• Gold holds steady while silver makes a move
  • Crude oil moved lower despite inventory declines
  • Natural gas continues to lose ground
  • Industrial metals holding while the dollar approaches the highs as the markets await news from the US Fed
  • Bitcoin falls below $10,000

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

A more detailed picture is available on the spreadsheet that is linked below.

 

 

Summary and highlights:

 

On Thursday, July 18, the big story was the silver market, which rose to new highs on the September futures contract and settled the session at $16.198 per ounce. Gold also posted gains during the session as the price of August futures settled at just below the $1430 per ounce. Both gold and silver moved higher in the aftermarket. New York Federal Reserve President John Williams said that the central bank needs to act quickly and forcefully when rates are low and economic growth is slowing. Williams said, “It’s better to take preventative measures than to wait for disaster to unfold.” William went on to say that keeping rates lower for longer is a strategy he favors. More dovish statements from central bank officials pushed the prices of gold and silver higher. Crude oil continues to decline as the nearby August contract probed below the $55 per barrel level for the first time since June 20. Natural gas fell below the $2.30 per MMBtu level despite the latest EIA report that said the injection into inventories for the week ending on July 12 was the lowest since April 5. The dollar index moved lower, but stocks did not move much during the session. The comments from Williams erased some of the losses. Grain prices fell led by wheat on the downside, and sugar dropped to a lower low while coffee and cocoa posted marginal gains. Cotton continued to make lower lows. Copper held above the $2.70 per pound level on September COMEX futures. Bitcoin recovered but remained below the $11,000 level. Last in the day, crude oil bounced on news that the US Navy shot down an Iranian drone in the Strait of Hormuz.

 

On Friday, gold and silver moved to higher highs, but profit-taking took both of the precious metals lower by the close of the week. Crude oil found a bid when news of the Iranian seizure of a British oil tanker and a Liberian tanker hit the market late in the day. Stocks moved a bit lower on the final session of last week as the dollar index rallied back towards the 97 level. The dollar has not moved lower on the prospects of falling interest rates because of the low level of rates and accommodative monetary policy in other nations around the world. Grains moved higher on the back of the latest weather forecasts and crop progress. Copper traded up to $2.80 per pound on the COMEX September futures contract, the highest price since May before settling at just over the $2.75 level. Lumber recovered on the final session of the week. President Trump continued to put lots of pressure on the Federal Reserve to lower interest rates at the upcoming July meeting. In a late interview on CNBC on Friday, Fed Governor did what central bankers do best as he confused the market by saying the economic data shows that economic growth in the US remains strong.

On Monday, Presidential candidate Elizabeth Warren sounded a warning bell for markets. She predicted that another financial is brewing. One of the most bullish factors for the stock market these days could be the rising calls that we could be on the verge of a significant correction. The bearish comments did not weigh on stocks as all of the leading indices posted gains on the session. Silver moved higher on Monday, while the price of gold was virtually unchanged. Crude oil rose on the back of tensions in the Middle East with Iran, and natural gas moved higher because of warmer than average temperatures in the US, which increase the demand for electricity. Grain prices declined, while the US dollar index moved back towards the 97 level on the September futures contract. Bitcoin was sitting at the $10,300 level. The markets are now waiting for the July 31 Fed meeting to see if the central bank cuts the Fed Funds rate by at least 25 basis points. On Tuesday, it looks like Boris Johnson will become the Prime Minister of the United Kingdom. The British pound was at the $1.2510 level, which was just above the recent low. Late in the day, Congress and the White House agreed to a deal to raise the debt ceiling for the next two years.

On Tuesday, Boris Johnson was officially elected Prime Minister of the UK by members of the Conservative Party. The British pound moved lower against the dollar on Tuesday, and the dollar rallied by 0.436 points to 97.418 on the September contract, just below the high and level of critical technical resistance. US stocks posted gains on the back of better than expected earnings reports. Meanwhile, after the close, the US Justice Department said they would conduct sweeping antitrust investigations in the tech sector, which could impact stock prices over the coming days, weeks, and beyond. Gold moved lower to around the $420 level, but silver posted a small gain on the session. Crude oil moved higher, and natural gas sat around the $2.30 level. Grains did not move much during the session. Copper gave up recent gains but remained over the $2.70 level. Bitcoin sat at the $10,300 level. The market was generally in wait-and-see mode for the Fed meeting on July 31, but Wednesday’s testimony by Robert Mueller has potential to make headlines.

