- Markets wait for Wednesday’s decision from the US Fed and expect a decline of 25 basis points in the Fed Funds rate
- Stocks move to record highs
- Stable precious metals- Palladium makes another new high
- Oil is quiet- Natural gas moves higher
- Trade continues to be the significant issues for commodity
The summary of trade recommendations for the coming week are as follows:
Summary and highlights:
On Thursday, October 24, the DJIA edged lower, the S&P 500 posted a marginal gain, but the tech-heavy NASDAQ was 0.81% higher. The long bond futures were steady and traded on either side of the 160 level on the December futures contract. The dollar index moved 0.169 higher to the 97.405 level. Grain prices edged lower but continue to hold most of their recent gains. Crude oil and oil products edged higher on the session. The EIA reported a slightly lower than expected injection into storage for the week ending on October 18, which pushed the price of November natural gas futures over the $2.30 per MMBtu level. Copper edged slightly lower, but gold and silver posted gains. Gold was back over the $1500 per ounce level on the December futures contract, and silver gained over 20 cents per ounce. Platinum moved a tough higher, while palladium took off on the upside to a new high at $1757.90. Palladium was over $30 per ounce higher on the session. The meats posted losses across the board with lean hog futures leading the way on the downside. Sugar, cocoa, and lumber moved a bit higher, but cotton, FCOJ, and coffee prices declined. Bitcoin continued to experience pressure as the price closed on Thursday at $7,500 per token on the CME futures contract. In the latest news on the Brexit saga, Prime Minister Boris Johnson called for a December 12 election.
On Friday, stocks moved higher as they approached new all-time highs. With the market convinced that the Fed will cut the short-term interest rate by 25 basis points on October 30 and earning supporting higher prices, money flowed into the stock market and sent prices higher. 30-Year bonds fell below the 160 level and were trading at 159-16 at the end of the week. The dollar index rallied by 0.194 points on the session. Soybeans fell by 13 cents, but corn was unchanged, and wheat moved marginally higher. Crude oil and oil products posted gains while natural gas was little changed on Friday. Gold and silver moved higher, but they gave up gains at the end of the session. Platinum moved higher while palladium edged lower. Copper was marginally higher and closed the week knocking on the door of the high end of its trading range at just above $2.70 per pound. Meat prices were higher across the board with cattle leading the way on the upside. Cocoa fell, but all of the other soft commodities posted gains led by coffee, which was three cents higher. Bitcoin exploded higher as it gained $1215 on Friday and settled at $8715 on the nearby CME futures contract.
On Monday, stocks moved higher into record territory as the markets expect the Fed to cut the Fed Funds rate by 25 basis points on October 30. Earnings from Q3 continue to provide some support for stocks. In Europe, Mario Draghi handed leadership of the ECB over to the former managing director of the IMF, Christine Lagarde. The EU approved an extension for Brexit until January 31, 2020. Prime Minister Boris Johnson requested a snap general election on December 12, but he needed a two-thirds majority and failed. Political paralysis in the UK over Brexit continued on Monday, and it will be back to the drawing board for the Prime Minister on Tuesday. All of the leading stock indices in the US posted gains on Monday.
The long bond continued to decline going into the Fed meeting with the December contract at the 158-16 level. The dollar index did not move much and was around the 97.50 level at the close of business on the first day of the week. Soybean futures posted a marginal gain, while corn and wheat prices went the other wat. Crude oil was lower with products, but gasoline outperformed the price of petroleum. Chinese economic data weighed on the price of the energy commodity. Brent fell less than WTI on the session. Natural gas was around 10 cents per MMBtu higher as the withdrawal season will start in mid-November. Gold and silver prices moved lower after early rallies ran into selling. Platinum was lower, but palladium moved to a new record high at $1784.90 per ounce and gained around $35 on Monday. Copper moved a bit higher than Friday’s closing level. Meats edged higher across the board. Orange juice, cotton, and lumber prices fell. Sugar, coffee, and cocoa prices moved to the upside with coffee climbing above the $1 per pound level, which is a pivot point for the soft commodity. Bitcoin continued to move to the upside with the price above the $9500 level at the end of the day. Bitcoin settled at $9,530 on the CME futures contract with a gain of $815 per token on Monday.
