• President Trump says a trade deal with China could be on the horizon
  • The US Congress takes a step towards impeachment of the President
  • Oil and energy commodities decline over the past week
  • A volatile week in precious metals but prices do not change dramatically from last week
  • Many issues face markets as we head towards the final quarter of the year beginning next week

Starting next Monday, I will start posting my third-quarter reports. There will be no weekly report on Wednesday, October 2. The October 9 report will cover the price action over the previous two weeks.

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

Summary and highlights:

 

On Thursday, September 19, stocks did not move much as the market continued to digest the 25-basis point rate cut by the Federal Reserve on Wednesday. The DJIA fell by just over 52 points, while the S&P 500 and NASDAQ moved marginally higher. Grain markets were quiet as US and Chinese negotiators sat down to discuss the trade war and work toward mending fences and find areas of cooperation. Wheat was slightly lower while corn and beans posted margin gains. Crude oil and oil products edged higher. The products outperformed the raw energy commodity, which lifted the value of crack spreads. The Brent-WTI rose above the $6 per barrel level, which reflects the risk in the Middle East. Natural gas futures fell after the EIA reported an injection of 84 bcf into storage. The price moved to a low at $2.53 per MMBtu, which is a pivot point for the natural gas futures market. Gold and silver prices dropped, but the yellow metal remained above the $1500 level on the December futures contract while silver was below $18 per ounce. Platinum was a touch higher, and palladium rose to another record high at $1617.30 per ounce on the December contract. Live and feeder cattle futures were on either side of unchanged while lean hogs declined by just over one and one-half cents on the October contract. Cocoa moved higher to the $2468 per ton level. However, all of the other soft commodities moved to the downside on Thursday with coffee posting the most significant loss as it dropped two cents on the session. The dollar index fell by 0.287 points, and the long bond was just 2-32 higher at the 160-06 level. Bitcoin was at the $10,230 level as the price did not move much from the previous day.

On Friday, the market became concerned when Chinese negotiators left Washington and canceled a trip to Montana. Every little development on the trade front seems to ripple through the markets like a tsunami these days. Stocks moved lower on the final session of last week with the DJIA down around 160 points, the S&P 500 slipping by 0.49% and NASDAQ posting a 0.80% loss on the session. Grain prices moved lower on the back of concerns over trade. Crude oil and oil products edged lower but were a bit higher in the aftermarket over fears of the unknown over the weekend. Natural gas did not move much and closed at just over the $2.53 per MMBtu pivot point. Gold was higher while silver posted a marginal loss. Platinum did not change much, but palladium rose to a new record high at $1638 on the December futures contract and closed the week at $1625. Rhodium moved to a midpoint at $5200 per ounce, a new high. Copper closed on Friday at just over the $2.60 per pound level on December futures. Live cattle edged lower while feeder cattle in October posted a small gain. Lean hogs fell by just over one cent per pound. All often commodities posted marginal gains, and lumber was $5.50 per 1,000 board feet high at the $383.80 level. The dollar index was 0.289 higher, and the long bond rose by 0-12 points. Bitcoin futures were only $45 higher to close the week at $10,275 per token.

On Monday, stocks did not move much as the leading indices were on either side of unchanged. The dollar index edged only 0.085 points higher. Grain prices posted marginal gains led by soybeans. Crude oil, oil products, and ethanol moved to the upside while natural gas was little changed. Copper edged just under one cent higher, but the most substantial moves came in the precious metals sector. After consolidating near recent lows, gold, silver, and platinum prices took off on the upside. Gold settled $16.40 higher, and platinum moved $11.30 to the upside. Silver was the leader with an 86.2 cents gain in the session. Palladium posted a marginal gain, but the price rose to a new record level. Meat prices were up across the board with cattle leading on the upside. OJ and cocoa moved slightly lower, while sugar, coffee, cotton, and lumber posted marginal gains. Bitcoin slipped below the $10,000 level again to close at $9,915 on the CME futures.