On Wednesday, stocks were mixed as the DJIA fell by almost 80 point and the S&P 500 and NASDAQ posted gains. Facebook earnings beat market expectations while Tesla came in below. However, Facebook agreed to a $5 billion settlement with the FTC. The dollar index held steady near the highs while Bitcoin dropped below the $10,000 level. Grains were mostly higher; crude oil fell despite bullish inventory reports from both the API and EIA as both said that stocks fell by over 10 million barrels for the week ending on July 19. Precious metals moved higher as copper remained over the $2.70 per pound level. Meats were high, while soft commodities were mixed as sugar recovered with cotton and OJ and coffee and cocoa moved to the downside. Robert Mueller’s testimony before two congressional committees did not yield any bombshells. The market is waiting to hear from the US Fed next week.

Stocks and Bonds

The stock market continued to edge higher during the Q2 earnings season. On Friday, July 19 the E-
Mini S&P 500 futures contract put in a bearish reversal on the daily chart.

Source: CQG

As the daily chart highlights, the reversal at the end of last week did not follow through on the downside. With the tensions in the Middle East rising, the Fed meeting next week, and the trade dispute with China continuing, there are plenty of reasons to be cautious when it comes to the stock market. Meanwhile, many market participants are bearish at the current level, which could be a factor that pushes equity prices higher over the coming weeks.

The S&P 500 moved 1.18% higher over the past week, while the NASDAQ gained 1.67%. The DJIA posted a 0.18% gain since the previous report.

A 25-basis point cut in the Fed Funds rate is already baked into stock prices, but if the Fed decided that a 50-basis point cut was in order, it would likely launch equity prices to new heights.
I continue to believe the Fed will act prudently and will only deliver a one-quarter of one percent cut at the end of this month. While Chairman Powell and NY Fed President William’s latest comments were dovish, Eric Rosengren seemed to go the other way in his interview with CNBC last Friday after the markets closed for the week. We are now in the blackout period before the July 31 meeting, and the last piece of data that the Fed will consider before deciding on rates will be the second-quarter GDP report.

Over the past week, Chinese stocks recovered and kept pace with US equity indices.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.46 level on Wednesday, which was 0.78% higher than the closing level on July 17. Since April 5 the FXI has traded in a range from $39.90 to a high at $45.96. Technical support is at the January 3 low at $38 per share which resistance at the April 5 peak.

FXI remains in the middle of its trading range despite the latest GDP data out of China that showed the slowest growth in recorded history at 6.2%.

US 30-Year bonds moved 0.04% higher since the previous report. Bonds are likely to hold steady until we hear from the Fed on July 31. Any surprise events that cause market participants to lower risk profiles would support the bond market, which is a safe-haven for investors during periods of uncertainty.

Open interest in the E-Mini S&P 500 futures contracts fell by 0.06% since July 17. Open interest in the long bond fell by only 0.10% over the past week. The VIX moved lower over the past week as stocks are near the highs and was at the 12.07 level on July 24, a decline of 13.6%.

I continue to favor buying VIX and VIX-related products when they dip as a short-term trading strategy to capture periods of uncertainty. Since both are short-term instruments, I have been using tight stops on long positions and taking small losses. As I wrote last week, “Any position in VIX or VIXY is not an investment position, but a trading position that requires constant monitoring and adjustments in stops and profit targets based on the most recent price of these instruments. I continue to recommend a minimum of a 1:1 risk-reward ratio when it comes to profit targets in the volatility indices. I would only look to enter any long position on price dips. A long position in the volatility-related instruments amounts to a short position in stocks which is going against the current trend.” I continue to trade VIXY taking small losses while looking for much higher rewards. Over the past week, a risk-reward ratio of 1:2 worked well with the product as the VIX was higher earlier in the week. The many factors facing markets could cause a sudden return of risk-off periods, which continues to favor the long side when it comes to the volatility products.

 

The dollar and digital currencies

The dollar index rose by 0.62% on the September futures contract since July 17, as the prospects for lower interest rates has not weighed on the greenback. The market will hear from ECB President Mario Draghi on Thursday. It is likely that rates in Europe will head lower providing support for the US dollar. The euro currency was 0.83% lower since last week’s report.

