• The US dollar slips to a seven-week low
  • Optimism rises over a “phase one” trade deal between the US and China
  • Precious metals continue to slip, but palladium rises to new record higher
  • Strength in energy and grains
  • The markets await news and the October 30 Fed meeting

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, October 10, stocks moved higher while US and Chinese negotiators met in Washington, DC. Some optimism returned to markets when it comes to progress that could de-escalate the trade war. The Us 30-Year Bond futures fell by around 1-14 on the session, and the dollar index was 0.400 lower. The USDA released a mostly bearish World Agricultural Supply and Demand Estimates report for October. Grain prices moved to the downside led by losses in the corn futures market. Crude oil moved higher with gains in oil products. However, natural gas moved lower after the EIA reported that stocks rose by 98 bcf for the week ending on October 4. Gold and silver were lower, copper recovered to over the $2.60 per ounce level, and platinum and palladium posted gains. Meats posted marginal losses in the aftermath of the WASDE report. Cocoa moved higher, but cotton, FCOJ, coffee, and lumber prices moved to the downside. Sugar was unchanged on the session. Bitcoin slipped by $50 per token to $8,595.

On Friday, two missiles struck an Iranian tanker carrying crude oil off the coast of Saudi Arabia. Optimism over trade dominated market action on the final session of the week. At the same time, there seemed to be progress towards a Brexit agreement around the contentious issue of the Irish border. At the end of the day, the US and
China announced they reached an agreement on phase one of a trade pact. Stocks moved higher, and the dollar fell by 0.401 points. The 30-Year US Treasury bond fell 1-17. Grains moved higher across the board as phase one of the trade deal includes significant purchases of US agricultural products. Crude oil rallied along with products, but natural gas edged lower. Ethanol futures rose above the $1.50 level on the back of gains in corn. Gold, silver, platinum, and palladium markets all posted losses on the final session of the week. Cattle and lean hog prices moved to the upside. Cotton, FCOJ, coffee, cocoa, and lumber moved higher while sugar was unchanged. Cotton posted the most significant gain on the back of the news on trade. Bitcoin moved $240 lower to the $8355 per token level.

On Monday, the Chinese warned that it is too early to pop the champagne for the “phase one” trade deal with the US. China signaled it needs more time and another round of talks between the negotiators before there can be a deal on some of the issues. Stocks edged lower on Monday on some degree of disappointment. The 30-Year Treasury bond futures moved around 0-24 higher to over the 161 level. The dollar index rose to the 98.17 level. Crude oil prices moved lower after last week’s recovery. The price of nearby NYMEX crude oil was around the $53.50 level. Oil products moved higher with the price of the energy commodity. Natural gas moved away from the $2.20 level and settled at $2.28 per MMBtu on the active month November futures contract as the market realized that the peak season for demand is now only one month away. Gold and silver moved higher along with palladium. Platinum was little changed on the session as the price was trading around the $900 per ounce level. Grain prices edged modestly higher. Hogs pulled back a bit, buy cattle prices strengthened. Cotton and cocoa prices moved to the downside, but sugar, coffee, FCOJ, and lumber posted gains. Bitcoin was unchanged at the $8,355 per token level.

On Tuesday, stocks rose on the back of positive news out of the EU over Brexit. The markets gained as the UK and EU moved closer to an agreement on the departure of the UK from the union that could come together before the October 19 deadline. Grain prices edged lower but retained most of their recent gains. Crude oil continued to slip, but oil product prices moved higher, causing gains in crack spreads. Natural gas moved back above the $2.30 per MMBtu level while ethanol fell. Gold, silver, and platinum prices moved lower on the back of the positive Brexit news. However, palladium eclipsed the $1700 per ounce level for the first time rising to a high at $1706.20, which was another in a long series of new record highs. Feeder cattle edged lower, but live cattle posted a gain. Lean hogs were up the three cents per pound limit on the session as Chinese demand provided support for the price of pork. Coffee and lumber edged lower, while sugar, FCOJ, cotton, and cocoa posted gains. The dollar index edged lower, and the long-bond futures fell back to the 160 level on the December futures contract. Bitcoin was around the $8,175 level, $180 lower than the previous day.