On Tuesday, the news cycle dominated market action. During a speech before the United Nations, President Trump removed optimism over the prospects for a trade agreement with China as he criticized the Asian nation in front of other world leaders. Late in the day, the Speaker of the House of Representatives Nancy Pelosi announced that Congress would begin an official impeachment inquiry against the President. In the UK, the Supreme Court ruled against the Prime Minister when it comes to the five-week suspension of the Parliament, which will resume in session on Wednesday, September 25. Stocks moved lower based on the news, and bonds moved to the upside. The dollar index was lower as the December futures contract declined below the 98 level. The grain markets were quiet as all of the leading futures contracts were either side of unchanged. The news on trade weighed on the price of oil and oil products. Natural gas also fell, but ethanol was around unchanged. Gold was a bit higher, but silver posted a small loss. Platinum and palladium both moved to the upside with another new record high in the palladium futures market. Meat prices edged higher, as did coffee and sugar futures. Cotton, FCOJ, cocoa, and lumber prices declined on the session. Bitcoin fell substantially, losing almost $1500 on the day with the futures closing at $8430 per token.

On Wednesday, stocks rose on some positive comments on trade from President Trump despite the move towards impeachment.  The bond market moved 2-00 lower and the dollar index took off on the upside posting a 0.732 rise on the session. Grains edged lower on the session along with crude oil and oil products. Natural gas edged higher but remained around the $2.50 level after falling to a new low during the session. Precious metals all posted losses on Wednesday. Meats moved higher, as did coffee, sugar, cotton, and cocoa prices. FCOJ and lumber moved a bit lower. Bitcoin fell by $25 to $8405 after trading to a new low at $8260 on the session.

Stocks and Bonds

The stock market slipped lower over the past week. The leading equity indices are back near the highs, but each time they approached a peak or rose to a new marginal high since early 2018, they experienced a pullback. The area around the highs in all of the indices has developed into critical resistance levels in the stock market. An eventual agreement between the US and China could be necessary to push the stock market higher. We got some positive feedback on trade on Wednesday, which pushed them a bit higher, but they were still down since last week. The rising tensions in the Middle East are another factor that could cause risk-off periods in stocks and weigh on equity prices over the coming weeks and months.

Meanwhile, Brexit continues to stand as a challenge for Europe and another area that could cause risk-off selling before the end of 2019. On the other hand, if Boris Johnson can pull a rabbit out of his hat in the form of a deal for Brexit, it would remove the issue as a problem for Europe and provide support for equities markets. Last week, the US Fed cut its short-term rate by 25 basis points, the second move by the world’s leading central bank since July 31. The ECB cut its deposit rate by ten basis points and will restart QE in November at a rate of 20 billion euros per month. Falling rates around the world continue to provide support for stocks market, but also are a signal of fears over global recessionary pressures.

The S&P 500 fell by 0.73% over the past week, while the NASDAQ moved 1.22% lower. The DJIA posted a 0.65% loss since the previous report. Trade, Brexit, impeachment, and the Middle East will remain the issues at the forefront of the minds of traders and investors over the coming weeks. Meanwhile, the 2020 election in the US could begin to impact equity prices. In an interview on CNBC last week, investor Leon Cooperman told reporters that a victory by Elizabeth Warren or another candidate with her ideology could cause a bear market in stocks that would take the leading indices 20%-25% lower.

Chinese large-cap stocks underperformed US stocks over the past week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.18 level on Wednesday, which was 1.98% lower than the closing level on September 18. 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 be a function of the progress of trade negotiations between the US and China. So long as the standoff over trade continues, weak economic data out of China is likely to weigh on the FXI product.

US 30-Year bonds moved higher over the past week in the aftermath of the Fed meeting. Volatility has increased in the bond market. 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 161-04 level as it moved 0.78% higher since the previous report. The long bond fell by 2-00 on Wednesday on the December futures contract.

Open interest in the E-Mini S&P 500 futures contracts fell sharply by 16.49% since September 18. The decline came as the end of the third quarter approaches. Open interest in the long bond fell by 1.20% over the past week. The VIX moved higher as stocks fell over the past week. The increased tensions with Iran also propped up the VIX. The volatility index was at the 15.96 level on September 25, a rise of 14.41% since last week. The most recent high was at 24.81 on August 5. The VIX has been volatile but remained below the 20 level for most of September.

As I have been writing, “I have been buying the VIXY and other VIX related products and was stopping out for small losses until Wednesday. I will continue to look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market as we witnessed following the July Fed meeting.  The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.” Nothing has changed since the previous report when it comes to my strategy for buying volatility on dips and taking profits during corrective periods. I believe that the VIX, VIXY, and volatility-related products are in the buying zone once again at the current levels. I would be a buyer looking for at least a 2:1 payoff on long volatility positions over the coming week. With stocks near recent highs, the potential for sudden periods of volatility remains high as we move towards the end of the third quarter. However, window dressing at the end of this week and next Monday, the final day of Q3, could prop up stocks as dominant players with lots of capital mark their books at the end of the month. However, the prospects for a political battle over impeachment is supportive of a higher VIX.

