- Stocks rise to record highs
- A bounce in the US dollar
- Precious metals continue to consolidate
- Oil and natural gas post gains
- WASDE on Friday, but the trade war is the most significant factor for markets over the coming week
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:
I was on the road on October 30 and 31 when the Fed cut the Fed Funds rate by 25 basis points for the third time this year. The central bank will now wait for news on trade and Brexit over the coming weeks before making up its mind about the path of short-term rates at the December meeting. While I was away, the US House of Representatives voted along party lines to officially commence an impeachment inquiry of the President. While I was away, the British Parliament agreed to hold a general election on December 12.
On Friday, November 1, the employment data came in better than expected in a sign that economic growth continues to march forward at a moderate pace. Stocks moved to the upside during the final session of the week. The dollar index declined to the 97 level, and the December long bond futures contract was at the 161-00 level at the end of the week. What and soybeans moved higher, while corn edged to the downside on Friday. The grain markets are awaiting the November 8 WASDE report from the USDA. Brent and WTI crude oil futures were significantly higher on the final session of the week, making back losses after the increases in inventories as reported by both the API and EIA earlier in the week. Oil products, natural gas, and ethanol all posted gains. Gold and silver edged lower but settled the week at over $1510 and $18 respectively on the December futures contracts. Cattle prices were higher while hogs moved to the downside. Coffee, cocoa, and lumber rallied while cotton and FCOJ futures moved marginally lower. Sugar was unchanged on the session at just below the 12.5 cents per pound level. Bitcoin settled the week at $9235 per token, down just $70 on the session after the recent gains. On Friday, Prime Minister Boris Johnson refused a pact with the leader of the Brexit Party, Nigel Farage. On Friday, Christine Lagarde took over as the President of the European Central Bank as Mario Draghi’s term ended.
On Monday, stocks continued to move to the upside after last week’s interest rate cut from the Fed. The dollar index rose to the 97.365 level. The December long bond fell by 1-01 to 159-19 as the prospects for another 25-basis point rate cut from the US central bank at the December meeting declined. Soybeans posted a marginal gain, but corn and wheat prices fell. Crude oil moved higher with oil products. Natural gas rallied to over the $2.80 level as the winter season is on the horizon. Gold and silver did not move much, but prices remained above $1500 and $18 per ounce, respectively. Platinum and palladium moved lower, while copper was a touch higher on the session. Meats only moved marginally with a gain in live cattle and lean hogs. Cotton and coffee edged lower, but FCOJ, sugar, cocoa, and lumber all posted small gains. Bitcoin was $330 higher to the $9,565 per token level.
On Tuesday, it was a quiet day in the stock market even though there was some talk of lifting some of the US tariffs on China to move towards a “phase one” agreement on trade. The dollar index moved higher and towards the 98 level on the December futures contract. The 30-Year long bond futures dropped by around 1-13 to the 158 level. Grains were mixed with corn and soybean prices edging lower, and wheat posted a gain on the session. Energy prices moved higher across the board with rallies in crude oil and products. Natural gas probed above the $2.90 per MMBtu level on the December futures contract. However, ethanol sank below the $1.40 per gallon level. The news on trade and a rising dollar sent precious metals prices lower, with the most significant losses coming in gold and silver. Gold settled $27.40 lower with silver losing just under 50 cents per ounce on the session on the active month December futures contracts. Hogs were higher, while cattle moved to the downside. Cocoa and lumber prices declined, but sugar, cotton, FCOJ, and coffee price posted gains. Bitcoin slipped $160 to the $9405 per token level.
On Wednesday, reports that a summit between President Trump and President Xi to sign a “phase one” trade deal caused optimism to decline a bit. The market is beginning to wonder if the negotiators are running into roadblocks that would prevent the preliminary agreement that would de-escalate the ongoing trade war. Stocks moved marginally lower on Wednesday. Bonds posted a gain, and the dollar index was steady. Wheat edged higher while corn and soybean price were lower as the markets await Friday’s WASDE report from the USDA. Crude oil moved lower on the back of inventory increases from the API and EIA. Natural gas corrected but remained at over the $2.80 per MMBtu level on the December futures contract. Ethanol continued to slide. Gold moved higher on concerns over trade, silver, platinum, and palladium were a touch higher. Copper moved lower as the red metal is highly sensitive to the news on trade. Meats posted losses across the board with hogs leading the way on the downside. Coffee continued to move to the upside, but all of the other soft commodities and lumber moved lower on the session. Bitcoin edged lower on Wednesday.