On Wednesday, housing numbers were strong, but retail sales data was weak. The strike at GM appears to be ending, but the Beige Book from the Fed showed a slight downgrade in the US economy. The latest data has caused some economists to lower expectations for GDP growth to 1.5%, increasing the odds of a Fed rate cut at the October 30 meeting. Stocks traded in a narrow range and closed a bit lower on the session. The dollar index dropped to a seven-week low, and US 30-Year bonds move a touch higher to just over the 160 level. Grains did not move much as they wait for the next news on “phase one” of a trade deal with China. Crude oil edged a bit higher with oil products as crack spreads remained firm. Gold and silver moved higher, platinum was marginally higher, and palladium moved to a new high at $1744.70 per ounce. Live cattle were a touch higher, while feeder cattle moved slightly lower. Lean hog futures gave back half of the previous day’s gain but remained above the 70 cents per pound level on the December futures contract. Coffee, sugar, and cocoa edged lower, which cotton, FCOJ, and lumber moved a bit higher. Bitcoin dropped below the $8000 level to around $7,940 on the nearby CME futures contract.

Stocks and Bonds

At the end of last week, news that the US and China agreed to “phase one” of a trade agreement. At the same time, there was some progress between the UK and EU over the Irish border injected optimism into the equities markets. All of the leading stock indices recovered and posted gains since the previous report.

There could be plenty of pitfalls along the way on trade. The deadline for Brexit is at the end of this month. Meanwhile, without a deal in hand by October 19, the recent vote in the Parliament requires Prime Minister Johnson to request an extension for the Brexit deadline. Optimism returned to the stock market over the past week, but the road ahead could still be bumpy.

 

The S&P 500 rose by 2.41% since the previous report, while the NASDAQ moved 2.79% higher. The DJIA posted a 2.49% gain since the last report. Trade, Brexit, impeachment, and the Middle East are the issues at the forefront of the minds of traders and investors. A “phase one” agreement between the US and China was welcome news for the stock market supported gains, but October historically is a challenging month for equities.

Chinese large-cap stocks continued to outperform US stocks over the past week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.52 level on Wednesday, which was 3.16% higher than the closing level on October 9. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. The path of least resistance for FXI will depend on the progress of trade talks between the US and China.

US 30-Year bonds moved significantly lower since the last report. Volatility has been the hallmark of the bond market over recent months. The nearby long-bond futures contract traded to a new high at 167-18 in late August. The December contract rose to a high at 166-25 on August 28 and fell to a low at 157-17 on September 13. On Wednesday, it was at the 160-10 level as it moved 2.17% lower since the previous report. The long bond fell as the Fed minutes highlighted the division within the voting members of the FOMC when it comes to further rate cuts. Additionally, the de-escalation of the trade war was a welcome sign when it comes to global economic growth sending the bonds lower.

Open interest in the E-Mini S&P 500 futures contracts rose by 1.45% since October 9. Open interest in the long bond rose by 0.64% over the past week. The VIX moved lower as volatility in the stock market fell over the past week with higher stock prices. The volatility index was at the 13.68 level on October 16, 26.61% lower over the period. The VIX recently probed above the 20 level.

I will continue to buy the VIXY and other VIX related products and stop out for small losses. I will look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market, as we witnessed over the past weeks and months.  The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.

The potential for two-way price variance in the stock market remains high for the coming weeks and months.