One of the leading reasons that the Trump administration is encouraging the Fed to lower rates is that a weaker dollar is a useful tool when it comes to trade negotiations with China and other nations around the world. A strong dollar makes US exports less competitive in global markets and weighs on the earnings of US multinational corporations. One of the most compelling reasons for a rate cut by the Fed is that US monetary policy is out of step with the rest of the world. China continues to devalue the yuan, and the state of the European economy favors more accommodative policies. While the US economy is the strongest in the world, the US does not exist in a vacuum. Contagion from other countries could weigh on US growth over the coming months, which is one of the reasons why the Fed adopted a more dovish stance. We will find out if the central bank follows through on its guidance from June on July 31. Lower US rates may not weigh on the dollar index because of central bank policy around the world. When it comes to the technical position of the US currency, a move below the 93 level on the dollar index could trigger lots of technical selling in the dollar. Short-term support levels to watch on the weekly chart are at 95.17, 94.635, and 93.395. Below 93.395, we could enter into a bear market for the dollar at a time when interest rates are moving to the downside. Technical resistance is at the 97.715 level, not far from Wednesday’s closing level. If US rates fall and the dollar weakens, the odds favor a continuation of bull market action in the gold market over the coming months. Gold continues to consolidate at the highest price in five years. When it comes to the dollar index, I believe that the shift in Fed policy has limited the upside in the greenback for the immediate future.

 

The leader of the digital currency asset traded up to a high at $14,170 on June 26. We have witnessed lots of volatility in digital currencies as Bitcoin corrected to below $10,000. Bitcoin moved 1.16% lower since last week to the $9,657.69 level while Ethereum posted a marginal 0.6% gain as it was at around $212.59 per token. The market cap of the entire asset class moved 0.21% higher as Bitcoin underperformed the other digital currencies. The number of tokens rose by 30 since July 17. Open interest in the CME Bitcoin futures fell by 7.4% since last week.

The US governments reaction to Facebook’s Libra token has been a bearish factor for the digital currency asset class. I continue to believe that an ETF product would inject optimism into the cryptocurrencies and lead to higher prices. One of the leading issues that the asset class continues to face when it comes to widespread acceptance is custody. The SEC and other regulators will only approve ETF products when storage and security for the tokens meet with its approval.

 

The Canadian dollar moved 0.78% lower since last week. Open interest on C$ futures fell by 2.43% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products.

The British pound posted a 0.36% gain since the previous report as Boris Johnson became the Prime Minister on July 24. We could see lots of volatility in the pound over between now and the end of October as the Prime Minister guaranteed Brexit by October 31 with or without a deal with the EU.

The Brazilian real posted a 0.21% loss against the US dollar but has been rallying slowly since May 20. Reforms by the Bolsonaro government that deal with corruption and attract investment in Brazil are likely to continue to bolster the value of the Brazilian real which remains at a very depressed level given the trading range between 2011 and the present time. At just over the $0.2650 level against the US dollar, the Brazilian real is far beneath the 2011 high at the $0.65 level. I am bullish on the real as the currency has lots of room for a significant recovery.

 

Gold made a new high over the past week, and silver rallied to a new high for 2019. Gold continues to move higher against all world currencies, which is a commentary on the value of traditional foreign exchange instruments and central bank policies. Silver’s move to the upside over the past week is another confirmation of the bullish tone in the gold market.

 

Precious Metals

Silver led the way on the upside since last week, with platinum higher and gold posting a marginal gain. Palladium and rhodium continued to correct lower as the two industrial and precious metals took the back seat to silver, platinum, and gold over the past week.

Gold was 0.02% higher since July 17 while silver gained 4.1% over the same period. Silver was almost 5% higher in the previous report. Platinum moved 4.01% higher over the period. The price of rhodium moved 1.62% lower while palladium declined by 0.31%. Open interest in the gold futures market moved 2.49% higher since the previous report and was over the 616,000-contract level. The metric moved 0.26% higher in platinum while it was 0.77% lower in the palladium futures market. Silver open interest edged 2.3% higher over the period. Silver and gold made higher highs over the past week with silver rallying to a new peak for 2019. The move in silver broke a pattern of lower highs on the weekly chart that had been in place since July 2016.

Source: CQG

The weekly chart highlights the progress in the silver market, and technical milestone as the precious metal rose to a new high for 2019 and its highest price since June 2018.

Gold remained above the $1420 per ounce level on Wednesday, after making a higher high at $1454.40 on July 19. Gold and silver will likely follow the events surrounding Iran and the next move by the Fed and its statement about the future that comes on July 31. The precious metals have been commenting on the world currency markets. The price of gold moved to the upside against all of the world’s currencies. Gold is the world’s oldest currency, and the yellow metal is telling us that the trend in fiat foreign exchange instruments continues to be lower.

The silver-gold ratio turned lower on the back of the price action in the silver futures market.