On Tuesday, the FOMC meeting got underway, and the markets were waiting for the decision on rates that will come tomorrow on October 30. President Trump sent what has become his usual message to the central bank:
Markets continued to believe that the Fed will cut the Fed Funds rate by 25 basis points on Wednesday. Stocks edged lower as the market’s focus turned to the Fed meeting. Grains were mixed with a gain in corn and marginal losses in wheat and beans. Crude oil moved a bit lower with heating oil futures. Gasoline posted a small gain, and natural gas continued to move to the upside. Gold, silver, and palladium prices were lower, while platinum and copper edged higher. Live cattle were up a bit, but feeder cattle and hog prices slipped. FCOJ, cocoa, and lumber were higher. Cotton, coffee, and sugar moved lower on the session. The dollar index did not move much, and the long bond edged a touch higher. Bitcoin was at around the $9400 per token level. Wednesday is likely to be a busy day in markets after the Fed renders its decision on short-term rates and guides for the rest of this year.
Stocks and Bonds
Stocks are anticipating a 25-basis point interest rate cut from the FOMC on October 30. As of the close of business on October 29, stocks moved higher since the levels on October 23. Earnings have also supported stock prices somewhat, but the test for the stock market will come on Wednesday when we hear from the central bank. Stocks are once again near the highs. Each time stocks have hit highs over the past year; a correction has spoiled the bullish party. The next candidate that could create a repeat performance could be the Fed if they decide to pause rather than cut the Fed Funds rate. At the same time, a rate cut and more hawkish statement that the Fed has completed rate reductions for 2019 could lead to disappointment and selling. We will find out on Wednesday if the central bank is a spoiler for the stock market bulls.
The S&P 500 rose by 1.08% since the previous report, while the NASDAQ moved 1.93% higher. The DJIA posted a 0.89% gain since the last report. Trade, Brexit, impeachment will all contribute to the path of least resistance of the stock market over the coming weeks and months. However, the next test comes on Wednesday, when the Fed tells markets if they doves or hawks when it comes to monetary policy. The recent buying in the stock market could set it up for disappointment if the Fed does not continue to loosen credit to stimulate the US economy.
Chinese large-cap stocks underperformed US stocks over the past week as optimism over progress to overcome the trade war declined a bit.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.46 level on Tuesday, which was 0.48% higher than the closing level on October 23. 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 edged lower since the last report, which is a sign of caution for tomorrow’s Fed meeting. While the stock market seems convinced the central bank will continue to ease credit, the bond market is not so sure. Volatility has been the hallmark of the bond market over recent months. 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 158-20 level as it moved 0.90% lower since the previous report. The long bond could be sending a warning that a surprise is coming from the FOMC. If the Fed decides to pause and not lower the Fed Funds rate, we could see disappointment in the stock market and a correction. Lower stock prices would likely lead to a recovery in the bond market.
Open interest in the E-Mini S&P 500 futures contracts rose by 2.68% since October 22. Open interest in the long bond increased by 0.98% over the past week. The VIX moved lower as volatility in the stock market fell over the past week. The volatility index was at the 13.20 level on October 29, 5.78% lower over the period.
As I have been writing, “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.” I will go into the Fed meeting with a long position in the VIX and VIXY as I view that the downside potential is minimal, given the current price level. A surprise could launch these products if the stock market turns lower in the wake of the Fed meeting, statement, and Chairman Powell’s press conference. I do not see much risk in a long volatility position at the current level but would cut it quickly if the Fed is surprising dovish on Wednesday.
The potential for two-way price variance in the stock market remains high for the coming weeks and months. Once the Fed meeting is out of the way, the market’s focus will return to trade, Brexit, impeachment, Iran, and the many issues facing markets.
The dollar and digital currencies
The dollar index bounced over the past week as it stemmed the losses over recent weeks. The December dollar index futures contract posted a 0.24% gain over the period. The index fell to a low at 96.885 on October 21, when it turned higher. The dollar was falling over optimism on trade and the prospects for a Brexit deal before the October 31 deadline. However, now that the UK will face a general election before Brexit, the pound and euro currencies fell, providing support for the dollar index. Below the recent low, 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. Resistance is at 99.305 and 99.33 in the upside.