 

The dollar and digital currencies

The dollar index moved lower since October 9. The index rose to a new high on the December contract at 99.305 on October 1. The December dollar index futures contract posted a 1.11% loss over the period. The index made a new and higher high at 99.33 on September 4 on the continuous contract and corrected to the downside. However, the dollar index continues to make higher lows and higher highs since reaching a bottom in February 2018.  The gap between US and other interest rates is a supportive factor for the greenback. The next level of technical support for the December dollar index stands at 97.56, the mid-September low.

The euro currency was 0.85% higher against the dollar since last week’s report. Falling interest rates, Brexit, and the sluggish pace of growth in Europe continues to be the most significant factor for the path of least resistance of the euro.

 

The leader of the digital currency asset class moved lower and was trading at the $8,001.69 level as of October 16. Bitcoin had broken to the downside in Q3.

Bitcoin fell by 6.81% since last week, while Ethereum posted an 8.49% loss as it was at around $174.53 per token. The market cap of the entire asset class moved 6.40% higher as it outperformed Bitcoin and Ethereum. The number of tokens rose by 28 since October 9 to 2989 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 3.29% since last week but fell by over 20% in the most recent report.

The prices of cryptocurrencies appear to be consolidating at current levels.

The Canadian dollar moved 1.03% higher since last week. Open interest in C$ futures rose by 9.53% 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. A rebound in crude oil and grain prices supported the value of the Canadian currency.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 0.50% since last week’s report. The rise in the FXI is a supportive factor for the Australian dollar.

The British pound posted a 5.12% gain since the previous report after optimism over a deal on Brexit rose. We are likely to see a wide range in the pound over the coming weeks. The pound will be sensitive to the next move on Brexit. The British currency had been falling over the prospects for a hard Brexit, but a deal would likely push the value of the currency significantly higher.

The Brazilian real moved lower since October 9 as it fell by 1.54%. The real remains not far above its lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks.

 

Gold fell towards the bottom end of its recent trading range over the past week. The optimism over trade and a deal on Brexit removed some fear and uncertainty from the markets, which weighed on the value of the yellow metal. The price of gold dropped alongside the dollar index. Gold and the dollar have been moving in the same direction since June, which is a departure from the historical norm between the metal and the currency.

 

Precious Metals

Gold and silver prices moved lower since last week but remained within their respective consolidation ranges. Platinum edged lower and palladium moved to a new high, while rhodium moved to the upside since the last report.

Gold was 1.24% lower since last week, and silver fell 2.15%. The price of December gold was below the $1495 per ounce level on Wednesday, while silver was just over $17.40. After December gold reached a peak at $1566.20 on September 4, and December silver climbed to $19.75 on the same day, both metals turned to the downside and have been consolidating and digesting their gains. While gold broke out to the upside above the 2016 high, silver did not make it to the milestone.

The price of platinum fell by 0.67% since last week. The level of technical resistance is now at the September 5 high at $1000.80 on September 5. December platinum futures were around the $890.70 level on Wednesday. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium rose by 8.63% since the previous report. The midpoint price of the metal was at $5350 per ounce on October 16. Palladium was 4.85% higher on the week as the price traded to a new peak at $1744.70 on Wednesday and closed at the $1735 per ounce level on Wednesday.

Open interest in the gold futures market moved 1.55% lower over the past week. The metric moved 1.83% higher in platinum while it was 5.33% higher in the palladium futures market. Silver open interest fell by 1.43% over the period.

Gold and silver have taken a rest as optimism over both trade and Brexit returned to the market. Even though the dollar index drifted to the downside, the two precious metals moved lower.

The silver-gold ratio moved higher since the last report.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 85.73 on Wednesday, 0.78 higher than the level on September 25. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, but it had been playing catchup over recent weeks. The ratio had declined to a low at 79.30 on September 4 when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 1.24% lower, the GDX was 4.81% lower since October 9, and GDXJ was 3.81% below the level from the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week reflected the continued consolidation in the gold market. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 2.11% loss since October 9, marginally outperformed the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels and will continue to appreciate given the path of global interest rates.