Stocks and Bonds
The 25-basis point reduction in the Fed Funds rate on October 30 was the third move by the US central bank since July 31. With the band of short-term rates at 1.50%-1.75%, the Fed has gone a long way to correct its overenthusiastic period of tightening in 2018 when a total of four rate increased pushed the Fed Funds rate to a high at 2.25%-2.50%. In its statement and the press conference that followed the latest move, the FOMC and Chairman Powell told markets they would continue to monitor US growth data as international events surrounding trade and Brexit going into future meetings. The central bank downplayed expectations for a fourth interest rate reduction in December but did not totally take it off the table. The trend of falling interest rates in the US and around the world sent stocks to new highs over the past week. All of the leading equity indices posted gains. Last Friday’s employment report, which was more encouraging than the market had expected, was a sign that economic growth in the US continues to march forward at a moderate pace.
The S&P 500 rose by 1.31% since the previous report, while the NASDAQ moved 1.62% higher. The DJIA posted a 1.56% gain since the last report. Trade, Brexit, impeachment will all contribute to the path of least resistance of the stock market over the coming weeks and months. The stock market is now in record territory, and time will tell if equities continue to march higher over the coming weeks and months. One thing to keep in mind is that each time the market has moved to a new high over the recent months and years, a correction has followed.
Chinese large-cap stocks outperformed US stocks over the past week as optimism over trade continues to boost the market’s sentiment. However, economic data out of China continues to be a warning signal that the trade issues are weighing on Chinese economic growth.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.69 level on Wednesday, which was 2.97% higher than the closing level on October 29. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. The path of least resistance for FXI will depend on the progress of trade talks between the US and China. Meanwhile, the FXI product rose to its highest level since late July over the past week as prospects for another Trump-Xi meeting rose. Expectations that the two leaders will reach and sign a “phase one” agreement boosted the FXI product. However, a meeting could be delayed to December which caused some light selling on Wednesday.
US 30-Year bonds edged higher since the last report as the Fed cut the short-term rate. On Wednesday, November 6, the long bond was at the 158-25 level as it moved 0.10% higher since the previous report. The US Treasury is likely preparing to issue and sell really long 50-year Treasury bonds, which makes sense in the current low interest rate environment. Even though long-term yields in the US are at or close to historically low levels, they remain highly attractive compared to rates in Europe and other areas of the world. The current environment is perfect when it comes to extending maturities for US government debt securities as they continue to offer safety and higher yields compared to competing sovereign debt instruments.
Open interest in the E-Mini S&P 500 futures contracts rose by 2.76% since October 28. Open interest in the long bond decreased by 1.66% over the past week. The VIX moved lower as volatility in the stock market fell as the indices rose to new highs over the past week. The volatility index was at the 12.62 level on November 6, 4.39% lower over the period.
I continue to favor the long side when it comes to the VIX and VIX-related instruments. The current level of volatility is so low that risk-reward is attractive. I would look for at least a 2:1 payoff ratio on short-term positions on the long side of price variance instruments like the VIX, VIXY, and others. I will look to buy on dips and take profits on rallies. The many issues facing markets have the potential to cause periods of selling in stocks, particularly with the leading indices at record high levels. The current level of the VIX at 12.62 limits the downside potential for the instrument.
The dollar and digital currencies
The dollar index edged higher towards the 98 level on the nearby December futures contract. The contract posted a 0.30% gain over the period. The index fell to a low at 96.885 on October 21 and had moved away from that level on November 6, as it settled at 97.764. Optimism over trade and an eventual Brexit deal continued to be factors that impacted the direction of the dollar over the past week. Below the recent low, the next level of technical support for the December dollar index stands at 96.60, the early August low on the December futures contract, and at 95.365, the June bottom on the continuous contract. Resistance is at 99.305 and 99.33 in the upside.
The euro currency was 0.44% lower against the dollar since last week’s report. Falling interest rates, Brexit, and the sluggish pace of growth in Europe continues to be the most significant factors for the path of least resistance of the euro. However, a Brexit deal would go a long way to removing some of the uncertainty that has hung over the euro. Meanwhile, the interest rate differential between the dollar and the euro will likely keep a cap on any potential rallies in the euro. Holding the euro currency on a short-term basis involved a cost, while long positions in the US dollar continue to provide a yield. The new President of the ECB, Christine Lagarde is likely to advocate for more fiscal stimulus from EU members during her term.
The leader of the digital currency asset class had experienced a significant recovery after trading below the $7,300 level. Over the past week, Bitcoin edged lower but kept most of its recent gains. Bitcoin was trading at the $9,333.57 level as of November 6, as it lost 0.57% compared to the value on October 29. Bitcoin posted an over 24% gain in the last report. Ethereum rose 1.32% and was at $189.86 per token on Wednesday. The market cap of the entire asset class moved 0.61% higher after posting an almost 22% gain last week. The number of tokens rose by 36 since October 29 to 3083 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 16.06% since last week, as higher prices in the asset class attracted more speculative activity. The next level to watch on the upside in Bitcoin is at around the $10,050 per token.