The euro currency was 0.21% lower 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 exploded higher at the end of last week and was trading at the $9,386.57 level as of October 29. Bitcoin rose by 24.38% since last week, while Ethereum posted a 15.72% gain as it was at around $187.38 per token. Bitcoin traded to a low below $7,300 before turning higher. The market cap of the entire asset class moved 21.88% higher as it underperformed Bitcoin and outperformed Ethereum. The number of tokens rose by 22 since October 23 to 3047 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 $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures fell by 1.94% since last week, which could be a sign of profit taking. The metric had declined over recent weeks with the price of Bitcoin. Bitcoin and digital currencies were overdue for a recovery rally after the recent price pressure.
The Canadian dollar moved 0.11% lower since last week. Open interest in C$ futures rose by 11.51% 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 has appreciated in the aftermath of the re-election of the Prime Minister on October 21. The C$ put in a bearish reversal on the daily chart on October 29, which could be a sign of a correction after the recent gains.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 0.15% since last week’s report.
The British pound posted a 0.39% loss since the previous report. Prime Minister Boris Johnson had a deal in hand with the EU, but his Parliament refused to approve the agreement saying they need more time. The UK has requested the EU to grant an extension until the end of January 2020 for Brexit. The Prime Minister has asked the Parliament for a snap election on December 12, which will serve as a second Brexit referendum. Boris Johnson currently enjoys a 15% lead in the polls, but elections can be tricky. The UK and the US have become accustomed to election surprises since 2016. As of the close of business on Tuesday, the Parliament had not approved the mid-December election.
The Brazilian real moved higher since October 23 as it rose by 0.87% after an over 3% rise last week. Even though the real has been moving higher against the dollar, it 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 edged lower over the past week and was below the $1500 per ounce level on October 29. Silver was just below $17.85 per ounce level, while platinum moved higher, and palladium made another new high. Precious metals continue to tell us that the value of fiat currencies is moving lower across the board as they held the gains over the past months.
Gold edged lower and silver prices moved to the upside over the past week. The two precious metals continued to consolidate below their respective early September highs. Platinum and palladium prices moved to the upside. Rhodium edged lower but remained over the $5000 per ounce level.
Gold was 0.33% lower since last week, and silver rose 1.43%. The price of December gold was just above the $1490 per ounce level on Tuesday, while silver was flirting with the $18 level during the week. 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 digesting the gains over the past months. While gold broke out to the upside above the 2016 high, silver has yet to accomplish that feat.
The price of platinum rose by 0.29% since last week. The level of technical resistance is at the September 5 high at $1000.80 on September 5. January platinum futures were around the $925.10 level on Tuesday. 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 0.96% since the previous report. The midpoint price of the metal was at $5140 per ounce on October 29. Palladium was 2.36% higher on the week as the price traded to a new peak at $1784.90 on October 28 and closed at the $1755.10 per ounce level on Tuesday. Platinum continues to march higher and achieve new record peaks.
Open interest in the gold futures market moved 3.97% higher over the past week and was at close to record-high territory. The metric moved 2.01% higher in platinum while it was 3.56% higher in the palladium futures market. Silver open interest increased by 3.55% over the period. Investors and market participants continue to purchase precious metals.
All of the precious metals that trade on the COMEX and NYMEX futures markets except gold posted gains despite a recovery in the dollar index over the past week. The stronger dollar was likely the result of the uncertainty surrounding Brexit in Europe. The euro and the pound account for the lion’s share of exposure in the dollar index. The stronger dollar did not encourage selling in gold, silver, platinum, or palladium futures.
The silver-gold ratio moved lower since the last report as silver outperformed gold.
The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 83.67 on Tuesday, 1.50 lower than the level on October 23. 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 outperformed the price of gold since the last report. While gold moved 0.33% lower, the GDX was 1.42% higher since October 23, and GDXJ appreciated by 2.64% 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 was supportive of the gold market. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 1.59% gain since October 23, outperforming 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 and palladium posted gains since October 23. December Palladium was trading at a premium over January platinum with the differential at the $830.00 per ounce level on Wednesday, which widened from the previous week and was around a new record level. January platinum was trading at a $565.60 discount to December gold at the settlement prices on October 29, which narrowed since the previous report. The price of rhodium, which does not trade on the futures market, moved $50 lower over the past week and was at $5,140 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. The price has moved higher from a low at $575 per ounce.
