of the end of September, stocks had already moved above the late 2018 high.

Source: EIA

As the chart shows, stockpiles of natural gas are 16.3% above last year’s level and 0.40% above the five-year average as of October 11. The level of stocks rose above the five-year average for the first time in the most recent report, but that did not push the price lower. This week, I expect the EIA to report an injection of around 92 bcf as the injection season begins to wind down. Open interest fell by 1.19% over the past week. Technical resistance is now at $2.398 per MMBtu level on the November futures contract. The $2.187 and $2.135 per MMBtu levels stand as technical support. I continue to favor buying on price weakness on price weakness over the coming weeks.

With approximately five weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 120.3 bcf per week to reach the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.9 tcf level at the beginning of the withdrawal season in November. In 2015 and 2016, stocks rose to record levels at over four tcf before the start of winter.

I favor buying call options with strike prices at the $2.80 to $3.00 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market on price weakness. The January $2.80 call at 13.6 cents was 4.6 cents lower since last week. At the current level, I believe the call options offer compelling value and a limited risk approach to the natural gas futures market. I had also been buying the leveraged GASL product on dips. In GASL, I will continue to work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. GASL was at the $6.87 level on Wednesday, up $0.22 on the week. I will not work any stops on the call option positions as I will at least hold them into the early winter months at the end of 2019. I had been stopping out of GASL for small losses but continue to re-establish long positions at lower levels looking to catch an updraft with the leveraged product. GASL is getting to a level where it could experience a reverse split.

November ethanol prices moved 1.87% higher over the past week. Open interest in the thinly traded ethanol futures market fell by 18.58% over the past week. However, with only 482 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose by 2.53% compared to its price on October 16, but the price of January coal futures in Rotterdam dropped by 4.70% over the past week.

On Wednesday, the API reported that oil inventories rose by 4.45 million barrels for the week ending on October 18. On Thursday, the EIA said crude oil stockpiles fell by 1.70 million barrels. Analysts had expected an increase of 2.232 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 702,000 barrels and a decline in distillate stocks of 3.491 million barrels. The EIA said gasoline stockpiles were 3.10 million barrels lower while distillate inventories declined by 2.70 million barrels. The API and EIA inventory data were mixed for the price of crude oil but the price of oil rallied in the aftermath of the EIA release on Wednesday.

Meanwhile, as I have been writing over the past weeks, “the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming weeks.” The recent events in Saudi Arabia were a chilling reminder of why the Middle East is the world’s most turbulent political region. However, the Saudi production came back fast, and US output made the result of the attack much less than it would have been in past years. Nothing has changed since last week when it comes to the region.

In natural gas, the price recovered from the low. Support is now at the $2.135 level on a short-term basis.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.532 in January, which was 8.0 cents per MMBtu lower than last week. I am sitting on positions in December through February call options with strike prices from the $2.70-$3.00 per MMBtu levels, and I am trading the GASL product from the long side. I will continue to look to purchase more call options on price dips with a time stop in early winter rather than a price stop. My stops on GASL will be tight, given the volatile nature of the product. I will take profits on rallies and trade around the current long position over the coming week. Nothing has changed since the previous report.

I have been tracking the price action in BG shares. Since October 9, the price of BG shares moved 0.09% higher to $55.45 per share on October 23. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.

Aside from rig count, inventories, and trade, the Middle East remains on the center of the stage in the oil market. The potential for more incidents will keep a bid under the price of oil. While Iran is supportive when it comes to the supply side of the oil market, the US-Chinese trade war will impact the demand side. Recent progress towards a trade deal should improve economic conditions, which is bullish. However, the slowest Chinese GDP growth since 1992 continues to highlight how the trade war is weighing on China’s economy.  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. I will continue to favor the long side of the market in crude oil and natural gas over the coming week. Crude oil was near the bottom end of its trading range, and it bounced. I will move to the sidelines on any move below the $50 level in November futures.

I continue to hold 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 6.35% higher over the past week at $15.58 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and volatility in the overall stock market pushed the price of the shares lower over the recent weeks.