The Canadian dollar moved 0.74% lower since last week. Open interest in C$ futures rose by 1.57% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. The C$ put in a bearish reversal on the daily chart on October 29 and followed through on the downside. However, I expect the currency to make a higher low against the US dollar.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 0.19% since last week’s report.
The British pound posted a 0.09% loss since the previous report. A general election will take place on December 12, which will serve as a second Brexit referendum. Boris Johnson currently enjoys a substantial lead in the polls, but elections can be tricky. The UK and the US have become accustomed to election surprises since 2016. Over the past week, the Prime Minister rejected any political pact with Nigel Farage and his Brexit Party. We could see increased volatility in the pound going into the election. However, a victory by the Prime Minister and deal on Brexit would likely cause the pound to rally and could take the British currency to the $1.40 level or higher against the US dollar.
The Brazilian real moved lower since October 29 as it fell by 1.88% after recent gains. Even though the real had been moving higher against the dollar, it remains not far above its lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks.
Gold continued to trade around the $1500 level over the past week, but a correction sent it below the pivot point with silver back under $18 per ounce. Precious metals continue to consolidate and signal that the value of all fiat currencies, including the US dollar, is trending lower given accommodative central bank policies.
Three of the four of the precious metals that trade on the COMEX and NYMEX futures exchanges moved marginally higher over the past week. Only silver, which is always the most volatile member of the sector posted a loss. Platinum was the leader of the pack on a percentage basis since October 29. While the price of rhodium was steady, palladium moved to a new record high, which has become routine for the platinum group metal. Gold continues to trade around the $1500 per ounce pivot point, but silver fell below $18 per ounce over recent sessions.
Gold was only 0.16% higher since last week, while silver corrected 1.31% lower. The price of December gold was just above the $1493 per ounce level on Wednesday, while silver was below the $17.60 level. December gold futures reached a peak at $1566.20 on September 4, and December silver climbed to $19.75 on the same day. Both metals corrected lower and have been digesting the gains over the past months. While gold broke out to the upside above the 2016 high, silver has yet to accomplish that feat.
The price of platinum rose by 0.71% since last week. The level of technical resistance is at the September 5 high at $1000.80 on September 5. January platinum futures were around the $931.70 level on Tuesday. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium moved $30 higher since the previous report. The midpoint price of the metal was at $5170 per ounce on November 6. Palladium was 0.34% higher on the week as the price traded to a new peak at $1799.20 on October 30 and closed at the $1761.10 per ounce level on Wednesday. Palladium continues to march higher and achieve new record peaks.
Open interest in the gold futures market moved 6.12% higher over the past week and to a new record peak at over 690,000 contracts. The metric moved 4.23% higher in platinum while it was 3.13% lower in the palladium futures market. Silver open interest increased by 2.42% over the period. Investors and market participants continue to gobble up precious metals.
The Fed’s 25 basis point cut was the third since July 31. Falling interest rates tend to be supportive of the prices of precious metals. Lower rates cause the cost of carrying both inventories and long positions to decline. Moreover, lower yields on fixed-income securities make the metals more attractive investment vehicles. Falling rates around the world continue to provide support for the prices of precious metals with gold leading the way as it is the leading metal when it comes to investors around the globe. In Q3, gold ETF experienced huge inflows.
The silver-gold ratio was moved higher since the last report as silver unperformed gold.
The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 84.70 on Wednesday, up 1.03 from the level on October 29. 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 0.16% higher, the GDX was 0.40% higher since October 29, and GDXJ appreciated by 1.46% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week was supportive of the gold market. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 1.08% loss since October 29, outperforming the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels and will continue to appreciate given the path of global interest rates.
Platinum and palladium posted gains since October 29. December Palladium was trading at a premium over January platinum with the differential at the $829.40 per ounce level on Wednesday, which slightly narrowed from the previous week but was still close to a new record level. January platinum was trading at a $561.40 discount to December gold at the settlement prices on October 29, which narrowed since the previous report. The price of rhodium, which does not trade on the futures market, did not move much over the past week and was at $5,170 per ounce on Wednesday. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is double the current price. However, markets rarely move in a straight line. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Nothing changed in the rhodium market since October 29.
We are long the PPLT platinum ETF product, which moved 0.99% higher since October 29. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move above the $1000 and $1200 resistance levels to break to the upside on a technical basis. Platinum could be heading for another test of the $1000 per ounce level.