 

The dollar and digital currencies

The dollar index moved higher over the past week. The move by the ECB was a sign that the US central bank remains behind the curve when it comes to cutting rates in the current environment, which boosts the value of the dollar against the euro and other world currencies. The December dollar index futures contract posted a 0.54% gain since September 18. The index made a new and higher high at 99.33 on September 4 on the continuous contract and corrected to the downside. The new peak was a continuation of the bullish trend in the dollar that started in February 2018 and now stands as the critical technical resistance level for the index. The rising dollar continues to be a contentious issue when it comes to the President’s criticism of the Federal Reserve. A stronger dollar means that US exports are less competitive in global markets. The President has argued that US growth would be higher along with the stock market if the Fed was more aggressive in cutting interest rates to keep up with the rest of the world. A weaker dollar would also assist US trade negotiators when it comes to China and other trading partners around the globe.

The euro currency was 0.87% lower against the dollar since last week’s report as falling interest rates, Brexit, and the sluggish pace of growth in Europe continues to weigh on the euro versus the US dollar foreign currency relationship.

 

The leader of the digital currency asset class moved sharply lower and was trading at the $8,377.55 level as of September 25. Bitcoin and other digital currencies had been trading in a range. Bitcoin remains broke below the bottom end of the $9000-$12,500 trading range over the past week.

Bitcoin moved 18.01% lower since last week while Ethereum posted a 20.83% loss as it was at around $167.92 per token. The market cap of the entire asset class moved 19.27% lower as it underperformed Bitcoin and Ethereum. The number of tokens rose by 24 since September 18 to 2895 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 rose by 0.10% since last week in the cash-settled futures product as the price dropped towards the $8000 level.

Bitcoin and the digital currency market had gone quiet over the past weeks. Most of the members of the asset class still have significant gains so far in 2019, but as the end of the third quarter approaches selling increased. The US government’s attitude towards Facebook’s Libra token likely weighed on many of the digital currencies. Meanwhile, the Chinese government could also be taking steps to prevent the flow of wealth out of its borders via the cryptocurrency market. Digital currencies take power away from governments when it comes to the money supply. Therefore, they continue to face challenges when it comes to the wide acceptance that would lead to higher prices.

The Canadian dollar moved 0.28% higher since last week. Open interest in C$ futures plunged by 52.66% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products. However, a scandal surrounding Prime Minister Justin Trudeau could derail his chances for reelection.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ declined by 1.02% since last week’s report.

The British pound posted a 0.93% loss since the previous report as it ran out of upside steam above the $1.26 level against the US dollar. We are likely to see a wide range in the pound over the coming weeks. The significant move higher came after the UK Parliament took a hard Brexit off the table before going on its hiatus. The British Supreme Court ruled that the Prime Minister’s suspension of the Parliament was illegal and it reconvened on Wednesday. A general election, which will be another referendum on the departure from the EU, will cause an increase in volatility. Since the June 2016 referendum, the price action in the pound has told us that a hard Brexit is bearish for the currency while a divorce with a deal or remaining within the EU is bullish for the British pound against both the US dollar and the euro currencies. Prime Minister Johnson continues to attempt to pull a rabbit out of his hat when it comes to a deal with the EU. The roadblock on a hard Brexit has put the Prime Minister in a position where he can only fulfill his promise to take the UK out of the EU by the end of October with a deal with the EU that passes the Parliament. Achieving that goal is a tall order for the leader of the UK but would be highly bullish for the pound and could lead to a victory in a general election.

The Brazilian real moved lower over the past week, falling 1.12% since September 18. 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. The real-dollar relationship continues to trade not far above its low.

 

Gold moved a bit lower over the past week in volatile trading as the yellow metal is consolidating on either side of the $1500 per ounce level. Since June gold has appreciated against all world currencies. While the dollar remains the king of the global foreign exchange market, gold is the established monarch of money. Another leg to the upside and a new high in the price of gold over the coming weeks and months would be another sign that all currency instruments are losing value. The trend of lower interest rates around the world is supportive of higher gold and lower fiat currency values.