Source: CQG

The daily chart of the price of nearby gold divided by silver futures shows that the ratio was at 85.68 on the on Wednesday, 3.59 lower than the level on July 17. The long-term average for the price relationship is around the 55:1 level. The relationship had been probing above the all-time 1990 high at the 93:185 level on the quarterly chart. Time will tell if the trend reversal in the silver-gold ratio continues, but the break to the upside in silver could be a significant event.

Central banks around the world hold gold and continue to be net buyers of the precious metal. Technical support for the gold market is at the breakout level at $1377.50. If silver continues to make progress on the upside, it will send a positive technical signal for the gold market.

We are long the gold mining stock ETF products GDX and GDXJ, which outperformed the price of gold since the last report. While gold moved 0.02% higher, the GDX was 3.91% higher since July 17 while GDXJ moved 5.92% to the upside. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. I continue to rate both ETFs as a hold. The moves in GDX and GDXY are supportive of more gains in gold, which could drive the mining shares even higher. We are also long SLV, the silver ETF product which posted a 3.88% gain since July 10 as it marginally underperformed the price action in the silver futures market. Gold and silver have been in bullish mode since June.

Platinum and palladium moved in opposite directions since July 17. October platinum futures rose by 4.01% to the $881.10 per ounce level. Palladium posted a 0.31% loss as of the close of business on July 24 and was at the $1538.50 per ounce level. Palladium recently rose to a new record high at $1600.50 per ounce. Palladium was trading at a premium over platinum with the differential at the $657.40 per ounce level on Wednesday, which continued to narrow over the past week. October platinum was trading at a $542.50 discount to August gold at the settlement prices on July 24 which narrowed over the period. The price of rhodium which does not trade on the futures market moved $55 lower over the past week and was at $3,340 per ounce on Wednesday.

We are long the PPLT platinum ETF product which moved 3.66% higher since July 17. I continue to believe that platinum offers the best value proposition in the precious metals sector given its discount to gold, palladium, and rhodium, and its position as a rare precious metal with a myriad of industrial applications. A significant upside correction is long overdue in the platinum futures market.

Gold and silver will be watching the price action in the dollar as well as world events over the coming week. Iran, Brexit, and the next action by the US Fed could provide direction for the two most popular precious metals. While palladium and rhodium have corrected lower over the past two weeks, both metals remain in bullish trends. When it comes to platinum, the metal that offers the best value proposition in the sector could surprise on the upside, at some point.

 

Energy Commodities

Crude oil and oil product prices slipped over the past week. Crack spreads moved in opposite directions as the gasoline refining spread edged lower while the distillate crack rose. Natural gas continues to move lower and falling gasoline and corn prices weighed on the price of ethanol. Rotterdam coal prices moved higher, and the Brent-WTI spread gained on concerns over the ongoing and mounting tensions between the US and Iran.

August NYMEX crude oil futures rolled to September and fell by 1.46% while September Brent futures moved 0.88% lower since July 17. September gasoline was 1.51% lower, and the processing spread in September posted a 1.83% loss since July 17. The gasoline market is now looking towards the end of the peak driving season. September heating oil futures edged 0.86% higher since the previous report, and the heating oil crack spread rose by 6.17% since last week. Technical resistance in the NYMEX crude oil futures market is now around the $60 per barrel level. Crude oil open interest fell by 1.73% since last week. We could see lots of volatility in the oil market and related products as the situation in the Middle East continues to unfold.

The spread between Brent and WTI crude oil futures in September moved higher to the $7.29 per barrel level for Brent, which was 48 cents above the July 17 level. The Straits of Hormuz is the flashpoint for crude oil as Iran continues to retaliate against US sanctions with provocative moves in the area. Since 20% of the world’s crude oil flows through the Strait each day, the 21-mile-wide seaway that borders on Iran will continue to be an area to watch over the coming week. The increased military presence in the area has the potential for engagement that could cause the price of oil to move higher in the blink of an eye. Since Iran hijacked a British tanker, European countries are now more closely aligned with the US in the region.

US daily production stood at 11.3 million barrels per day as of July 19 according to the Energy Information Administration, which is 0.700 million barrels below the previous week’s level. Crude oil inventory data showed a decline in crude oil but increases in product stocks last week. As of July 12, the API reported a decline of 1.401 million barrels of crude oil stockpiles while the EIA said they fell by 3.10 million barrels for the same week. The API reported a drop of 476,000 barrels of gasoline stocks but said distillate inventories rose by 6.226 million barrels as of July 12. The EIA reported an increase in gasoline stocks of 3.6 million barrels and an increase in distillates of 5.7 million barrels. Rig counts, as reported by Baker Hughes, fell by five last week to 779 rigs in operations as of July 19, which is 79 below the level operating last year at this time. The reduction in the number of rigs, daily output, and lower oil stocks did not cause the price to rally, but it likely prevented more aggressive selling over the past week.