Platinum group metals moved in opposite directions since October 9. January platinum futures fell by just 0.67% to the $890.70 per ounce level. Palladium posted a 4.85% gain as of the close of business on October 16 and was at the $1735 per ounce level. December Palladium was trading at a premium over January platinum with the differential at the $844.30 per ounce level on Wednesday, which widened to a new record level over the past week. January platinum was trading at a $603.30 discount to December gold at the settlement prices on October 16, which narrowed since the previous report. The price of rhodium, which does not trade on the futures market, moved $425 higher over the past week and was at $5,350 per ounce on Wednesday. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is double the current price. However, markets rarely move in a straight line. Rhodium has been then best-performing precious metal since 2016.

We are long the PPLT platinum ETF product, which moved 0.75% lower since October 9. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move above the $1000 and $1200 resistance levels to break to the upside on a technical basis. Platinum seems to be in a holding pattern around the $900 per ounce level.

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

 

Energy Commodities

Crude oil and oil products recovered over the past week. Crack spreads have been strong over recent weeks while the price of oil was falling, which was a sign of strength for the oil patch. Over the past week, gasoline processing spreads moved slightly higher while distillates moved lower. Natural gas traded below the $2.20 per MMBtu level, but turned higher because of the coming peak season for demand. Ethanol fell and coal prices moved to the downside since the previous report.

The price of crude oil bounced from the $51 per barrel level over the past week. Two rockets struck an Iranian oil taker moving through the Red Sea late last week, which caused some buying in the crude oil market.

November NYMEX crude oil futures rose by 1.46% over the past week. December Brent futures moved 1.96% higher since October 9. November gasoline was 2.38% higher, and the processing spread in November posted a 6.29% gain since last week as gasoline outperformed the price of crude oil over the period. Since early December, the gasoline crack spread has been moving steadily higher even though it is now in a seasonally weak period of the year. November heating oil futures moved 1.21% higher since the previous report, and the heating oil crack spread rose by 0.57% since the last report.

Technical resistance in the November NYMEX crude oil futures contract is at $63.89 per barrel level, the high from September 16, with support at the $50.48 level. Crude oil open interest rose by 1.47% 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. Last week I wrote, “I believe that price weakness offers market participants buying opportunities in the oil patch.” The de-escalation in the trade war between the US and China is a supportive factor for the price of the energy commodity.

The spread between Brent and WTI crude oil futures in
December rose to the $5.97 per barrel level for Brent, which was $0.30 above the October 9 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the December contract reached a high at a lower level at $7.39 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.47 on August 19. The rising tensions in the Middle East should keep a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil is at $50 per barrel.

US daily production stood at 12.6 million barrels per day as of October 4, according to the Energy Information Administration, which was a new record peak for daily output. As of October 4, the API reported an increase of 4.13 million barrels of crude oil stockpiles, while the EIA said they rose by 2.90 million barrels for the same week. The API reported a decline of 5.94 million barrels of gasoline stocks and said distillate inventories fell by 3.98 million barrels as of October 4. The EIA reported a fall in gasoline stocks of 1.2 million barrels and a decrease in distillates of 3.90 million barrels. Rig counts, as reported by Baker Hughes, rose by two last week to 712 rigs in operations as of October 11, which is 157 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.6 million barrels per day level is a sign of the efficiency of the oil business in the US. As the rig count continues to drop, it could eventually weigh on production and provide some degree of support for the price of oil. However, that has yet to materialize. Record US production eased the blow when it comes to the loss of output from Saudi Arabia in mid-September. President Trump said that he would release oil from the US strategic stockpiles to offset the impact of any hostilities in the Middle East. Iran continues to stand as the issue that could cause wide price variance in the crude oil market throughout the rest of 2019 and into 2020. The latest missile attack on the Iranian tanker could lead to more incidents in the coming days and weeks.