The recent price action in crude oil sent it to the bottom end of its trading range. The energy commodity has the potential to recover towards the top end of the back around the $60 per barrel level on nearby NYMEX futures. In natural gas, the rally to over $2.70 per MMBtu in mid-September came too soon. The dip to below the $2.20 level came too soon as the withdrawal season is around one month away. I am friendly towards the energy commodities and expect to see higher prices over the coming week. However, I will approach the markets with tight stops or limited risk positions via call options to protect capital in the current environment. While I am bullish, I am always expecting the unexpected in the volatile energy sector.

 

Grains                                                             

Grain prices were steady over the past week with only corn posting a loss. Soybeans were a touch higher while the price of wheat moved to the upside. The grain sector held on to recent gains in the aftermath of the October WASDE report.

 

November soybean futures moved 0.62% higher over the past week and was at $9.3375 per bushel on Wednesday. Open interest in the soybean futures market rose by 5.73% since last week. Price momentum and relative strength indicators on the daily chart remained above neutral territory with the recent price gains in the soybean market on Wednesday.

The December synthetic soybean crush spread moved a touch higher and was at the $0.8150 per bushel level on October 23, up 4.50 since October 16. 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 price action in the December crush spread was a bullish sign for the price of the oilseed futures. The crush spread is now rolling to the March futures.

December corn was trading at $3.8775 per bushel on October 23, which was 1.02% lower on the week.

Open interest in the corn futures market rose by 2.42% since October 16. The price of ethanol rose by 1.87% since the previous report. December ethanol futures were at $1.4200 per gallon on Wednesday. The spread between December gasoline and ethanol futures widened to 19.33 cents per gallon on October 23, up 1.34 cents since last week.

 

December CBOT wheat futures rose 1.46% since last week. The December futures were trading $5.2075 level on October 23. Open interest rose by 2.12% over the past week in CBOT wheat futures.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at a 97.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread widened by 9.25 cents since October 16. 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. The spread is close to the highest level in years.

My positions in the grain markets continue to be small, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. Any news from the trade front between the US and China could cause increased volatility. The bottom line is that optimism over trade is bullish for the prices of agricultural commodities, while pessimism would continue to weigh on prices. Over the past week, optimism continued to underpin prices.

The focus is now on the weather conditions in South America as the 2019/202- crop year gets underway south of the equator. South America produces the marginal bushels in the grain markets. The production from Argentina, Brazil, and other countries have particular significance given the trade war. China will be a significant buyer of the South American crop over the coming months. Any problems with the yields would force China to fulfill requirements with imports from the US as feeding 1.4 billion people is essential.

 

Copper, Metals, and Minerals

Base metals and industrial commodities prices were mostly higher over the past week. Progress on trade talks and the potential for a de-escalation of the ongoing trade war between the US and China is supportive of prices. However, the issues between China and the US on trade remain significant and could lead to another period of pessimism. Base metals and other industrials are construction essentials. Copper is the leader of the sector, and its price action reflects the market’s overall optimism. However, each of the metals or other industrial commodities have independent supply and demand fundamentals that determine the path of least resistance of prices.

The price of copper moved higher on COMEX and edged to the upside on the LME. Aluminum, lead, zinc, and tin prices posted gains over the past week, while the price of nickel moved to the downside after recent gains. The price of lumber moved higher while the Baltic Dry Index fell over since October 16. The price of iron ore edged higher over the period. Uranium futures were lower since the previous report.

Copper moved 3.17% higher on COMEX, while the red metal posted a 0.81% gain on the LME since the last report. Open interest in the COMEX futures market moved 2.34% lower over the past week. Copper was trading at $2.6715 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade war between the US and China. The de-escalation has been moderately bullish news for the red metal, which is the leading force in the base metals sector. Copper has been trading in a range from under $2.50 to around the $2.70 per ounce level and moved towards the top end of the trading band. Over the past week, copper inventories on both the LME and COMEX declined.

The LME lead price moved higher by 3.19% since October 16, while the price of nickel fell by 5.15% over the past week despite the acceleration of the export ban in Indonesia that will start on the first day of 2020. Tin posted a 1.54% gain since the previous report. Aluminum was 0.15% higher on the week. The price of zinc rose by 2.23% since October 16, adding to last week’s gain. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.