The bottom line is that falling interest rates are a supportive factor for precious metals prices. The many issues facing the world when it comes to both politics and economics create a bullish environment for the precious metals sector of the commodities asset class. Gold seems to be moving lower when optimism over a trade deal rises and higher when it declines.
The leading members of the energy sector posted gains since the previous report. WTI and Brent futures edged higher. However, gasoline and heating oil futures declined a bit. The price of natural gas moved to the upside, but ethanol fell. Rotterdam coal continued to decline. OPEC ministers will meet in Vienna, Austria, at the beginning of December to decide on production policy for the first six months of 2020. The price of Brent futures is at the low end of the cartel’s desired range.
December NYMEX crude oil futures rose by 1.46% over the past week. December Brent futures rolled to January moved 0.80% higher since October 29. December gasoline was 0.94% lower, and the processing spread in December posted a 11.10% loss since last week as gasoline underperformed the price of crude oil over the period. Since early September, the gasoline crack spread had been moving steadily higher even though it is the seasonally weak time of the year. December heating oil futures moved 0.93% lower since the previous report, and the heating oil crack spread was 5.93% lower since October 29.
Technical resistance in the December NYMEX crude oil futures contract is at $59.11 per barrel level, the high from September 23, with support at the $50.89 level. Crude oil open interest rose by 1.66% over the period. Trade and Iran continue to be the drivers of the path of least resistance for crude oil prices over the coming days and weeks. The de-escalation in the trade war between the US and China over recent weeks is a supportive factor for the price of the energy commodity. The 2020 Presidential election could turn out to be a referendum on US energy policy as the progressive wing of Democrats favors banning fracking. The US is the world’s leading oil producer these days. An end to fracking could return Russia and Saudi Arabia as the leading forces in oil production if the “Green New Deal” becomes US policy.
The spread between Brent and WTI crude oil futures in
January moved lower to the $5.34 per barrel level for Brent, which was $0.25 below the October 29 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 January contract reached a high at a lower level at $6.82 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.39 on September 3. The tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil is at $50 per barrel.
US daily production stood at 12.6 million barrels per day as of October 25, according to the Energy Information Administration, which was at the record peak for daily output. As of October 25, the API reported a decrease of 1.70 million barrels of crude oil stockpiles, while the EIA said they rose by 5.70 million barrels for the same week. The API reported a decline of 4.70 million barrels of gasoline stocks and said distillate inventories fell 1.60 million barrels as of October 25. The EIA reported a fall in gasoline stocks of 3.00 million barrels and a decrease in distillates of 1.00 million barrels. Rig counts, as reported by Baker Hughes, fell by five last week to 691 rigs in operations as of November 1, which is 183 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.6 million barrels per day level is a sign of the efficiency of the oil business in the US. The decline in the rig count is significant and could weigh on production and provide some degree of support for the price of oil. The next significant event for the crude oil market will be the meeting of OPEC oil ministers at the beginning of next month. The price of Brent crude oil is near the bottom of the cartel’s desired trading range between $60 and $70 per barrel, which could lead the ministers to increase production cuts to support the price.
OIH and VLO shares moved in opposite directions since last week. OIH rose by 0.08%, while VLO moved 0.47% lower since October 29. The recent strength in VLO had been because of strong refining margins that go directly to the bottom line of processing companies. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks. I will wait before adding any more shares to the position in OIH, given the price action last year at this time. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in last week’s report, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.” ERX was 2.38% higher since last week’s report. Any sector rotation that causes a recovery in shares within the oil patch could have explosive results for the ERX product over the coming weeks. I am using tight stops on a long position in the product and will re-enter if the market triggers stops. I expect to take small losses in the quest for a significant profit as I would ride a bullish wave with trailing stops in ERX.
December natural gas futures were at $2.828 on November 6, which was 7.16% higher than on October 29. The futures contract traded to a high at $2.905 during the week. Last week, the EIA reported an injection of 89 bcf into storage, bringing the total amount of gas in storage to 3.695 tcf as of October 25. 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. Stocks had already moved above the late 2018 high in September. We are now at the end of the 2019 injection season.
As the chart shows, stockpiles of natural gas are 17.8% above last year’s level and 1.40% above the five-year average as of October 24. This week, I expect the EIA to report an injection of around 54 bcf as the injection season begins to wind down. Open interest fell by 2.24% over the past week. Technical resistance is now at $2.905 per MMBtu level on the December futures contract with support at $2.388. The $2.187 and $2.135 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $3.00 per MMBtu. As I wrote last week, “I continue to favor buying on price weakness but expect a significant recovery sooner rather than later in the natural gas futures market as November arrives this week.” I would look to take profits on existing long positions in natural gas, starting at the $2.90 level on a scale-up basis.
