S&P 500 Bulls Meet Unemployment Claims

After another bullish gap and more intraday gains, stocks are likely to challenge the mid-Feb gap’s upper border at around 3335 shortly. And once they succeed, the Feb all-time highs come next. And frankly, why shouldn’t they make it there before the elections uncertainty fully strikes? Protracted stimulus negotiations (let alone a botched deal falling too short of markets’ expectations), now that would have some power to rock the bullish boat.

Talking spanners in the works, here come the jobs data. Yesterday’s ADP non-farm employment change fell way short of expectations, but today’s new and continuing unemployment claims showed improvement.

I expect not too exciting non-farm employment change figures tomorrow, underscoring the pain real economy feels and its tenuous path to recovery. It was though encouraging to see the bulls waving off bad data this fast yesterday. No knee-jerk reaction, which means the markets aren’t willing to take that seriously just yet (are they betting this soft patch would be gone?).

With U.S. – China tensions on the back burner, stimulus takes the spotlight – with a flare up in earnest between the frenemies (think trade deal phase one) being the wildcard (distant black swan), After a two-week window of the Fed expanding its balance sheet, the central bank tightened again as the data for the final July week show.

So, will the stimulus with its bone of contention in the form of federal $200 or $600 addition to unemployment claims be a buy-the-rumor-sell-the-news moment? In my opinion, the markets are more likely to welcome it than to sell off in its wake.

This isn’t all out greed, and the retail investors aren’t yet largely in. This bull run is even more hated and disbelieved that the 2009 one. I know, I have been trading those days too, and have a lot to compare against – this is not the dot com mania or housing bubble level of greed. Far from it, and whoever brings up the bubble talk – remember that bubbles first need to get ridiculous before they burst. In this unprecedented reflation, we aren’t there yet.

But first things first. The jobs-heavy week with a seventh profitable trade in a row just closed, brought up these trades’ total to 244 points gained!

Let’s check the market pulse next.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

This breakout attempt above the early June highs is really sticking, and has powered higher on solid volume yesterday. With sellers nowhere to be seen, both the Monday and Wednesday bullish gaps are standing and supporting the bulls.

Let’s check the credit markets next.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) moved higher, ever so lightly but still (please see this and many more charts at my home site). The volume decreased though, which could mark a short-term indecision ahead.

Regarding these two ratios, my yesterday’s credit market observations are relevant also today:

(…) What a great sight as both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) – are supporting each other’s upswings. One day the former has the baton, the next day the other leads. The direction is clear, enabling higher stock prices.

The overlaid S&P 500 closing prices (black line) keep getting farther away from the HYG:SHY ratio. They indeed seem more than willing to lead, thus sending a message of the bull run having still a way to go.

The below notes about this bull run are still ringing true today:

(…) So far, the propping efforts to bridge the mini-depression are working. The recovery off the March lows has been among the strongest ones when looking at all the WWII stock market rebounds that have made it past the 61.8% Fibonacci retracement. We’re still in the “everyone benefits and no one pays” stages of inflation. The canaries in the coal mine flashing danger (hey, this can’t last forever) are gold and the dollar.

Smallcaps, Emerging Markets and Copper

The S&P 500 closing prices overlaid with the Russell 2000 (IWM ETF) paints a bullish picture – smallcaps sprang to life, and on respectable volume. That’s good for both indices.

Emerging markets (EEM ETF) are alive and well too, as their overlaid black line shows. That’s another piece in the bullish S&P 500 puzzle – with higher highs and higher lows the norm these weeks, the S&P 500 path of least resistance remains up.

The red metal ($COPPER) agrees with stock market bulls. Consolidating the earlier July gains, it’s getting ready to move some more, or consolidate gains as a minimum. The prevailing direction is higher for both this metal with PhD. in economics, and the stock market itself.

Summary

Summing up, the preceding S&P 500 consolidation paved the way for more stock gains, and it wasn’t all due to tech pushing higher again. The advance-decline line is subtly improving, and has further to run. With credit markets, smallcaps and emerging markets aligned, the bulls are well positioned to grapple with incoming jobs market data, and welcome the stimulus cheerfully.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

China Shares Surge after Regulators Lift Equity Investment Cap for Insurers

The major Asia Pacific stock indexes traded steady to mixed on Monday, but mainland Chinese stocks jumped as China’s central bank maintained its benchmark lending rate for the third straight month, much to the delight of investors. China shares were also supported after regulators lifted equity investment cap restrictions for insurers, giving them the greenlight to buy stocks more aggressively.

Early in the session, Asian shares were pressured by weak commodities such as crude oil and copper, as a spike in global coronavirus cases cast a pall over markets awaiting efforts from the Euro Zone and United States to stitch together fiscal stimulus plans to battle the pandemic.

On Monday, Japan’s Nikkei 225 Index settled at 22717.48, up 21.06 or +0.09%. Hong Kong’s Hang Seng Index is trading 24996.42, down 92.75 or -0.37 and South Korea’s KOSPI Index finished at 2198.20, down 2.99 or -0.14%.