OIH and VLO shares moved higher since last week. OIH rose by 4.94%, and VLO moved 3.52% higher since July 17. The week, I suggest purchasing the OIH ETF as it has been under significant pressure, is at a very low level, and should be ripe for a recovery. OIH closed on Wednesday at $14.65 per share, and I would purchase the ETF on the opening on Thursday at that level.

August natural gas futures continued to move lower in the aftermath of Hurricane Barry. The August futures were at $2.220 on July 24, which was 3.65% lower than on July 17. Natural gas could not reach technical resistance at above the $2.50 level as the hurricane approached the Louisiana coast, which was a bearish sign for the energy commodity. However, the reaction to the latest inventory data was revealing as the energy commodity moved lower in the face of falling injections compared to past weeks and forecasts for very hot temperatures over vast areas of the United States that increased the demand for cooling. Last week, the EIA said an injection of 62 bcf into storage brought the total amount of gas in storage to 2.533 tcf as of July 12. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November is almost certain to be higher than last year. However, the rate of injections has slowed significantly over the past weeks.

Source: EIA

As the chart shows, stockpiles of natural gas are 13% above last year’s level but were still 5.3% under the five-year average as of July 12. Last week’s injection was a bit below the level the market had expected. This week, I expect the EIA to report an injection of around 38 bcf as the hot conditions in July increased demand for cooling, limiting the amount of natural gas flowing into storage across the United States. Open interest fell by 0.12% over the past week. The falling level of injections because of above-average temperatures should be supportive of the price of natural gas, but the price action over the past week reveals the bearish tone in the market.

With approximately 17 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 42.1 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 86.3 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. I will be watching these numbers closely over the coming weeks as they are likely to influence the short-term price direction of the natural gas futures market. Over the past week, the lowest injection since April 5 did not stop the price from moving lower, which was a bearish sign for the price path of the energy commodity. I would not be surprised to see natural gas test the previous low at $2.134 per MMBtu on the August futures contract.

September ethanol prices moved 0.27% lower over the past week. Pressure in the ethanol futures market has come from a combination of falling gasoline and corn prices. Open interest in the thinly-traded ethanol futures market fell by 3.94% over the past week. The KOL ETF product moved 1.02% higher compared to its price on July 17, and the price of October coal futures in Rotterdam rose 3.91% as the market begins to look past the summer season. Coal posted a gain despite the losses in crude oil and natural gas over the past week.

On Tuesday, the API reported that oil inventories fell by 10.961 million barrels for the week ending on July 19 and the EIA said they decreased by 10.80 million barrels on Wednesday. Analysts had expected a decline of 4.011 million barrels for the API report. When it comes to products, the API reported a rise in gasoline inventories of 4.436 million barrels and an increase in distillate stocks of 1.42 million barrels. On Wednesday, the EIA said that gasoline stocks fell by 200,000 barrels and distillate inventories rose by 600,000 barrels for the week ending on July 19. The inventory data was bullish for the price of crude oil and products. However, the price action did not reflect the stockpile reports. When it comes to crude oil, the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming week.

In natural gas, the reaction to the most recent inventory data was a sign that the price could be heading lower once again for a test of the June lows.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.631 in January. I would consider buying call options for December through February at lower prices but will wait for mid to late August to make any decisions. I am not anxious to purchase the options as I would prefer to wait to avoid paying elevated levels when it comes to the time value for the options. I will continue to watch the action in the forward curve over the coming weeks for buying opportunities in limited risk options.  Nothing has changed since last week.

I have been tracking the price action in BG shares because of the volatility in the price of ethanol. Bunge is an ethanol refiner with interests in Brazil as the company processes sugarcane into the biofuel. Since July 17, the price of BG shares moved 2.16% higher to $56.87 per share on July 24. I suggested a long position in BG at $57.40 on July 11. I will stop out of this position at $51.47 per share on the downside while looking for at least an equal profit on the upside depending on the price action. I will continue to post weekly updates on this position.

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

I continue to favor a long position in PBR, Petroleo Brasileiro SA. PBR had been trending higher throughout 2019, and reforms from the Bolsonaro administration could keep that trend intact. I believe that this stock has the potential to double in value, and it was trading at the $15.86 per share level on July 24, down 1.86% from last week’s level. I continue to rate PBR as a buy. This week I am adding OIH to the portfolio, and will return with a stop in next week’s report.