With approximately two weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 152.5 bcf per week to reach the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.80 tcf level at the beginning of the withdrawal season in November. In 2015 and 2016, stocks rose to record levels at over four tcf before the start of winter.
I have favored buying call options with strike prices at the $2.80 to $3.00 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market on price weakness. The January $2.80 call at 29.2 cents was 6.80 cents higher since last week.
I had also been buying the leveraged GASL product on dips. In GASL, I will continue to work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. GASL was at the $8.16 level on Wednesday, up $0.61 on the week. I will not work any stops on the call option positions as I will at least hold them until the end of 2019. I had been stopping out of GASL for small losses but continue to re-establish long positions at lower levels looking to catch an updraft with the leveraged product. I had no position in GASL as of Wednesday after taking profits on Tuesday. I would use a tight stop on any long position in the GASL product.
December ethanol prices moved 2.96% lower over the past week. Open interest in the thinly traded ethanol futures market rose by 13.69% over the past week. However, with only 656 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product was unchanged compared to its price on October 29 but the price of January coal futures in Rotterdam dropped by 1.68% over the past week.
The API reported that crude oil inventories rose by 4.26 million barrels for the week ending on November 1. The market had expected a rise of 1.515 million barrels. On Wednesday, the EIA said that stockpiles rose by 7.90 million barrels for the same period. While the consensus estimate was for a 1.809-million-barrel decline in gasoline inventories, the API said they fell by 4.00 million. Distillate stocks decreased by 1.60 million barrels for the week ending on November 1, according to the API. The EIA reported declines of 2.80 million and 600,000 barrels for gasoline and distillate stocks, respectively, for as of the first day of November. The inventory data was bearish for the price of crude oil.
Iran continues to lurk in the background of the oil market these days. While there have been no significant provocations since the mid-September attacks on Saudi oilfields, US sanctions continue to choke the Iranian economy. Any actions that threaten production, refining, or logistical routes in the region could cause short-term price spikes in the oil futures market. Iran remains a supportive factor for the price of the energy commodity.
In natural gas, the most recent price action reflects the coming winter season and uncertainty of the average temperatures across the US in November through March.
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.907 in January, which was 18.30 cents per MMBtu higher than last week. I am sitting on positions in December through February call options with strike prices from the $2.70-$3.00 per MMBtu levels, and I am trading the GASL product from the long side. My stops and profit levels on GASL will be tight, given the volatile nature of the product. I continue to believe that natural gas will test $3 and perhaps higher over the coming days and weeks.
I have been tracking the price action in BG shares. Since October 9, the price of BG shares moved 1.74% lower to $55.21 per share on November 6. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.
Aside from rig count, inventories, and trade, the Middle East remains on the center of the stage in the oil market. The potential for more incidents will keep a bid under the price of oil. While Iran is supportive when it comes to the supply side of the oil market, the US-Chinese trade war will impact the demand side. Recent progress towards a trade deal should improve economic conditions, which is bullish. However, the two sides have a long way to go when it comes to a comprehensive agreement.
I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. I will continue to favor the long side of the market in crude oil and natural gas over the coming week. Crude oil was near the bottom end of its trading range, and it bounced. I will move to the sidelines on any move below the $50 level in December futures. Nothing has changed when it comes to my opinion of the crude oil market over the past week. Meanwhile, we could see price volatility increase going into the early December OPEC meeting, which is now less than one month away.
I continue to hold a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 0.56% lower over the past week at $15.95 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and volatility in the overall stock market pushed the price of the shares lower over the recent weeks.
The stock market made new highs over the past week, but the oil-related companies continue to experience pressure. The potential for a policy shift in the US after the 2020 election could be weighing on energy company shares. However, a period of sector rotation is long overdue, and if stocks continue to move to the upside, investors and traders will hunt for bargains. Energy stocks are trading at low multiples and continue to pay attractive dividends in the current environment. I believe that risk-reward favors higher share prices for the oil and gas patch. I would be a buyer on price weakness but would be quick to take profits or put a trailing stop on long positions if share prices begin to move to the upside. I remain cautiously bullish on oil and natural gas prices but will continue to trade with tight stops.
The US Department of Agriculture will release its November World Agricultural Supply and Demand Estimates report this Friday, November 8, at noon EST. The end of the 2019 crop year wrapped up with the harvest. Trade between the US and China weighed on prices throughout the crop year, but there were no significant weather events that caused price appreciation to any notable degree. The focus is not on the weather conditions south of the equator in countries like Brazil and Argentina. It will not be long before the futures market begins to look towards the next crop year in the US and northern hemisphere that starts in the spring of 2020. Grain prices were steady since the last report as the market prepared for the November WASDE report. WASDE is the gold-standard when it comes to fundamental supply and demand data in the US and around the globe.