In China, the Shanghai Index settled at 3314.15, up 100.02 or +3.11% and Australia’s S&P/ASX 200 Index closed at 6001.60, down 32.00 or -0.53%.

Chinese Markets Supported by Two Strategic Moves

Over the weekend, China’s regulators raised the limit on how much insurers can invest in equity assets to 45%, according to Reuters, in an effort to bring more long-term funds into the market.

On Monday, China kept both its one-year and five-year loan prime rate unchanged, according to Reuters, as its economy continued to recover after reopening following the coronavirus crisis. Last week, official data showed that its economy grew 3.2% in the second quarter from a year earlier, better than the 2.5% expected by analysts, according to Reuters.

Japan’s Volatile Nikkei 225 Index Inches Higher

Japan’s benchmark Nikkei, which had started firm, faltered by late morning, only to turnaround into the close. The earlier weakness was attributed to data that showed the country’s exports suffered a double-digit decline for the fourth month in a row in June.

Japan’s exports dived 26.2% in June from a year earlier, the report showed, according to Reuters. Economists were looking for a 24.9% decline. Imports fell 14.4%, compared with an estimate of a 16.8% decline, according to Reuters.

The auto sector took a big hit. With the news, Nissan dived 3.12%, Mitsubishi Motor tumbled 2.12% and Suzuki declined 3.79%.

Hong Kong Shares Tumble as Government Tightens Restrictions

Hong Kong tightened COVID-19 restrictions on Sunday, closing amusement parks, gyms and 10 other types of venues for another seven days, while a requirement for restaurants to only provide takeaway after 6pm was extended. Face masks will be mandatory in indoor public areas, and non-essential civil servants were told to work from home this week.

Australian Shares Fall on Renewed Virus Recovery Concerns

Australian shares closed lower Monday, dragged by the energy sector on weaker oil prices, and as authorities warned that the coronavirus outbreak in the country’s second-most populous state could take weeks to control.

Australia’s chief medical officer said the outbreak in Victoria State could take weeks to subside despite a lockdown and orders to wear masks.

Prospects of a prolonged recovery from the outbreak hit travel stocks hard, with Victoria and New South Wales being busy commercial air traffic hubs.

The energy index fell 2.6 percent to its lowest close since May 18 as oil prices declined on fears that a recovery in fuel demand could be derailed by a rise in the pace of coronavirus infections globally.

For a look at all of today’s economic events, check out our economic calendar.

Funds Rushing into Commodities

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, July 7. During this U.S. holiday shortened week the appetite for risk was firm with the Nasdaq 100 rising by 3.6% and the CSI 300 by a staggering 12.8%. Strong buying across all sectors lifted the Bloomberg Commodity Index by 2.4% with gains seen in all but four of the 24 major commodity futures tracked in this update.

Hedge funds responded to the favorable price movements by raising bullish bets in all but four of the 24 major commodity futures tracked in this update. While the biggest price gains were seen across the energy sector, led by gasoline and natural gas, it was short covering in the grains sector that helped lift the combine net-long back above one million lots for the first time since late January.

Energy

Despite solid price gains, both WTI and Brent crude oil were net-sold with the combined net-long falling by 26k lots to 557k lots. The reductions primarily due to long liquidation as both contracts struggled to break resistance at $41/b in WTI and $44/b in Brent. However, based on the reduction being led by long liquidation and not fresh short selling, the bullish narrative has yet to challenged. The long position in natural gas jumped by 27% as an emerging heatwave across the U.S. helped lift the price by 7%

Latest developments

Crude oil trades lower today following Friday’s rally. Key focus this week will be Wednesday’s OPEC+ meeting where the group needs to decide whether to keep the temporary 9.6 million barrels/day production cut into August or begin to restore up towards 2 million barrels/day. Reports over the weekend said the group look set to ease oil cuts as demand continues to recover.

The decision however comes at a time where Libya attempts to restore production, U.S. stocks are close to record levels while the pandemic is far from under control. Especially across the three biggest fuel consuming U.S. states. Both benchmark oil contracts in our view remain range-bound with resistance at $41 on WTI and $44 on Brent capping the upside

Metals

A relatively quiet week across the metal space with funds adding exposure to all five contracts. The gold net-long only increased by 1% during the reporting week that finished the day before the yellow metal traded above $1800/oz. for the first time since 2011. However, with funds increasing fresh short positions (+6k) almost by as much they added to the long side (+7.6k), some nervousness may emerge about the underlying strength in the market. Something that was highlighted on Friday when after having struggled to attract fresh momentum on the break above $1800/oz closed back below on virus treatment hopes,.

The HG copper net-long rose 14% to reach 31.5k lots, the highest since June 2018. This before finishing another strong week at $2.8975, a level last seen in May 2019. The 40% rally since the March low has been driven by a forceful combination of increased Chinese demand, a speculative surge and most recently coronavirus disruptions to supply from Chile and Peru, the world’s two largest producers. The latter explaining why copper, at least in the short term, can trade above pre-pandemic levels.