 

Precious Metals

Gold and silver prices moved marginally in opposite directions over the past week and continue to consolidate after the recent corrections. The recent price action has been volatile in both gold and silver. Platinum posted a loss, but the other platinum group metals moved higher, led by rhodium on a percentage basis. Meanwhile, palladium rose to a new record higher since the previous report.

Gold was 0.23% lower since last week while silver rose 0.86%. The price of December gold was just above the $1512 per ounce level on Wednesday while silver was just over $18. December gold rose to a new high at $1566.20 on September 4, and December silver moved to the highest level since 2016 at $19.75 on the same day before both metals turned corrected to the downside. Fed had lit the initial bullish fuse under the gold and silver markets in June. On July 31, the first interest rate cut in years and the end to quantitative tightening kept the bullish price action going. However, it was the escalation of the trade dispute on August 1 that fueled the rally that took gold and silver to highs. After the September 18 Fed meeting and 25 basis point reduction in the Fed Funds rate, the prices of both metals have been stable. Some positive news on trade on Wednesday sent prices lower.

The price of platinum fell by 0.72% since last week after reaching a new short-term high at $1000.80 on September 5. October platinum futures were around the $928 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 rose by 7.37% since the previous report. The midpoint price of the metal rallied to $5100 per ounce. Palladium was 1.87% higher on the week as the price traded to a new peak at $1648.70 on the December futures contract and was over the $1610 per ounce level on Wednesday.

Open interest in the gold futures market moved 4.43% higher to a new record peak. The metric moved 6.58% lower in platinum while it was 8.31% higher in the palladium futures market. Silver open interest rose by 1.27% over the period.

Technical resistance on the December gold futures contract is at the recent high at $1566.20 and at just over the $1600 per ounce level. Gold now awaits fresh news on global economic data and the direction of interest rates as well as the trade war between the US and China.  Brexit is an issue that could stoke volatility in the gold market over the coming weeks as the saga between the Prime Minister, and the Parliament play out.

The silver-gold ratio moved marginally lower over the past week as silver outperformed gold.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 84.02 on Wednesday 0.18 lower than the level on September 18. 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 0.23% lower, the GDX was 3.16% higher since September 18 and GDXJ was 4.99% above last week’s level. 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 bullish for the gold market as it was a sign of money flowing into the sector. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted a 0.97% gain since September 18 outperformed the price action in the silver futures market. I 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 were volatile since September 18. October platinum futures fell by 0.72% to the $927.90 per ounce level. Palladium posted a 1.87% gain as of the close of business on September 18 and was at the $1611.80 per ounce level. Palladium was trading at a premium over platinum with the differential at the $683.90 per ounce level on Wednesday, which widened over the past week. October platinum was trading at a $584.40 discount to December gold at the settlement prices on September 4 which widened slightly since the previous report. The price of rhodium, which does not trade on the futures market moved $350 higher over the past week and was at $5,100 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 around double the current price. However, markets rarely move in a straight line.

We are long the PPLT platinum ETF product which moved 0.48% lower since September 18. 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.

I remain bullish on the precious metals sector and believe the recent price dip in gold and silver is a buying opportunity. 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 make new highs. The trend is your friend in these metals but buying dips rather than rallies has been the optimal strategy since 2016.

 

Energy Commodities

The oil market calmed after the initial reaction to the September 14 attacks on Saudi oilfields as the world continues to wait for a response from Saudi Arabia and the United States. Crude oil and oil product prices moved lower over the past week. Crack spreads were higher as gasoline and heating oil prices outperformed the raw crude oil. The price of natural gas fell to its support level at around $2.50 per MMBtu. Ethanol edged lower and coal moved to the downside.

While it seems like a period of calm has once again emerged in the Middle East, the area is not likely to remain that way for long. More provocative incidents from the Iranians could occur in the blink of an eye which could cause supply concerns and future price spikes to the upside in the oil market. However, the Iranian President said he is prepared to negotiate a deal if the US lifts sanctions this week. Time will tell if the Saudis will use restraint over the recent attack or the situation in the region intensifies.

October NYMEX crude oil futures rolled to November and fell by 2.67% since last week. November Brent futures moved 1.90% lower since September 18. November gasoline was 1.83% lower, and the processing spread in November posted a 4.0% gain since last week as gasoline outperformed the price of crude oil over the period. Over the recent weeks, the gasoline crack spread has been moving steadily higher even though it is now in a seasonally weak period of the year as the driving season ended. November heating oil futures moved 1.06% lower since the previous report, and the heating oil crack spread rose by 2.72% since last week.