OIH and VLO shares posted gains since last week. OIH rose by 4.52%, and VLO moved 4.73% higher since October 9. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks. I will wait before adding any more shares to the position in OIH, given the price action last year at this time.

November natural gas futures hit a low so far in 2019 on August 5 at $2.135 per MMBtu while the continuous contract fell to $2.029. Over the past week, the price fell to a low at $2.187 on October 11 and turned higher. The November futures were at $2.303 on October 16, which was 3.09% higher than on October 9. Last week, the EIA reported an injection of 98 bcf into storage, bringing the total amount of gas in storage to 3.415 tcf as of October 4. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. As of the end of September, stocks had already moved above the late 2018 high.

Source: EIA

As the chart shows, stockpiles of natural gas are 16% above last year’s level but were still just 0.30% under the five-year average as of October 4. This week, I expect the EIA to report an injection of around 130 bcf as the injection season begins to wind down. Open interest rose by 1.94% over the past week. Technical resistance is now at $2.745 per MMBtu level on the November futures contract. The $2.187 and $2.135 per MMBtu levels stand as technical support. I continue to favor buying on price weakness on price weakness over the coming weeks.

With approximately five weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 117 bcf per week to reach the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.9 tcf level at the beginning of the withdrawal season in November. In 2015 and 2016, stocks rose to record levels at over four tcf before the start of winter.

I favor buying call options with strike prices at the $2.80 to $3.00 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market over the recent weeks. The January $2.80 call at 18.2 cents was 1.10 cents higher since last week. At the current level, I believe the call options offer value and a limited risk approach to the natural gas futures market. I had also been buying the leveraged GASL product on dips. In GASL, I will continue to work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. GASL was at the $6.65 level on Wednesday, up $0.10 on the week. I will not work any stops on the call option positions as I will at least hold them into the early winter months at the end of 2019. I did some light call buying over the past week on the price dip and will continue to add to long positions if the natural gas market experiences further price weakness.  I had been stopping out of GASL for small losses but continue to re-establish long positions at lower levels looking to catch an updraft with the leveraged product. GASL is getting to a level where it could experience a reverse split.

November ethanol prices moved 5.14% lower on the over the past week. Open interest in the thinly traded ethanol futures market rose by 8.43% over the past week. However, with only 592 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose by 2.32% compared to its price on October 9, but the price of January coal futures in Rotterdam dropped by 2.22% over the past week.

On Wednesday, the API reported that oil inventories rose by a larger than expected 10.45 million barrels for the week ending on October 11. Due to the Columbus Day holiday, the EIA data will come out on Thursday, October 17. Analysts had expected an increase of 2.88 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 934,000 barrels and a decline in distillate stocks of 2.862 million barrels. The API inventory data was bearish for the price of crude oil but continued to be a bit bullish for the prices of products.

Meanwhile, as I have been writing over the past weeks, “the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming weeks.” The recent events in Saudi Arabia were a chilling reminder of why the Middle East is the world’s most turbulent political region. However, the Saudi production came back fast, and US output made the result of the attack much less than it would have been in past years.

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

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.612 in January, which was 4.40 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. I will continue to look to purchase more call options on price dips with a time stop in early winter rather than a price stop. My stops on GASL will be tight, given the volatile nature of the product. I will take profits on rallies and trade around the current long position over the coming week. Nothing has changed since the previous report.

I have been tracking the price action in BG shares. Since October 9, the price of BG shares moved 1.04 higher to $55.40 per share on October 16. 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. Last week’s progress towards a trade deal should improve economic conditions, which is bullish. I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. I will continue to favor the long side of the market in crude oil and natural gas over the coming week. Crude oil was near the bottom end of its trading range, and it bounced. I will move to the sidelines on any move below the $50 level in November futures.

I continue to hold a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 2.06% higher over the past week at $14.65 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and volatility in the overall stock market pushed the price of the shares lower over the recent weeks.