We could see lots of volatility in the energy sector over the coming week because of Iran. In natural gas, if the hot temperatures across the US do not cause a recovery rally, the price could be heading for a new low and perhaps towards $2 per MMBtu.

 

Grains                                                             

Grain prices were mixed over the past week as soybeans recovered and corn and wheat prices posted marginal losses for the period.  New crop November soybean futures moved 0.86% higher since the previous report. Open interest in the futures market decreased by 0.59% over the past week. Hotter than average temperatures over vast areas of the US during the height of the growing season was a factor that lifted the price of the oilseed.

Source: CQG

The December synthetic soybean crush spread was at the $0.9675 per bushel level on July 24 which was 2.0 cents lower than on July 17. The crush rose to a peak at $1.3650 on May 30, which was supportive of the price of the oilseed futures. However, since then, as the price of soybeans recovered, meal and oil products lagged, which was a sign of lower demand. While beans edged higher over the past week, the crush spread declined, which is a sign that soybean prices could run out of upside steam.

New crop December corn was trading at $4.3075 per bushel on July 24, which was 2.44% lower on the week. Open interest in the corn futures market fell by 0.78% since July 17. The decline in the price of corn over the past week kept the pressure on ethanol prices, which are around the $1.50 per gallon level. The weakness in gasoline and corn added pressure to the biofuel. The spread between September gasoline and ethanol futures was at 30.13 cents per gallon on July 24, down 2.36 cents since July 17 as gasoline declined more than the biofuel.

September CBOT wheat futures moved 1.53% lower since last week. The September futures were trading $4.9775 level on July 24. Open interest rose by 2.67% over the past week in CBOT wheat futures. The weather conditions in Europe and Russia will determine the path of wheat prices over the coming week as the USDA continued to project that Russia will be the leading exporter of wheat to the world in 2019.

As of Wednesday, the KCBT-CBOT spread in September was trading at a 58.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread moved 5.5 cents higher than on July 10 but it remains at an elevated historical level. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that could weigh on the price of the grain.

My positions in the grain markets are all small, given the time of the year and the price volatility over the past week. I have very small long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move towards the harvest season, the less active I will be when it comes to trading. However, a continuation of excessively hot temperatures could provide a chance for profit-taking on existing long positions in the grains. At the same time, the trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. For the coming week, the price volatility is likely to be a function of the weather forecasts in the US grain belt and the growing region in the northern hemisphere when it comes to wheat.

 

Copper, Metals, and Minerals

 

Half of the LME metals posted gains over the past week on the back of the prospects for lower US interest rates. Since LME metals use the US currency as the benchmark pricing mechanism, lower US rates typically support higher nonferrous metals prices. Moreover, lower rates cause the cost of carrying inventories to decline.  The price of uranium moved lower, keeping the pressure on some of the US-based uranium producer stocks which fell last week after a memo from President Trump did not support findings by the Commerce Secretary that the US should increase the percentage of US purchases from US producers of the metal. The price of lumber recovered since last week. The Baltic Dry Index continued to move higher over the past week because of new low-sulfur fuel regulations. The price of iron ore backed off a from last week’s level. In the LME metals, nickel was the leader of the pack, but tin, zinc, and aluminum posted losses compared to their prices on July 17.

Copper moved 0.15% lower on COMEX, while the red metal posted a 0.30% gain on the LME over the past week. Open interest in the COMEX futures market moved 1.00% lower as the price remained over the $2.70 per pound level on the active month September futures contract. Copper continues to be a barometer when it comes to the trade negotiations between the US and China. Over the past weeks, copper inventories on both the LME and COMEX moved appreciably higher, after a slight decline last week, stockpiles rose since July 17.

LME lead moved higher by 1.91% since July 17, and the price of nickel gained 2.76% over the past week. Tin posted a 2.19% loss since the previous report. Aluminum was 0.87% lower on the week. The price of zinc fell 1.67% since July 17.

September lumber futures rose to the $343.90 level, up 5.14% since July 17. The price of uranium moved 2.45% lower since last week. The Baltic Dry Index was 7.66% higher as it rose to the 2165 level, as the requirements for lower sulfur fuels will increase the price tag for shipping products by ocean vessels. September iron ore futures posted a 3.65% loss compared to the price on July 17. Open interest in the thinly-traded lumber futures market rose by 8.05% over the past week.