November lumber futures were at the $400.60 level, 5.45% higher since the previous report. The price of uranium for December was 1.20% lower at $24.75 per pound. The Baltic Dry Index was 4.85% lower since last week as the shipping rate moved lower as the winter months approach. December iron ore futures posted a 1.35% gain compared to the price on October 16. Open interest in the thinly traded lumber futures market rose by 18.14% over the past week, which is a bullish sign for the price of wood.

LME copper inventories dropped by 1.68% to 270,350 metric tons since last week. COMEX copper stocks decreased by 6.69% since last week to 34,855 tons. Lead stockpiles on the LME fell by 0.18%, while aluminum stocks declined by 1.36%. Aluminum stocks fell to just under the 972,500-ton level. Zinc stocks moved 2.72% lower since the previous report. Tin inventories moved 1.98% higher since last week to 6,685 tons. Nickel inventories were 7.96% lower compared to the level on October 16, in a continuation of the trend of falling stockpiles over recent weeks. The decline in nickel inventories could turn out to be highly supportive of gains in the nickel market on the LME. Over the coming weeks and months as the Indonesian export ban takes effect at the start of 2020.  The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The fear of war in the Middle East and Brexit could impact behavior in markets, and base metals are no exception. Over the past week, the news cycle continued to provide some support for prices.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.97 per share on Wednesday, up 13 cents over the past week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.53 on October 23 up 10 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. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $11.17 per share and moved 6.58% higher.

We own two units of FCX shares at an average of $10.56. The stock was trading at $10.13 on October 23, $0.63 higher since the previous report. I will maintain a small long position in FCX shares and would add if the price drops below $8 per share.

A return of optimism surrounding global economic growth should be bullish for the prices of base metals and industrial commodities. The trade war between the US and China continue to be the most significant factor facing this sector of the commodities market. Nothing has changed in the industrial commodities sector over the past week.

 

Animal Proteins

Meat prices were mixed since last week. Meats have been uncharacteristically strong during the offseason over the past weeks. The supply problems in the pork market in China because of African swine fever had provided support for the lean hog futures market. We are now in the heart of the offseason for cattle and hog futures markets. Live cattle posted a gain, while feeder cattle and lean hog futures fell since the previous report.

 

December live cattle futures were at $1.15250 per pound level up 1.21% from last week. Technical resistance is at $1.2000.  Technical support stands at $1.1000 per pound level, as the market is recovering over the past week. Price momentum and relative strength indicators are in overbought territory but have begun to move sideways. Open interest in the live cattle futures market moved 2.31% higher since the last report.

November feeder cattle futures underperformed live cattle as they fell by 0.81% since last week. November feeder cattle futures were trading at the $1.44750 per pound level with support at $1.39575 and resistance at $1.46825 per pound. Open interest in feeder cattle futures fell by 4.87% 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 moved lower over the past week as the price ran into selling at over the 70 cents per pound level. The active month December lean hogs were at 65.825 cents on October 23, which was 6.80% lower on the week. Hog futures were trading below the middle of the recent trading range on Wednesday. The open interest metric rose by 3.25% from last week’s level. Price momentum and the relative strength index were falling from neutral territory. Support is at 63.075 cents with technical resistance on the October futures contract at 72.725 cents per pound level.

The forward curve in live cattle is in contango from October 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 February 2021. The Feeder cattle forward curve is in backwardation from November 2019 through March 2020, and contango from March 2020 through August 2020 when a slight backwardation returns until September 2020.

In the lean hog futures arena, there is contango from December 2019 until July 2020.  From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through April 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. China needs US pork exports given the current situation, and we could see purchases as a result of “phase one” of a trade agreement if both sides sign a deal.

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 December futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.75090:1 compared to 1.61240:1 in the previous report. The spread increased by 13.85 cents as live cattle became more expensive compared to lean hogs on a historical basis. The spread moved away from the historical norm.

Trade is the most significant factor facing the animal protein sector over the coming weeks. However, production in Argentina and Brazil and any moves in the currency markets could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices. In the heart of the offseason for animal protein demand, the price action over the past few weeks have been moving back and forth. Live cattle remain near the top end of its trading range. Feeder cattle and lean hog futures were at or below the middle of their trading bands as of October 23.