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

 

Grains                                                             

Grain prices continued to move mostly higher in the aftermath of the release of the USDA’s World Agricultural Supply and Demand Estimates report on October 12. The report was not all that supportive of prices, but the progress on trade that will lead to Chinese purchases of US agricultural products trumped the fundamental data in the USDA report. The link to the full text of the latest WASDE report is here:

 

 https://www.usda.gov/oce/commodity/wasde/wasde1019.pdf

 

I reached out to Sal Gilbert, the founder of the Teucrium family of agricultural ETF products, for his take on the October WASDE report. Sal told me:

 

The USDA’s October 10, 2019 WASDE report, while initially viewed as bearish for corn prices due to unmet trader expectations, will likely be remembered as a game changer for soybeans, and probably for grains as a whole moving forward. Significant uncertainties remain about the actual size and quality  of this year’s U.S. corn and soybean crops, and the soybean balance sheet has tightened immensely in the four months since the June WASDE report release, with ending stocks down almost 44% in the U.S. and down more than 15% globally in only 4 months’ time, yet corresponding U.S. soybean futures prices for 2020 are up barely 5%. Global soybean demand is strong, stocks are declining, and the Chinese are back buying U.S. soybeans despite trade war tensions; none of these things would suggest that soybean prices have much downside from current levels, but only time will tell where the crop, and subsequently prices, will go from here. It will certainly be an interesting, if belated, harvest season this year.

 

The announcement of progress on a trade agreement between the US and China came on Friday, after Sal’s commentary.

 

 

The USDA told the soybean market that global oilseed stocks fell from the previous report, which supported the price of the soybean futures market. New-crop November soybean futures moved 0.46% higher over the past week as was at $9.2800 per bushel on Wednesday. Open interest in the soybean futures market rose by 5.74% since last week. Price momentum and relative strength indicators on the daily chart moved into overbought territory with the recent price gains in the soybean market and were crossing lower on Wednesday.

The December synthetic soybean crush spread moved lower and was at the $0.7700 per bushel level on October 9, down 7.50 since October 9. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The price action in the December crush spread continues to be a bearish sign for the price of the oilseed futures.

The USDA told the corn market that global stocks edged lower since the September WASDE report. New-crop December corn was trading at $3.9175 per bushel on October 16, which was 0.63% lower on the week.

Open interest in the corn futures market fell by 3.11% since October 9. The price of ethanol fell by 5.14% since the previous report. November ethanol futures were at $1.422 per gallon on Wednesday. The spread between October gasoline and ethanol futures widened to 20.28 cents per gallon on October 16, up 11.47 cents since last week on strength in the gasoline futures price and weakness in corn.

 

The October WASDE said that supplies rose, and usage fell in the wheat market, pushing global stocks to a record level. December CBOT wheat futures rose 2.60% since last week. The December futures were trading $5.1325 level on October 16. Open interest rose by 3.69% over the past week in CBOT wheat futures.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at an 88.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread widened by 1.25 cents since September 25. 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.

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

The focus will now shift to the weather conditions in South America over the coming weeks and months as its crop year gets underway.

 

Copper, Metals, and Minerals

Base metals and industrial commodities prices were mixed over the past week. Progress on trade talks and a de-escalation of the ongoing trade war between the US and China provided support for the sector. Base metals and other industrials are construction essentials. As China is the demand side of the equation for many of these commodities, economic expansion on the back of an easing in tensions is supportive of prices.

The price of copper moved higher on both COMEX and the LME. Aluminum, nickel, and lead prices posted losses over the past week, while the prices of zinc and tin moved to the upside. The price of lumber edged higher while the Baltic Dry Index recovered from losses over recent weeks. The price of iron ore moved lower over the period. Uranium futures were unchanged since the previous report.