LME copper inventories moved 0.15% higher to 293,375 metric tons since last week. COMEX copper stocks increased 3.09% since last week to 38,380 tons. The increase in stockpiles of the leader of the nonferrous metals over recent weeks had been a negative factor for the price of the red metal, but copper held steady because of the prospects for falling US interest rates since last week. Lead inventories on the LME fell by 7.97%, while aluminum stocks declined by 3.42%. Aluminum stocks have been falling steadily for years from over five million to 960,175 tons. Zinc stocks dropped 3.65% since the previous report. Tin inventories moved 3.45% lower since last week. Nickel inventories were 1.78% lower compared to the level on July 16. Falling stocks have supported the price of nickel and pushed the price of the base metal to almost $14,500 per ton. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. The next significant event is likely to be the Fed meeting at the end of this month. A 25-basis point decline in the Fed Funds rate would likely provide some support for the prices of the nonferrous metals. A 50-basis point decline could light a bullish fuse under the sector. However, I expect only a one-quarter of one-percent move on July 31.

We own Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium. Last week we doubled up on this position and are now long at $2.55 per share. We are working a stop at $1.49 and have an initial profit target at $6 per share. UUUU and other and some of the other uranium stocks dropped sharply, and a I wrote last week, “UUUU declined because of what appeared to be negative news from the Trump administration. UUUU and another company asked the government to impose a quota requiring that at least 25% of all uranium used in the US come from US producers. Currently, only 7% of US uranium requirements come from US production. The shares dropped as it appeared that the Trump administration would decline to set any quota. I continue to believe UUUU is an attractive stock.” I will keep the stop at $1.49 on close over the coming week. UUUU was trading at $1.87 per share on Wednesday.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $4.14 on July 24. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:

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

 

We own one unit of FCX shares at $11.16. The stock was trading at $11.94 on July 24, 88 cents higher over the past week. I will maintain a small long position in FCX shares and would only add if the price drops appreciably from the current level.

The summer can be a quiet time for the industrial commodities, especially for LME metals as Europe tends to close down for vacation during August. However, the prospects for lower interest rates are supportive of prices, which appear to have stabilized despite the ongoing trade dispute between the US and China. Copper will continue to be the barometer for trade over the coming weeks and months.

 

Animal Proteins

We are now heading into the second half of the peak season for animal protein demand, and prices edged higher in cattle and hog futures markets since last week. The 2019 grilling season will end on the Labor Day weekend at the beginning of September.

August live cattle futures were trading at $1.08900 per pound level up 0.72% from last week. Technical resistance is at $1.09925 which was the May 10 peak on the August contract.  Technical support stands at $1.01975 per pound level, which was the low from June 24. Price momentum and relative strength indicators are steady in the lower region of overbought territory on the daily chart. Open interest in the live cattle futures market moved 1.49% lower since the last report.

August feeder cattle futures outperformed live cattle again last week as they rose by 1.60% since last week. August feeder cattle futures were trading at the $1.42825 per pound level with support at $1.30950 and resistance at $1.48100 per pound which was the May 10 peak. Open interest in feeder cattle futures fell by 1.70% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others the opposite occurs. Both feeder cattle and live cattle futures appear to have found bottoms as prices have recovered since June.

Lean hog futures moved higher over the past week. August lean hogs were at 86.550 cents on July 24, which was 5.55% higher on the week. The open interest metric rose by 3.27% from last week’s level. Price momentum and relative strength were rising in overbought territory on July 24.

The forward curve in live cattle is in contango from August 2019 until April 2020. From April 2020 until August 2020 a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from August through December 2020. The Feeder cattle forward curve is relatively flat from August 2019 through May 2020, but a backwardation could be developing from October 2019 through April 2020.

In the lean hog futures arena, there is a backwardation from August until December 2019 after which contango returns until June 2020. There is a backwardation from June through December 2020. The forward curves reflect the seasonal trading patterns in the meat markets, but there were no significant shifts in the term structure in the lean hog futures market since July 17.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two meats moved higher.

Source: CQG

Based on settlement prices, the spread was at 1.2582:1 compared to 1.3186:1 in the previous report. The spread decreased by 0.0604 away from the historical norm on strength in the hog futures. The continuing problems caused by African swine fever in Asia continues to put some pressure on the spread as global supply concerns in the pork market are supporting the price of hogs compared to cattle futures.

Animal proteins tend to be one of the most volatile sectors of the commodities market. As we head towards the end of the peak summer season, prices typically decline, but the shortages of pork in Asia are making the 2019 season anything but typical. Trade, the dollar, and the spread of African swine fever are the most significant factors facing the animal protein sector over the coming weeks and months.

Soft Commodities

The price of coffee moved lower over the past week despite a small gain in the value of the Brazilian real versus the US dollar. The other four soft commodities all posted gains since July 17.