We are long the PPLT platinum ETF product, which moved 0.45% 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 is in a holding pattern with a midpoint at the $900 per ounce level.
I continue to favor the precious metals as I view the break to the upside in the gold market in June as a significant event. The higher price of gold reflects the decline in the value of all fiat currencies. It may be just a matter of time before silver catches up with the yellow metal. Meanwhile, palladium and rhodium have been bullish beasts. While platinum has been the dog of the platinum group metals, the old saying that every dog has its day could turn out to have explosive results for platinum, which is the rarest of the precious metals with a myriad of industrial applications.
Energy commodities prices moved mostly higher over the past week. Crude oil and oil products were on either side of unchanged. Oil processing spreads were higher since October 23. Natural gas was higher, while ethanol posted a small loss. The price of coal in Rotterdam moved to the downside since the previous report.
December NYMEX crude oil futures fell by 0.77% over the past week. December Brent futures moved 0.65% higher since October 23. December gasoline was 1.75% higher, and the processing spread in December posted a 13.62% gain since last week as gasoline outperformed the price of crude oil over the period. Since early September, 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 0.32% lower since the previous report, but the heating oil crack spread edged 0.27% higher 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 1.51% over the period in a sign that market participants holding short positions exited risk position as the market once again held the $50 per barrel level. 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 over the recent weeks is a supportive factor for the price of the energy commodity. Last week I pointed out that 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 moved higher to the $6.05 per barrel level for Brent, which was $0.83 above the October 23 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 18, the API reported an increase of 4.45 million barrels of crude oil stockpiles, while the EIA said they fell by 1.70 million barrels for the same week. The API reported a decline of 720,000 barrels of gasoline stocks and said distillate inventories fell by 3.491 million barrels as of October 18. The EIA reported a fall in gasoline stocks of 3.10 million barrels and a decrease in distillates of 2.70 million barrels. Rig counts, as reported by Baker Hughes, fell by 17 last week to 696 rigs in operations as of October 25, which is 179 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. The decline in the rig count is significant and could weigh on production and provide some degree of support for the price of oil. The next significant event for the crude oil market will be the meeting of OPEC oil ministers with the Russians in Vienna, Austria, at the beginning of December. The price of Brent crude oil is at the bottom of the cartel’s desired trading range between $60 and $70 per barrel, which could lead the ministers to increase production cuts to lift the price.
OIH and VLO shares moved in opposite directions since last week. OIH fell by 0.50%, while VLO moved 7.43% higher since October 23. The strength in VLO has been because of strong refining margins that go directly to the bottom line of processing companies. 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. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies. The most recent top holdings include:
Source: Yahoo Finance
Timing is the most significant factor when it comes to products like ERX.
Meanwhile, any sector rotation that causes a recovery in shares within the oil patch could have explosive results for the ERX product over the coming weeks. I would use a tight stop on a long position and re-enter if the market triggers stops. I would expect to take small losses in the quest for a significant profit as I would ride a bullish wave with trailing stops in ERX.
November natural gas futures rolled to December and were at $2.639 on October 29, which was 8.74% higher than on October 23. Last week, the EIA reported an injection of 87 bcf into storage, bringing the total amount of gas in storage to 3.606 tcf as of October 18. 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. The recent price pressure was likely because of the level of stockpiles going into the winter season.
As the chart shows, stockpiles of natural gas are 16.8% above last year’s level and 0.80% above the five-year average as of October 18. This week, I expect the EIA to report an injection of around 86 bcf as the injection season begins to wind down. Open interest fell by 3.37% over the past week as the market appeared to run out of selling on the downside. Technical resistance is now at $2.704 per MMBtu level on the December futures contract with support at $2.388. The $2.187 and $2.135 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $2.71 per MMBtu. I continue to favor buying on price weakness but expect a significant recovery sooner rather than later in the natural gas futures market as November arrives this week.
With approximately three weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 131.4 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 3.85 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 have favored 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 22.4 cents was 8.0 cents higher since last week. At the current level, I continue to believe the call options offer compelling value and a limited risk approach to the natural gas futures market. However, time is growing short, and I will be sticking with current positions and will refrain from adding aggressively if the price heads lower from the current level to protect capital.