November soybean futures rolled to January and moved 0.54% lower over the past week and was at $9.2750 per bushel on Wednesday. Open interest in the soybean futures market fell by 4.27% since last week after a decline of 7.50% last week. Price momentum and relative strength indicators on the daily chart were in oversold territory on November 6.
The March synthetic soybean crush spread moved lower over the past week and was at the $0.84.50 per bushel level on November 6, up 4.0 cents since October 29. 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 March crush spread was supportive of the price of the oilseed futures.
December corn was trading at $3.7875 per bushel on November 6, which was 1.94% lower on the week.
Open interest in the corn futures market rose by 0.66% since October 29. Technical metrics were falling towards oversold territory in the corn futures market as of Wednesday. The price of ethanol fell by 2.96% since the previous report on the back of weakness in the corn futures market. December ethanol futures were at $1.3770 per gallon on Wednesday. The spread between December gasoline and ethanol futures widened to 24.92 cents per gallon on November 6, up 2.66 cents since last week.
December CBOT wheat futures rose 1.03% since last week. The December futures were trading $5.1675 level on November 6. Open interest rose by 1.96% over the past week in CBOT wheat futures.
As of Wednesday, the KCBT-CBOT spread in December was trading at a 89.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread narrowed by just 3.50 cents since October 29. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” The spread continues to be at a level that is bearish for the wheat market. The spread is close to the highest level in years.
My positions in the grain markets continue to be small, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The trade dispute between the US and China remains one of the most significant factors for the prices of soybeans and corn. Any news from the trade front between the US and China could cause increased volatility. The bottom line is that optimism over trade is bullish for the prices of agricultural commodities, while pessimism would continue to weigh on prices. Over the past week, optimism continued to provide some support for prices. We could see some volatility in grain prices later this week when the USDA publishes the November WASDE report. However, trade and the weather in South America will be the primary issues when it comes to the path of least resistance of prices over the rest of 2019.
Copper, Metals, and Minerals
Base metals and industrial commodities prices moved mostly lower since October 29. Trade between the US and China continues to be the most significant issue facing the base metals and other industrial commodities. Copper is the leader of the base metals. However, nickel has been the best-performing nonferrous metal over the past months because of the mineral export ban in Indonesia that will take effect on January 1, 2020. Over the past week, prices and inventories both moved to the downside in most of the members of the sector.
Lumber was just below the $400 per 1,000 board feet level over the recent sessions. Iron ore edged higher, while the Baltic Dry Index continued to fall as the winter months in the northern hemisphere have arrived. The price of uranium edged lower since the last report.
Copper moved 0.99% lower on COMEX, while the red metal posted a 0.03% gain on the LME since the last report. Open interest in the COMEX futures market moved 3.29% lower over the past week. Copper was trading at $2.6650 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade war between the US and China. The de-escalation has been moderately bullish news for the red metal, which is the leading force in the base metals sector. However, the red metal will need to see more progress to move above the $2.70 per pound level.
Copper has been trading in a range from under $2.50 to around the $2.70 per ounce level. Over the past week, copper inventories declined a bit on the LME and increased on the COMEX. The worst civil unrest in three decades in Chile, the world’s leading copper-producing nation, has provided some support for the price of the red metal. Anti-government protests that include the powerful mining unions could lead to production disruptions and logistical problems over the coming weeks and months. The political issues in Chile led to the cancelation of the summit between President Trump and President Xi last week.
The LME lead price moved lower by 1.93% since October 29. Many analysts are forecasting a physical downstream deficit in lead because of increased demand from electric automobiles. The price of nickel fell by 2.73% over the past week even though China increased imports of ore ahead of the export ban in Indonesia that will start on the first day of 2020. Tin fell by 1.93% since the previous report. The $16,600 per ton short-term support level gave way over the recent sessions. Aluminum was 1.76% higher on the week as inventories fell. The price of zinc rose 0.04% since October 29, as inventories continued to decline. Critical support is around $2355, with resistance at $2550 in the zinc market. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.
January lumber futures were at the $396.00 level, 3.42% lower since the previous report. The price of uranium for December was 0.41% lower at $24.24 per pound. The Baltic Dry Index was 8.15% lower since last week as the shipping rate moved lower as the winter months approach. December iron ore futures posted a 0.55% gain compared to the price on October 29. Open interest in the thinly traded lumber futures market fell by 0.54% over the past week, after an over 15% rise last week.