Copper moved 0.84% higher on COMEX, while the red metal posted a 1.59% gain on the LME since the last report. Open interest in the COMEX futures market moved 0.18% higher after the double-digit percentage gain in last week’s report. Copper was trading at $2.5895 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 is bullish news for the red metal, which is the leader of the base metals sector. Copper has been trading in a range from under $2.50 to around the $2.70 per ounce level and remained within the trading band. Over the past week, copper inventories on the LME and COMEX declined.

The LME lead price moved lower by 1.31% since October 9, while the price of nickel fell by 3.26% over the past week despite the acceleration of the export ban in Indonesia that will start on the first day of 2020. Tin posted a 0.49% gain since the previous report. Aluminum was 1.38% lower on the week. The price of zinc rose by 6.49% since October 9. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.

November lumber futures were at the $379.90 level, 3.71% higher since the previous report. The price of uranium for December was unchanged at $25.05 per pound. The Baltic Dry Index was 5.39% higher since last week as the shipping rate bounced a bit higher after recent declines. December iron ore futures posted a 3.59% loss compared to the price on October 9. Open interest in the thinly traded lumber futures market rose by 2.78% over the past week.

LME copper inventories dropped by 2.96% to 274,975 metric tons since last week. COMEX copper stocks decreased by 3.31% since last week to 37,355 tons. Lead stockpiles on the LME rose by 0.11%, while aluminum stocks rose by 2.11%. Aluminum stocks rose to just under the 986,000-ton level. Zinc stocks moved 2.84% lower since the previous report. Tin inventories moved 2.46% lower since last week to 6,555 tons. Nickel inventories were 19.45% lower compared to the level on October 9, in a continuation of the trend of falling stockpiles over recent weeks. The decline in nickel inventories could turn out to be highly supportive of more 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 was supportive of prices.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.84 per share on Wednesday, down 13 cents over the past week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.43 on October 16. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:

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

 

US Steel shares were at $10.48 per share and moved 3.87% higher.

We own two units of FCX shares at an average of $10.56. The stock was trading at $9.50 on October 16, $0.95 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.

 

Animal Proteins

Meat prices moved higher across the board since last week’s report. The USDA released its October World Agricultural Supply and Demand Estimates report on October 12. Pork production was unchanged from the precious WASDE report, but beef output was lower on a slower pace of fed cattle slaughter. The USDA raised its cattle price forecast but reduced its hog price forecast on more abundant expected supplies. However, trade issues between the US and China have trumped the WASDE report as China continues to suffer from a severe shortage of pork. African swine fever has caused a deficit in Asian supplies, which could lead to a significant increase in US exports of the meat. The disease has spread beyond China’s borders, and some reports have said that it is raging in North Korea.

 

December live cattle futures were at $1.138750 per pound level up 2.43% from last week. Technical resistance is at $1.14925.  Technical support stands at $1.0920 per pound level, as the market is recovering over the past week. Price momentum and relative strength indicators are in overbought territory given, the move to the upside that began with the September 9 low. Open interest in the live cattle futures market moved 1.17% lower since the last report.

November feeder cattle futures underperformed live cattle as they rose by 1.16% since last week. November feeder cattle futures were trading at the $1.44925 per pound level with support at $1.39575 and resistance at $1.46825 per pound. Open interest in feeder cattle futures fell by 2.58% 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 in volatile trading. The active month December lean hogs were at 70.625 cents on October 16, which was 1.66% higher on the week. However, hog futures rebounded from a low at just over 63 cents on October 8, the day they put in a bullish reversal on the daily chart. The open interest metric fell by 1.87% from last week’s level. Price momentum and the relative strength index were rising towards overbought territory. Support is at 63.075 cents with technical resistance on the October futures contract at 72.725 cents per pound level.

The forward curve in live cattle is in contango from October 2019 until April 2020. From April 2020 until August 2020, a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through February 2021. The Feeder cattle forward curve is in backwardation from November 2019 through March 2020, and contango from March 2020 through August 2020 when a slight backwardation returns until September 2020.