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 $7.55 level on Wednesday, up $0.68 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. I have also taken profits on GASL on rallies, as we witnessed over the past week.
December ethanol prices moved 0.07% lower over the past week. Open interest in the thinly traded ethanol futures market rose by 19.71% over the past week. However, with only 577 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell by 0.71% compared to its price on October 23 as the price of January coal futures in Rotterdam dropped by 2.14% over the past week.
Since this week’s report comes a day early, the EIA inventories were not available. The EIA inventory report comes out on Wednesday morning. Late Tuesday, the API said that crude oil stocks rose by 592,000 barrels for the week ending on October 25. The market had expected a rise of 729,000 barrels. While the consensus estimate was for a 2.333-million-barrel decline in gasoline inventories, the API said they rose by 1.599 million. Distillate stocks increased by 1.998 million barrels for the week ending on October 25. The inventory data was bearish for the price of crude oil. The price of oil will likely be more sensitive to the EIA report on Wednesday, and the results of the FOMC meeting.
While Iran has been quiet over the recent weeks, the potential for incidents in the Middle East that impact oil production, refining, or logistical routes remains high. Any surprises from the region could cause short-term price volatility to the upside in the oil future markets. Brent crude oil is likely to be impacted the most as it is the benchmark for the energy commodity from the area of the world that is home to over 50% of the world’s petroleum reserves.
In natural gas, the price recovered from the recent higher low, as we had expected. Support for the December futures contract is now at the $2.388 level on a short-term basis.
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.724 in January, which was 19.2 cents per MMBtu higher 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. My stops and profit levels 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.
I have been tracking the price action in BG shares. Since October 9, the price of BG shares moved 1.34% higher to $56.19 per share on October 29. 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. Nothing has changed when it comes to my opinion of the crude oil market over the past week. Meanwhile, we could see price volatility increase going into the early December OPEC meeting, which is only one month away.
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 2.95% higher over the past week at $16.04 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.
Crude oil has repeatedly bounced off the $50 per barrel level and could head for 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 on the immediate horizon. Just as I wrote last week, I remain friendly towards the energy commodities and expect to see higher prices over the coming week. I will continue to 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. The unexpected in oil could come on the upside, considering the tension in the Middle East with Iran.
Grain prices edged lower over the past week as the 2019 harvest season is coming to an end. The market will shift its attention to the weather in the southern hemisphere. However, trade between the US and China remains the most significant factor for the agricultural products that feed the world. With 1.4 billion people, the Chinese have over 18% of the world’s population and is the most substantial addressable market for food products on the earth. A trade deal between the US and Chinese would be bullish for the prices of agricultural commodities that come from the United States.
November soybean futures moved 1.66% lower over the past week and was at $9.1825 per bushel on Wednesday. Open interest in the soybean futures market fell by 7.50% since last week. Price momentum and relative strength indicators on the daily chart were falling below neutral territory on October 29.
The December synthetic soybean crush spread moved a touch higher and was at the $0.8925 per bushel level on October 29, up 7.75 since October 23. 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 supportive of the price of the oilseed futures. The crush spread has been rolling to the March futures.
December corn was trading at $3.8625 per bushel on October 29, which was 0.39% lower on the week.
Open interest in the corn futures market fell by 0.62% since October 23. The price of ethanol fell by 0.07% since the previous report. December ethanol futures were at $1.4190 per gallon on Tuesday. The spread between December gasoline and ethanol futures widened to 22.26 cents per gallon on October 29, up 2.93 cents since last week.
December CBOT wheat futures fell 1.78% since last week. The December futures were trading $5.1150 level on October 29. Open interest fell by 1.81% over the past week in CBOT wheat futures.
As of Wednesday, the KCBT-CBOT spread in December was trading at a 92.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread narrowed by just 5.00 cents since October 23. 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 the 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 provide some support for prices. We could see some adjustments in the grain markets if the dollar index experiences volatility in the aftermath of the FOMC meeting on October 30.
Copper, Metals, and Minerals
Base metals and industrial commodities prices moved mostly to the upside since October 23. Trade between the US and China continues to be the most significant issue facing the base metals and other industrial commodities. Copper is the leader of the base metals. However, nickel has been the best-performing nonferrous metal over the past months because of the mineral export ban in Indonesia that will take effect on January 1, 2020. Last week, only lead posted a loss as the other LME base metals experienced price gains. This week, the LME is holding the annual conference in London. LME week attracts consumers, producers, and traders from around the world.