The October sugar futures dropped below the 12 cents per pound level but put in a bullish reversal on July 23 on elevated volume which led to a gain on the week. October sugar futures posted a 2.29% increase over the period and was 6.21% higher since the previous report. The level to watch on the downside is at 11.36 cents per pound, which was the late May low on the continuous futures contract. Over the past week, the price traded as low at 11.39 cents as it made a higher low. Support is now at the late May low. Technical resistance is at the June 28 peak at 12.84 cents. The value of the Brazilian real against the US dollar moved slightly lower over the last week and was at the $0.26520 level against the US dollar, which was $0.000550 lower. Since domestic costs in Brazil are in the local currency, a weak real is a negative factor for the price of commodities like sugar that come from the South American nation. Sugar is also sensitive to the price of crude oil, and oil products which have been weighing on the sweet commodity as selling hit the energy commodities and took the price of oil below $60 per barrel on the nearby NYMEX futures contract. Brazil processes sugarcane into ethanol for domestic use, which impacts the amount of the sweet commodity available for exportation to the rest of the world. The sugar futures market continues to consolidate, but it had moved to the lower end of its trading range. So far, in 2019, the price range in nearby sugar futures has been from 11.36 to 13.50, which are the levels of critical support and resistance in the soft commodity. We will find out over the coming sessions if the reversal that rejected the low was a significant event.

Price momentum on the daily sugar chart fell to deeply oversold territory and crossed to the upside. The metric on the weekly and monthly charts are in neutral territory. If sugar falls substantially, I will look to add to long positions.

September coffee futures declined by 5.96% since last week’s report. Short-term support is at the June 19 low at 96.25 cents on the September futures contract.  I continue to favor coffee on the long side.  The first level of technical resistance on the upside is at the July 15 high at $1.1065 per pound. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $34.70 on Wednesday. Open interest in the coffee futures market rose by 2.41% since last week. Coffee needs to remain above the 96.25 cents per pound level on the September futures contract to keep the bullish price pattern since May intact.

Cocoa futures have been climbing since the previous report. On Wednesday, September cocoa futures were at the $2463 per ton level, 1.61% higher than last week. Open interest rose by 1.06%. Relative strength and price momentum are in neutral territory.  The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton recently, which is now the upside target now that cocoa is back in bullish mode. The price of cocoa has posted gains over the past five consecutive months, but it will have to close above the $2583 per ton level at the end of July to keep the streak going. The first level of technical support stood at the June 27 low at $2420 per ton on the September futures contract. On July 16 September futures fell to a low at $2391 per ton, but the futures market reversed from that level. Cocoa has been making higher lows and higher highs since mid-March. To keep that trend intact, the price will need to remain above $2321 per ton and put in a new and higher high above the $2600 level.

The price of cotton futures recovered since last week. December cotton futures moved 2.93% higher since the previous report.

December cotton was sitting at the 64.32 cents per pound level on Wednesday. The first significant target on the upside is technical resistance at 68.35 cents; above there, the next level on the upside is at the 70 cents per pound level on the December contract. On the downside, support is at the recent low at 61.66 cents, 60 cents, and the March 2016 low at 55.66 cents stand as support levels for the fiber futures. Open interest in the cotton futures market rose by 2.88% since July 16. Trade with China and the weather across growing regions will be the primary drivers of the price of the fiber over the coming weeks.

Meanwhile, price momentum and relative strength metrics crossed to the upside in oversold territory on the daily chart, but the metrics remain in oversold conditions on the weekly and monthly charts. I continue to believe cotton is in the buying zone and that a correction to the upside is overdue.

September FCOJ futures edged higher over the past week and remained above the $1 per pound level. On Wednesday, the price of September futures was trading around the $1.0390 per pound level. FCOJ nearby futures moved 0.83% higher over the past week. Support is at the 98.85 cents level with technical resistance at the early June high at $1.1530 per pound. Open interest rose by 0.59% since July 16.

Aside from cocoa, all of the members of the soft commodities sector remain not far above the bottom end of pricing cycles. I continue to favor sugar, coffee, and cotton at the price levels and would be a scale-down buyer on further weakness in those futures markets.

 

A final note

The heart of summer is usually a quiet time in markets. However, next week’s Fed meeting, the ongoing trade dispute, UK and EU politics, and the tensions in the Middle East are making the summer of 2019 anything by a typical time. Keep stops tight on risk positions and take profits when they are on the table. The gold and silver markets are telling us that there could be lots of volatility on the horizon over the coming weeks and months.

 

 

 

Until next week,

 

Andy Hecht

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.