Technical resistance in the November NYMEX crude oil futures contract is now at $63.89 per barrel level, the high from September 16, with support at the $54.00 level. Crude oil open interest fell by 1.20% since last week. Trade and Iran will be the drivers of the path of least resistance for crude oil prices over the coming days and weeks. I believe that price weakness will offer market participants buying opportunities in the oil patch.

The spread between Brent and WTI crude oil futures in November rose to the $5.88 per barrel level for Brent, which was $0.35 above the September 18 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 November contract reached a high at a lower level at $7.41 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.46 on August 20. The attack on Saudi Arabia is likely to keep a bid under the price of Brent crude oil and the spread between the two benchmarks. While oil fell this week, it seems like it should find support around the current level.

US daily production stood at 12.5 million barrels per day as of September 20 according to the Energy Information Administration, which was up 0.10 million from last week  and at a record peak for daily output. As of September 13, the API reported an increase of 592,000 barrels of crude oil stockpiles while the EIA said they rose by 1.1 million barrels for the same week. The API reported a rise of 1.599 million barrels of gasoline stocks and said distillate inventories rose by 1.998 million barrels as of September 13. The EIA reported a rise in gasoline stocks of 800,000 barrels and an increase in distillates of 400,000 barrels. Rig counts, as reported by Baker Hughes, fell by 14 last week to 719 rigs in operations as of September 20, which is 147 below the level operating last year at this time. The decrease in the number of rigs with daily output at 12.5 million barrel per day level is a sign of the efficiency of the oil business in the US. However, as the rig count continues to drop, it could weigh on production and provide some degree of support for the price of oil.  Record US production eased the blow when it comes to the loss of output from Saudi Arabia. President Trump said that he would release oil from the US strategic stockpiles to offset the impact of lost Saudi output. Meanwhile, 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 in opposite directions since last week. OIH fell by 6.06%, and VLO moved 0.07% higher since September 18 on the back of higher crack spreads. 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.

October natural gas futures hit a low so far in 2019 on August 5 at $2.045 per MMBtu while the continuous contract fell to $2.029. Over the past week, the price corrected lower after reaching its latest high at $2.71 per MMBtu on September 17. The October futures were at $2.502 on September 25, which was 5.12% lower than on September 18. The October futures are rolling to November and fell to a low at $2.455 on Wednesday. Last week, the EIA reported an injection of 84 bcf into storage, bringing the total amount of gas in storage to 3.103 tcf as of September 13. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November will be above last year’s level, but below a record level for stockpiles in the US.

Source: EIA

As the chart shows, stockpiles of natural gas are 14.50% above last year’s level but were still 2.4% under the five-year average as of September 13. This week, I expect the EIA to report an injection of around 87 bcf as the flow into storage increases over the coming weeks as cooler weather of all has arrived. Open interest fell by 6.23% over the past week. Technical resistance stood at $2.53 per MMBtu level on the continuous futures contract. $2.53 and $2.522 were the lows from 2018 and 2017 respectively. The price traded to a high at $2.710 per MMBtu on September 17. During the recent correction, the price dropped to a low at $2.455, where it could find support. The peak season for demand tends to begin in mid-November. The price action has been constructive, and I favor buying on price weakness during the current dip in prices.

With approximately eight weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 18 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 112.2 bcf per week is needed to push the supplies over the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.7-3.8 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.

As I reported over the past weeks, I began buying some call options with strike prices at the $2.80 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market over the recent weeks. The January $2.80 call at 26.9 cents was 8.1 cents lower over the past week; I began purchasing these calls at the 16 cents level. I had also been buying the leveraged GASL product at prices below $9 per share. In GASL, I will 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 $10.34 level on Wednesday, down $2.07 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 did some light call buying over the past week on the price dip and will continue to add to long positions if the natural gas market experiences further price weakness.

November ethanol prices moved 0.22% lower on the over the past week. Open interest in the thinly traded ethanol futures market rose by 12.96% over the past week. However, with only 549 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell by 5.66% compared to its price on September 18, and the price of November coal futures in Rotterdam decreased by 5.65% over the past week.