Lumber moved back above the $400 per 1,000 board feet level over the recent sessions in a sign of strength for wood demand. Iron ore moved lower, while the Baltic Dry Index edged to the downside as the winter months in the northern hemisphere approach. The price of uranium also moved lower since the last report.
Copper moved 0.75% higher on COMEX, while the red metal posted a 1.43% gain on the LME since the last report. Open interest in the COMEX futures market moved 1.55% lower over the past week. Copper was trading at $2.6915 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 declined on the LME and marginally increased on the COMEX. The worst civil unrest in three decades in Chile, the world’s leading copper-producing nation, has provided support for the price of the red metal. Anti-government protests that include the powerful mining unions could lead to production disruptions and logistical problems over the coming weeks and months.
The LME lead price moved lower by only 0.43% since October 23. Lead continues to attract buying as many analysts are forecasting a physical downstream deficit because of increased demand from electric automobiles. The price of nickel climbed by 4.02% over the past week as China boosted imports of ore ahead of the export ban in Indonesia that will start on the first day of 2020. Tin rose by 0.45% since the previous report. The $16,600 per ton support level held over recent sessions. Aluminum was 0.87% higher on the week. The trading range in the aluminum market on the LME has been narrowing with support and resistance at the $1715 and $1745 per ton levels. The price of zinc rose by 2.47% since October 23, as inventories continued to decline. Critical support is around $2355, with resistance at $2550 in the zinc market. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.
November lumber futures rolled to January and were at the $410.00 level, 1.91% higher since the previous report. The price of uranium for December was 2.42% lower at $24.30 per pound. The Baltic Dry Index was 0.17% lower since last week as the shipping rate moved lower as the winter months approach. December iron ore futures posted a 0.73% loss compared to the price on October 23. Open interest in the thinly traded lumber futures market rose by 15.17% over the past week, which continues to be a bullish sign for the price of wood.
LME copper inventories dropped by 5.44% to 255,650 metric tons since last week. COMEX copper stocks increased by 0.38% from last week to 34,983 tons. Lead stockpiles on the LME rose by 0.76%, while aluminum stocks declined by 0.89%. Aluminum stocks fell to the 963,825-ton level. Zinc stocks moved 3.63% lower since the previous report. Tin inventories moved 1.42% lower since last week to 6,590 tons. Nickel inventories were 18.92% lower compared to the level on October 22, in a continuation of the trend of falling stockpiles as the Indonesian export ban is set to take effect on January 1. The decline in nickel inventories could turn out to be highly supportive of gains in the nickel market on the LME. 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. In Chile, an increase in civil unrest that includes unions could reduce copper supplies and cause the price to rally above the resistance level at just over $2.70 per pound on the December futures contract on COMEX.
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 $1.98 per share on Wednesday, up one cent over the past week.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.90 on October 23, up 37 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:
US Steel shares were at $12.22 per share and moved 9.4% higher.
We own two units of FCX shares at an average of $10.56. The stock was trading at $10.23 on October 29, $0.10 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. Each of the members of the industrial commodities sector has individual supply and demand characteristics. However, the macro-economic landscape tends to move the prices of the commodities higher or lower, and these trades the Chinese economy and trade war are the primary drivers of the sector.
Cattle edged higher while lean hog futures moved to the downside since October 23. During the offseason for animal protein demand, the prices have stable to higher. The supply problems in the pork market in China continue to be an underlying support factor for hog futures that is likely to push prices higher at times. Aside from Chinese demand for meats, currency values in Argentina and Brazil could impact prices. The low level of the Argentine peso and Brazilian real make meat exports more competitive in global markets and weigh on prices.
December live cattle futures were at $1.168250 per pound level up 1.37% from last week. Technical resistance is at $1.2000. Technical support stands at $1.1000 per pound level, as the market continued to recover over the past week. Price momentum and relative strength indicators are in overbought territory and are moving sideways. Open interest in the live cattle futures market moved 2.73% higher since the last report.