LME copper inventories dropped by 2.99% to 248,000 metric tons since last week. COMEX copper stocks increased by 5.94% from last week to 37,060 tons. Lead stockpiles on the LME rose by 0.76%, while aluminum stocks declined by 1.30%. Aluminum stocks fell to the 956,300-ton level. Zinc stocks moved 7.36% lower since the previous report. Tin inventories moved 7.21% lower since last week to 6,115 tons. Nickel inventories were 1.67% lower compared to the level on October 28, in a continuation of the trend of falling stockpiles as the Indonesian export ban is set to take effect on January 1. Nickel stocks tumbled by around 19% last week. The decline in nickel inventories could turn out to be highly supportive of gains in the nickel market on the LME. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The fear of war in the Middle East and Brexit could impact behavior in markets, and base metals are no exception. Over the past week, the news cycle continued to provide some support for prices. In Chile, an increase in civil unrest that includes unions could reduce copper supplies and cause the price to rally above the resistance level at just over $2.70 per pound on the December futures contract on COMEX. However, trade is the leading issue, and the market is waiting for further progress in trade negotiations before buying returns to the metal markets.
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 $2.03 per share on Wednesday, up five cents over the past week.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.19 on November 6, up 29 cents since last week. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:
US Steel shares were at $12.84 per share and moved 5.07% higher on the back of a positive earnings report.
We own two units of FCX shares at an average of $10.56. The stock was trading at $10.64 on November 6, $0.41 higher since the previous report. I will maintain a small long position in FCX shares and would add if the price drops below $8 per share.
A return of optimism surrounding global economic growth should be bullish for the prices of base metals and industrial commodities. The trade war between the US and China continue to be the most significant factor facing this sector of the commodities market. Nothing has changed in the industrial commodities sector over the past week. Each of the members of the industrial commodities sector has individual supply and demand characteristics. However, the macro-economic landscape tends to move the prices of the commodities higher or lower, so the Chinese economy and trade war are the primary drivers of the sector. Nothing much changed since last week in this sector of the commodities market.
Live and feeder cattle futures moved higher by almost 2% over the past week, while lean hogs posted a smaller gain. We are in the heart of the offseason in the animal protein sector at this time of the year. The meats will move higher or lower based on any changes in supply and demand fundamentals. On Friday, November 8, the USDA will update the animal protein markets in its monthly WASDE report for November. At the same time, currency movements in Brazil and Argentina, both significant producing countries, could cause prices to move over the coming weeks and months.
December live cattle futures were at $1.19000 per pound level up 1.86% from last week. Technical resistance is at $1.20325 and $1.3000 per pound. Technical support stands at around $1.1000 per pound level, as the market continued to move to the upside over the past week. Price momentum and relative strength indicators are in overbought territory. Open interest in the live cattle futures market moved 10.75% higher since the last report. Rising price and increasing open interest tend to be a bullish sign in a futures market.
January feeder cattle futures marginally outperformed live cattle as they rose by 2.00% since last week. January feeder cattle futures were trading at the $1.444250 per pound level with support at $1.38525 and resistance at $1.46700 per pound. Open interest in feeder cattle futures rose by 4.41% 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 edged higher over the past week after the price ran into selling at over the 70 cents per pound level in mid-October. The active month December lean hogs were at 64.775 cents on November 6, which was 0.70% higher on the week. Hog futures were trading below the middle of the recent trading range on Tuesday. The open interest metric rose by 3.35% from last week’s level. Price momentum and the relative strength index were in oversold territory. Support is at 63.075 cents with technical resistance on the December futures contract at 72.725 cents per pound level.
The forward curve in live cattle is in contango from December 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 April 2021. The Feeder cattle forward curve is in backwardation from November 2019 through March 2020, and contango from March 2020 through September 2020 when a slight backwardation returns until October 2020.
In the lean hog futures arena, there is contango from December 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through April 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months. China needs US pork exports given the current situation, and we could see purchases as a result of “phase one” of a trade agreement if both sides sign a deal. Optimism over trade has not translated into sustained buying in the lean hog futures market, but prices for June and July were at just over 90 cents per pound. We could see volatility on the back of trade news over the coming weeks.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the December futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.83710:1 compared to 1.81620:1 in the previous report. The spread increased by 2.09 cents as live cattle became more expensive compared to lean hogs on a historical basis. The spread moved away from the historical norm.
Trade is the most significant factor facing the animal protein sector over the coming weeks. However, production in Argentina and Brazil and any moves in the currency markets could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices. In the heart of the offseason for animal protein demand, the price action over the past few weeks has been stable. Cattle prices have continued to climb over the past week. However, the risk of a correction increases with the price. Lean hog futures have corrected from over 70 cents per pound but have been consolidating between 63 and 67 cents since October 22. While seasonality favors a quiet market throughout the rest of 2019, we could see price volatility on the back of developments in the trade war between the US and Chinese. The next significant event for the meat futures markets is Friday’s WASDE report.