 

Soft Commodities

The prices of three of the five soft commodities posted losses over the past week. Coffee was the best performing member of the sector. Cotton futures moved higher as of the close of business on October 23 compared to their prices on October 16. The prices of cocoa, FCOJ, and sugar moved to the downside since last week.

March sugar futures fell 1.62% lower since October 16, as the price of the sweet commodity was around the 12.15 cents per pound level. Technical resistance is at the October 2 peak at 12.93 cents with support at 11.92 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is the level of short-term support. The value of the December Brazilian real against the US dollar moved higher the last week and was at the $0.24730 level against the US dollar, which was $0.00770 or 3.21% higher. The Brazilian currency remains near its multiyear lows, which is likely contributing to the overall weakness in the price of sugar and other commodities where Brazil is a leading producer and exporter.

Price momentum and relative strength on the daily sugar chart are falling towards oversold territory. The metrics on the weekly and monthly charts reflect neutral conditions. If sugar suffers a substantial decline, I will look to add to long positions, but that does not seem likely. Sugar open interest rose by 3.21% over the past week. I will be looking to add to the long position in CANE at lower levels. I expect the price of sugar to move higher over the coming weeks and months.

December coffee futures rose by 4.49% since last week’s report and were trading at the 97.75 cents per pound level. Short-term support is at the August 20 low at 92.20 cents on the December futures contract. Resistance is at $1.0290. I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. 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 $32.49 on Wednesday. Open interest in the coffee futures market rose by 1.61% since last week. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle. I have been a scale-down buyer leaving room to add on further weakness over the coming days and weeks. Coffee continues to be a frustrating trade on the long side.

Cocoa futures were lower since last week. On Wednesday, December cocoa futures were at the $2457 per ton level, 2.31% lower than last week. Open interest fell by 0.24%. Relative strength and price momentum are falling from neutral territory on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures on the weekly chart. We are long the NIB ETN product at $25.76. NIB closed at $28.24 on Wednesday, October 23.

December cotton futures moved 0.64% higher over the past week. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. December cotton was trading at 64.95 cents on October 23 after rising to a high at 65.85 on October 14. The next level on the upside above the recent high is at the 68.35 cents per pound level on the December contract, the July 1 peak. On the downside, support is at 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 0.22% since October 16.

Price momentum and relative strength metrics were rising towards overbought conditions on Wednesday. The metric remains in an oversold condition on the monthly chart but is attempting to cross higher. I continue to believe that the price level limits the downside prospects for the cotton futures market, and positive news on the trade front could ignite rallies as we witnessed recently.

November FCOJ fell over the past week. On Wednesday, the price of November futures was trading around 98.20 cents per pound. FCOJ nearby futures moved 2.24% lower over the past week. Support is at the 94.65 cents level. Technical resistance is at around $1.0450 per pound. Open interest fell by 5.69% since October 16. OJ tends to rally as the winter season approaches each year. In November 2016, FCOJ hit its all-time peak at $2.35 per pound.

While there have been no dramatic moves in the soft commodities sector over the past weeks and months, it can be one of the most volatile areas of the asset class. Prices can double, triple, or halve in value over short periods. Coffee, sugar, cotton, and FCOJ are at levels that are closer to the bottoms than the tops of pricing cycles. Cocoa prices are likely to find support from minimum price initiatives from West African producers. I am bullish on the soft commodities sector and believe buying on price weakness is the optimal approach to all of the members of the luxury commodities sector.

 

A final note

Next week, I will be traveling on business. Therefore, I will post the weekly commodities report on Tuesday, October 29, instead of Wednesday, October 30. The following week, the report will come out on Wednesday, November 6.

The many issues facing markets will continue to determine the path of least resistance of many of the members of the commodities asset class. Trade, Brexit, Iran, and the geopolitical state of the world will continue to be the primary drivers of prices. However, the uncertainty surrounding the Fed meeting on October 30 will be the next significant factor when it comes to the path of the dollar, the US stock and bond markets, and could cause volatility in the commodities markets.

Keep stops tight and take profits when they are on the table. Trading rather than investing has been the optimal approach to all markets, and that is likely to continue over the coming weeks and months.

 

 

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.