On Wednesday, the API reported that oil inventories rose by 1.38 million barrels for the week ending on September 20. The EIA said that stocks were 2.40 million barrels higher as of the end of last week. Analysts had expected a decline of 768,000 barrels for the API report. When it comes to products, the API reported an increase in gasoline inventories of 1.90 million barrels and a decrease in distillate stocks of 2.20 million barrels. The EIA said that gasoline stockpiles rose by 500,000 barrels and distillate inventories moved 3.0 million barrels lower for the week ending on September 20. The overall inventory data was bearish for the price of crude oil and products. 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.

In natural gas, the price corrected over the past week. Support is now at the September 25 low at the $2.455 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 $2.773 in January, which was 13.3 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.

I have been tracking the price action in BG shares. Since September 4, the price of BG shares moved 1.58% lower to $56.08 per share on September 25. 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. Progress towards a trade deal that improves economic conditions would be bullish, but an escalation of the protectionist measures would weigh on the price of the energy commodity. 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.

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 1.09% lower over the past week at $14.46 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 selling in the overall stock market pushed the price of the shares lower over the recent weeks.

We are now approaching the fourth quarter, which begins next week. In 2018, Q4 was a bearish time for crude oil as the price dropped from $76.90 in early October to a low of $42.36 per barrel in late December. Natural gas went the other way rising from $3 to $4.929 from October through November. Given the issues surrounding trade and Iran, the potential for volatility remains high as we head into the final three months of 2019.

 

Grains                                                             

Beans and corn moved a touch higher and wheat fell over the past week after rising in the wake of the September WASDE report. The Chinese delegation on trade left Washington at the end of last week and canceled a visit to Montana. The markets interpreted the move as another problem on the trade front causing grain prices to slip on the final trading session of last week. However, a bit of optimism returned to the markets on comments from the President that his team was making progress on trade.

 

 

New-crop November soybean futures moved 0.06% higher over the past week. Open interest in the soybean futures market rose by 3.07% since last week.

The December synthetic soybean crush spread moved lower and was at the $0.8675 per bushel level on September 25, down 4.50 since September 18. 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 is a bearish sign for the price of the oilseed futures as we enter the harvest season.

New-crop December corn was trading at $3.7425 per bushel on September 25, which was 0.81% higher on the week.

Open interest in the corn futures market fell by 0.63% since September 18. The price of ethanol declined by 0.22% since the previous report. November ethanol futures were at $1.3810 per gallon on Wednesday. The spread between October gasoline and ethanol futures narrowed to 21.92 cents per gallon on September 25, down 5.25 cents since the prior week on weakness in gasoline and a marginal rise in corn futures.

 

December CBOT wheat futures fell 2.50% since last week. The December futures were trading $4.7725 level on September 25. Open interest rose by 0.77% over the past week in CBOT wheat futures.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at a 73.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread narrowed by 6.50 cents since September 18. 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 I view as bearish for the wheat market.

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 further we move towards the harvest season, the less active I will be when it comes to trading. 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.

The harvest season is now underway in the grain markets, and the focus will soon shift to the planting and growing seasons in the southern hemisphere. Meanwhile, the population growth around the world continues to expand the addressable market for grains, which are staples for nutrition. The end of the third quarter is a reminder that there are another 18-20 million mouths to feed in the world, which continues to put upward pressure on the demand side of the fundamental equation for grains. The base prices during periods of oversupply are likely to ease higher, but during times of shortfalls, price action could become explosive. Demographics are a powerful force when it comes to the global food supply. The trade war has distorted prices, but that is likely to be a temporary event. The weather around the world over the coming years will always be the primary driver of the price of grain markets.

 

Copper, Metals, and Minerals

 

Base metals and other industrial commodities are the building blocks of infrastructure around the world. Economic growth in China over the past decades has made the Asian nation the demand side of the fundamental equation for many of the commodities that trade on the London Metals Exchange. The other raw material products that are construction essentials are highly sensitive to economic conditions in China.

Base metals prices turned in a mixed performance over the past week. Copper posted marginal losses on both COMEX and the LME. Aluminum, zinc, and tin posted losses while nickel was higher, and lead was unchanged on the week. Meanwhile, the price of lumber moved a lower while the Baltic Dry Index continued to correct lower. The price of iron ore moved to the downside since last week. Uranium futures posted a gain since the previous report.