The prices of three of the five soft commodities moved higher over the past week. Coffee was the best performing member of the sector as the price moved back above the $1 per pound level. Sugar and FCOJ futures moved higher as of the close of business on November 6 compared to their prices on October 29. The prices of cocoa and cotton moved lower since last week.
March sugar futures rose 1.78% lower since October 29, as the price of the sweet commodity was around the 12.56 cents per pound level. Technical resistance is at the October 15 peak at 12.73 cents with support at 12.05 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is another level of support. The value of the December Brazilian real against the US dollar moved lower since last week and was at the $0.244750 level against the US dollar, which was $0.00470or 1.88% lower. The Brazilian currency remains near its multiyear lows, which is likely contributing to the overall weakness in the price of sugar and other commodities where Brazil is a leading producer and exporter. However, it has been edging higher and recovering over the recent weeks, which could be a function in the overall correction in the US dollar.
Price momentum and relative strength on the daily sugar chart have climbed above neutral territory. The metrics on the monthly chart reflects a neutral condition. If sugar suffers a substantial decline, I will look to add to long positions, but that does not seem likely. Sugar open interest rose by 1.60% over the past week. I will be looking to add to the long position in CANE at lower levels. I expect the price of sugar to move higher over the coming weeks and months.
December coffee futures rose by 9.15% since last week’s report and were trading at the $1.0800 per pound level. Short-term support is at the August 20 low at $1.00 on the December futures contract. Resistance is at $1.1440. 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 $35.90 on Wednesday. Open interest in the coffee futures market fell by 0.64% since last week. I continue to believe the soft commodity has room on the upside. I had been a scale-down buyer. I have taken some profits but will keep a small long core position in the coffee futures market and the JO ETN product.
The price of cocoa futures fell marginally since last week. On Wednesday, December cocoa futures were at the $2444 per ton level, 1.65% lower than last week. Open interest increased by 2.30%. Relative strength and price momentum moved below neutral territory on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures on the weekly chart. We are long the NIB ETN product at $25.76. NIB closed at $28.07 on Wednesday, November 6. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide some degree of support to the cocoa market on price dips.
December cotton futures moved 1.59% lower over the past week. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. December cotton was trading at 63.69 cents on November 6 after rising to a high of 65.99 on October 30. The next level on the upside above the recent high is at the 68.35 cents per pound level on the December contract, the July 1 peak. On the downside, support is at 60, 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 3.26% since October 28.
Price momentum and relative strength metrics were falling towards oversold conditions on Wednesday. The metric remains in an oversold condition on the monthly chart but is attempting to cross higher. I continue to believe that the price level limits the downside prospects for the cotton futures market, and positive news on the trade front could ignite rallies as we witnessed recently.
January FCOJ rose over the past week. On Wednesday, the price of January futures was trading around 99.25 cents per pound. FCOJ nearby futures moved 1.43% higher over the past week. Support is at the 96.10 cents level. Technical resistance is at around $1.0705 per pound. Open interest fell by 0.20% since October 28. OJ tends to rally as the winter season approaches each year. In November 2016, FCOJ hit its all-time peak at $2.35 per pound.
The price action in sugar and coffee is likely to follow any moves in the Brazilian real versus the US dollar currency relationship over the coming weeks. Cocoa should find support from the proposed $400 per ton surcharge by the two West African nations that produce over 60% of the world’s supplies each year. Cotton could become volatile later this week as the USDA releases its November WASDE report. FCOJ futures are moving into the winter season, which is typically a time of price appreciations. The uncertainty of the weather conditions in Florida and Brazil and the potential for crop disease can inject price variance into the orange juice futures market.
A final note
Friday’s WASDE report is the next significant event for the commodities sector, but at the end of the harvest season, there are not likely to be any surprises. In early December, the oil ministers of OPEC will meet, which always has the potential to cause price volatility in the energy commodity. The price of natural gas has rallied on the uncertainty of the weather conditions and average temperatures across the US over the coming weeks and months during the peak heating season.
Gold and other metals have found support from the dovish Fed and accommodative monetary policies of other world central banks. Both gold and silver continue to consolidate below the early September highs. I continue to favor these metals in the current interest rate environment. In December, the final Fed meeting of the year could inject more volatility into the markets. Until then, the Fed will be watching US economic data, inflation, trade, Brexit, impeachment, and the myriad of other issues facing markets.
As the end of the year approaches, the 2020 Presidential election that could have a significant impact on energy and tax policy will take the center of the stage. I expect that volatility will remain the norm rather than the exception in markets across all asset classes over the coming year.
Until next week,
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.