In the lean hog futures arena, there is contango from December 2019 until June 2020.  From June 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.

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

Source: CQG

Based on settlement prices, the spread was at 1.61240:1 compared to 1.60020:1 in the previous report. The spread increased by 1.22 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.

 

Soft Commodities

The prices of three of the five soft commodities posted gains over the past week. Cocoa was the best performing member of the sector. FCOJ and cotton futures moved higher as of the close of business on October 16 compared to their prices on October 9. The prices of coffee and sugar moved to the downside since last week.

March sugar futures fell 0.48% since October 9, as the price of the sweet commodity was around the 12.35 cents per pound level. Technical resistance is at the October 2 peak at 12.93 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is the level of short-term support. The value of the December Brazilian real against the US dollar moved lower the last week and was at the $0.2396 level against the US dollar, which was $0.00375 or 1.54% 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.

Price momentum and relative strength on the daily sugar chart are falling towards oversold territory. The metrics on the weekly and monthly charts reflect neutral conditions. If sugar suffers a substantial decline, I will look to add to long positions, but that does not seem likely. Sugar open interest rose by 2.71% 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 fell by 1.99% since last week’s report and were trading at the 93.55 cents per pound level. Short-term support is at the August 20 low at 92.20 cents on the December futures contract. Resistance is at $1.0290. I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $31.05 on Wednesday. Open interest in the coffee futures market rose by 11.87% since last week. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle. I have been a scale-down buyer leaving room to add on further weakness over the coming days and weeks. However, the rise in open interest is a bearish sign for the coffee futures market.

Cocoa futures were higher since last week. On Wednesday, December cocoa futures were at the $2515 per ton level, 4.49% higher than last week. Open interest fell by 0.29%. Relative strength and price momentum are rising in neutral territory on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures on the weekly chart. We are long the NIB ETN product at $25.76. NIB closed at $28.95 on Wednesday, October 16.

December cotton futures moved 3.95% higher over the past week. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. December cotton was trading at 62.85 cents on October 16 after rising to a high at 65.85 on October 14. The next level on the upside above the recent high is at the 65.85 cents per pound level on the December contract, the October 14 peak. On the downside, support is at 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 1.57% since October 9.

Price momentum and relative strength metrics were rising above neutral conditions on Wednesday. The metric remains in oversold conditions on the monthly chart. 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 over the past week.

November FCOJ rose over the past week. On Wednesday, the price of November futures was trading around $1.0045per pound. FCOJ nearby futures moved 2.76% higher over the past week. Support is at the 94.65 cents level. Technical resistance is at around $1.0450 per pound. Open interest fell by 0.77% since October 9. 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 path of the Brazilian real against the dollar could influence sugar, coffee, and FCOJ prices. The latest WASDE report provided on surprises for the cotton market. Cocoa could receive support as the Ivory Coast and Ghana are looking for base price premiums for their cocoa exports. The two West African countries produce over 60% of the world’s cocoa beans. Soft commodities can be highly volatile. With many of the members of the sector, sans cocoa, close to the bottom end of their multiyear pricing cycles, the downside potential is likely to be limited.

 

A final note

The news on trade at the end of last week was bullish for many commodities prices as China is the demand side of the equation for the asset class. Anything that will bolster China’s economy would likely support the prices of copper and base metals, crude oil and energy, grains, and a host of other raw materials.

However, there are more than a few issues facing the world that will continue to cause volatility to be the norm rather than the exception in commodities and markets across all asset classes. I will be keeping stops tight and taking profits when they are on the table. I continue to favor gold and precious metals because the yellow metal is both a commodity and a currency instrument that does well during periods of fear and uncertainty in markets. I believe the price of natural gas is too low, given that the peak season for demand begins in around one month. Commodities can be highly volatile, so trading rather than investing is likely to be the optimal approach when it comes to the members of the asset class.

 

 

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.