Copper moved 0.04% lower on COMEX, while the red metal posted a 0.12% loss on the LME since the previous report. Open interest in the COMEX futures market moved 1.64% lower on the week. Copper was trading at $2.6120 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade dispute between the US and China, which is now a trade war. Copper fell to a new low below the $2.50 level on September 3 but turned higher and probed over the $2.70 level before returning to the midpoint of the recent trading range. Over the past week, copper inventories on both the LME and COMEX stocks declined.

The LME lead price did not move since September 18, while the price of nickel rose by 1.03% over the past week on continued gains on the back of the acceleration of the export ban in Indonesia that will start on the first day of 2020. Tin posted a 1.50% loss since the previous report. Aluminum was 0.39% lower on the week. The price of zinc fell by 2.00% since September 18. Base metals are waiting for the next shoe to drop in the trade war between the US and China. We could see lots of price volatility during the fourth quarter in the base metals sector.

November lumber futures were at the $369.20 level, 3.35% lower since the previous report. The price of uranium for December delivery was a touch higher at $26.05 per pound level up 1.17%. The Baltic Dry Index was 7.32% lower since last week as the shipping rates continued to correct from the recent highs. November iron ore futures posted a 5.77% loss compared to the price on September 18. Open interest in the thinly traded lumber futures market rose by 2.29% over the past week.

LME copper inventories fell by 6.41% to 280,150 metric tons since last week. COMEX copper stocks decreased by 7.21% since last week to 40,738 tons. Lead stockpiles on the LME fell by 2.95%, while aluminum stocks fell by 0.64%. Aluminum stocks were at under the 900,000-ton level. Zinc stocks moved 1.65% lower since the previous report. Tin inventories moved 1.14% lower since last week to 6,495 tons. Nickel inventories were 4.41% lower compared to the level on September 17. 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 could cause some risk-off behavior in markets, which could weigh on base metal prices. Inventories of base metals fell across the board since last week, which is supportive of 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 $1.98 per share on Wednesday down five cents since last week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.41 on September 18. 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 moved lower on a Q3 earnings warning last week. At $11.45 per shares X moved 8.03% lower.

We own two units of FCX shares at an average of $10.56. The stock was trading at $10.07 on September 25, 29 cents lower over the past week. I will maintain a small long position in FCX shares and would only add if the price drops from the current level.

Trade war with China and the potential of military hostilities with Iran should continue to be the leading factors that will determine the path of least resistance of base metal and industrial commodities prices over the coming week. Volatility in base metals in Q4 could increase.

 

Animal Proteins

The prices of meat futures moved higher in the week following the release of the September World Agricultural Supply and Demand Estimates report. While we are in the offseason for animal protein consumption, the price still moved to the upside on the back of some optimism over progress on trade between the US and China.

China continues to suffer from a severe pork shortage because of the African swine fever outbreak. Buying in the lean hog futures market if the US begins to export pork to China would likely cause support for cattle futures prices.

 

October live cattle futures rolled to December and were at $1.08500 per pound level up 2.19% from last week. Technical resistance is at $1.14925.  Technical support stands at 98.20 cents per pound level, as the market is recovering over the past week. Price momentum and relative strength indicators are climbing in overbought territory with the price over the $1 per pound level. Open interest in the live cattle futures market moved 2.93% lower since the last report.

November feeder cattle futures outperformed live cattle as they rose by 3.54% since last week. November feeder cattle futures were trading at the $1.41125 per pound level with support at $1.27550 and resistance at $1.43975 per pound. Open interest in feeder cattle futures fell by 2.20% 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 also moved higher over the past week. The now active December lean hogs were at 71.40 cents on September 25, which was 5.82% higher on the week. The open interest metric rose by 0.71% from last week’s level. Price momentum and the relative strength index are rising towards overbought territory. Support is at 57.775 cents with technical resistance on the October futures contract at 79.975 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 contango from September 2019 through October 2019, and a backwardation from October 2019 through March 2020. From March 2020 through August 2020 a contango returns.

In the lean hog futures arena, there is contango from October 2019 until June 2020.  From June 2020 through December 2021 the curve is in backwardation, but contango returns from December 2020 through February 2021. The forward curves reflect the seasonal trading patterns in the meat markets. The curves shifted to reflect the recent selling in the animal protein futures markets.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the December futures contracts moved lower as the price of live cattle underperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.51960:1 compared to 1.57350:1 in the previous report. The spread decreased by 5.39 cents as hogs became more expensive compared to live cattle on a historical basis. The spread moved towards the historical norm.