November feeder cattle futures underperformed live cattle as they rose by only 0.50% since last week. November feeder cattle futures were trading at the $1.454750 per pound level with support at $1.39575 and resistance at $1.46825 per pound. Open interest in feeder cattle futures fell by 0.16% 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 after the price ran into selling at over the 70 cents per pound level in mid-October. The active month December lean hogs were at 64.325 cents on October 29, which was 2.28% lower on the week. Hog futures were trading below the middle of the recent trading range on Tuesday. The open interest metric rose by 1.13% from last week’s level. Price momentum and the relative strength index were falling towards oversold territory. Support is at 63.075 cents with technical resistance on the December 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. Optimism over trade has not translated into sustained buying in the lean hog futures market, but prices for June and July were at just over 90 cents per pound.
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.
Based on settlement prices, the spread was at 1.81620:1 compared to 1.75090:1 in the previous report. The spread increased by 6.53 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 has been stable. 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 29. While seasonality favors a quiet market throughout the rest of 2019, we could see price volatility on the back of developments in the trade war between the US and Chinese.
The prices of three of the five soft commodities moved higher over the past week. Sugar was the best performing member of the sector. Coffee and cocoa futures moved higher as of the close of business on October 29 compared to their prices on October 23. The prices of cotton and FCOJ moved lower since last week.
March sugar futures rose 1.56% lower since October 23, as the price of the sweet commodity was around the 12.34 cents per pound level. Technical resistance is at the October 15 peak at 12.62 cents with support at 12.05 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is another level of support. The value of the December Brazilian real against the US dollar moved higher the last week and was at the $0.249450 level against the US dollar, which was $0.00215 or 0.87% 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 turned higher in oversold territory. The metrics on the monthly chart reflects a neutral condition. 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 3.40% 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 1.23% since last week’s report and were trading at the 98.95 cents per pound level after probing above $1 per pound. Short-term support is at the August 20 low at 92.20 cents on the December futures contract. Resistance is at $1.0180. 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 $32.83 on Tuesday. Open interest in the coffee futures market rose by 0.12% 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 rose last week. On Wednesday, December cocoa futures were at the $2485 per ton level, 1.14% higher than last week. Open interest increased by 0.97%. Relative strength and price momentum in 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 $28.53 on Tuesday, October 29. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide some degree of support to the cocoa market on price dips.
December cotton futures edged just 0.35% lower 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 64.72 cents on October 29 after rising to a high of 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 0.83% since October 23.
Price momentum and relative strength metrics were rising towards overbought conditions on Tuesday. 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.
January FCOJ fell over the past week. On Wednesday, the price of January futures was trading around 97.85 cents per pound. FCOJ nearby futures moved 3.17% lower over the past week. Support is at the 96.90 cents level. Technical resistance is at around $1.0705per pound. Open interest rose by 4.96% since October 23 as November futures rolled to January. 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.
There were no significant price moves in the soft commodities sector over the past week. The prices of coffee, cotton, FCO, and sugar remain closer to the bottom end of their respective pricing cycles than the top. When it comes to cocoa, the attempt to install a minimum premium for West African beans could provide support to the price. At the same time, the growing demand for chocolate confectionery products around the world is likely to continue to be a bullish factor. The soft commodities sector can be highly volatile at times, but the price action has been tame over the past weeks.
A final note
I am traveling on business over the coming days, which is why I am posting this week’s report one day early. I will post the weekly summary on Friday or over the weekend, depending on when I return. The next weekly report will come out on Wednesday, November 6.
Tomorrow’s Fed meeting will guide prices in markets across all asset classes. While the market expects a 25-basis point reduction in the Fed Funds rate, and the central bank will likely deliver, a surprise pause is not out of the question. We could see lots of volatility, including selling in stocks and some commodities, if the Fed does not act to cut rates for the third time since July 31 on Wednesday. Even if the Fed lowers the short-term rate, the devil will be in the details when it comes to the statement and press conference that follows the FOMC meeting. A hawkish pivot by the central bank could also cause price volatility to increase in markets.
Keep those stops tight and take profits when they are on the table. Given the low level of volatility in the stock market, I favor going into the Fed meeting long the VIX or VIX-related products as the current level is likely to limit the downside potential. On the other hand, a surprise from the Fed could cause a sudden increase in volatility, making risk-reward favor the upside.
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.