News on trade will be the primary driver of hog prices over the coming week. Even though the animal protein sector is in the offseason, the selling seems to have run out of steam in the beef and pork markets. I would not be surprised if prices hold or continue to work higher over the coming week, but any long positions require tight stops from a risk perspective.

 

Soft Commodities

The prices of three of the five soft commodities posted gains over the past week. Sugar was the best performing member of the sector as the October-March roll wound down. Coffee moved higher to just above the $1 per pound level again, but cotton was at just below 60.50 cents. Cocoa posted a gain while OJ was down and below the $1 level as of the close of business on September 25.

October sugar futures rose 7.27% since last week as the price of the sweet commodity moved away from the 11 cents per pound level. October futures are rolling to March. Technical resistance is at the August 12 peak at 11.96 cents. Nearby sugar futures traded to a low at 10.68 cents on September 12 which is now the level of short-term support. The value of the December Brazilian real against the US dollar moved lower over the last week and was at the $0.23955 level against the US dollar, which was $0.00270 or 1.12% lower. The recent decline in the Brazilian currency likely contributed to the weakness in the price of sugar over the recent weeks. However, the sweet commodity rallied on Wednesday on reaching 12.70 cents on the March futures contract.

Price momentum and relative strength on the daily sugar chart rose above neutral readings over the past week. The metrics on the weekly and monthly charts still reflect oversold conditions. If sugar suffers a substantial decline, I will look to add to long positions, but that does not seem likely. Sugar open interest fell by 0.64% over the past week. I will be looking to add to the long position in CANE at lower levels but expect the recovery to continue.

December coffee futures rose by 0.60% since last week’s report and were trading at the $1.0095 per pound level. Short-term support is at the August 20 low at 93.40 cents on the December futures contract. 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 $33.59 on Wednesday. Open interest in the coffee futures market rose by 2.98% 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. Last year, October was a bullish month for both coffee and sugar futures, and the rallies began during the second half of September. So far, the type of move we witnessed last year has not developed.

Cocoa futures continued to recover over the past week after the recent losses. On Wednesday, December cocoa futures were at the $2469 per ton level, 2.83% higher than last week. Open interest rose by 8.16%. Relative strength and price momentum are rising to overbought conditions. 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 $28.31 on Wednesday, September 25.

December cotton futures edged higher and moved 0.08% lower over the past week. Cotton came close to the March 2016 low at 55.66 cents per pound. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical low. December cotton was trading at 60.45 cents on September 25 after rising to a high at 63.39 on September 13. The next level on the upside above the recent high is at the 64.68 cents per pound level on the December contract, the July 25 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 1.36% since September 17.

Price momentum and relative strength metrics were in neutral conditions and leaning lower on Wednesday. The metrics remain in oversold conditions on the weekly and monthly charts but are 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.

November FCOJ fell over the past week. On Wednesday, the price of November futures was trading around 97 cents per pound. FCOJ nearby futures moved 2.12% lower over the past week. Support is at the 94.65 cents level. Technical resistance is at around $1.0550 per pound. Open interest rose by 3.30% since September 17.

I will be watching the price action in the Brazilian real versus the US dollar currency relationship over the coming week as it could influence over coffee, sugar, and FCOJ prices. Cocoa continues to rally, and cotton will be watching developments on trade. Soft commodities are often the most volatile member of the asset class, but over recent weeks the price action has been calm with no significant percentage moves.

 

A final note

Next Monday, September 30, is the end of the third quarter of 2019. I will be publishing my comprehensive quarterly reports starting next Monday and throughout next week. The most robust reports will only be available to subscribers. There will be seven separate reports that cover precious metals and cryptocurrencies, base metals, grains, soft commodities, energy, and meats. A general report will include a review of my best bets for Q3 and those for Q4.

Since I will be working hard to get the quarterly reports out in a timely fashion, there will be no weekly report on Wednesday, October 2. Instead, the weekly will return on Wednesday, October 9 and will cover the past two weeks of price action.

Trade, Iran, and Brexit should dominate the news cycle over the coming two weeks, and each one could cause increased volatility in markets across all asset classes.   Over the coming days, be aware of end of the quarter window dressing in markets, which could distort prices on Monday, September 30.

 

 

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.