Latest developments:

HG Copper took aim at $3/lb during the Asian session thereby continuing its impressive run of gains that has taken it to the highest in more than two year and well above January’s pre-pandemic level. On top of the support being provided by virus-related supply disruptions from the world’s two largest producers in South America, the market now also has to deal with the risk of strikes. This after workers at an Antofagasta mine in Chile have rejected a final offer while another operation will conclude voting today on whether to accept a final offer.

Precious metals trade higher this Monday, inspired by a the general risk on that has driving stocks higher and the dollar lower. On top of this some safe have demand due to a continued surge in virus cases and US-China trade and political tensions. Adding to this copper’s impressive run of gains which has given silver a fresh boost. The price is once again challenging resistance at $19/oz while the XAUXAG ratio has dropped to 95.50. A break below the June low at 94.50 could be the trigger that signals a move in the spot price towards $20/oz.

Agriculture

Funds spent another week scrambling to adjust grain positions to a potential more friendly price outlook. Corn was bought for a second week and the net-short has now more than halved to 142k lots. The turnaround since June has been let by a pick-up in ethanol demand and most recently the surprise June 30 announcement that U.S. farmers had planted less corn than previously expected.

The wheat net-short was trimmed by 14% to 33.5k lots just before the price surged above $5/bu in response to concerns about shrinking crop production estimates in countries from France and Russia to Argentina.

Soft commodities had a mixed week with sugar being bought despite trading rangebound around 12 cents/lb. The cocoa short jumped by 90% to 21k lots, a ten-month high, as the pandemic continued to sap demand for both cocoa and coffee.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire


What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Commodities Weekly: Gold Pops, Oil Drops as Covid-19 Maintain its Grip

An index tracking the performance of leading commodities reached a four-month high this week with the sector being supported by gains among industrial metals and grains, most noticeably wheat and copper.

Gold meanwhile made a small but nevertheless very important move higher to the highest level since 2011 above $1800/oz. However, the Bloomberg Commodity Index, which tracks a basket of major commodities in energy, metals and agriculture, weakened ahead of the weekend as the market grew increasingly nervous about the surging coronavirus cases around the world.

In the U.S., where the three biggest fuel-consuming states are all seeing a surge in cases, real-time indicators are suggesting that consumers are changing their behavior again. In Europe, we are beginning to see signs of an acceleration in new cases, with countries such as Portugal and Bulgaria paving the way for a potential resurgence with tourism beginning to pick up over the next two months.

The risk appetite seen up until now this month was led by an eight-day government-supported buying frenzy in Chinese stocks and fresh record highs in the technology-heavy Nasdaq 100 index. With margin debt from Chinese speculators hitting levels last seen during the 2014 to 2015 doubling of the CSI 300 and subsequent 40% collapse, the government and state media stepped in with actions and warnings to stem the buying.

Grain

Grain traders are looking ahead to Friday’s ‘World Agriculture Demand & Supply’ (WASDE) from the U.S. Department of Agriculture for confirmation that the recent 10% rallies in corn and wheat can be sustained. Short covering has been the main driver, with demand for corn having been triggered by the recent lowering of the US planted acreage. The Chicago wheat future leapt to its highest price in more than two months as the latest crop estimates in major exporting countries such as Argentina, France and Russia raised questions about the level of global supply.

Spot gold

Gold finally broke above $1800/oz, thereby succeeding in what it failed to do on two previous occasions, most recently in 2012. At the same time, with silver breaking resistance at $18.40/oz, the paths towards higher prices have now opened up. The break could signal an extension for gold towards the 2011 record high at $1920/oz while silver, for now, has found resistance at $19/oz ahead of the next level at $19.65/oz.

Apart from virus-related worries adding support, another major development supporting the latest move higher has been recent movements in U.S. yields. While the nominal yield on ten-year notes remain anchored in a relatively tight range, we have seen breakeven yields, an expression of inflation, move higher leading to a drop in real yields to the current -0.8%. These developments basically highlight what a U.S. market with yield-curve control would look like heading into a rising inflation scenario.

Rising inflation expectations leading to lower real yields combined with the potential for a weaker dollar are some of the key drivers we believe will continue to support precious metals during the coming months. Adding to this, rising political tensions within the U.S. ahead of the November election and outside with China.

Gold is heading for a fifth weekly gain and, in the short-term, its ability to attract additional momentum above $1800/oz holds the key. Weakness below that level could raise the risk of another correction but, overall, our bullish outlook has not changed with the record high from 2011 at $1921/oz being the next key level to focus on – a view shared by Goldman Sachs, which sees the price hitting $2000 within the next 12 months.

The combination of rising gold and industrial metal prices should continue to support a relative stronger performance by silver. Its current relative value against gold at 97 ounces of silver to one ounce of gold remains historical low and on that basis we could see continued gold strength leading to a lowering of the gold-silver ratio, initially towards the 90 level

Oil

WTI and Brent crude oil both traded lower following several unsuccessful attempts during the past few weeks to break resistance at $41/b and $44/b respectively. Crude oil stocks in the U.S. remain close to record levels with the market now worrying that the virus surge in Texas, California and Florida, the three biggest fuel-consuming states, could slow the recent recovery in demand.

Adding to the supply gloom was news that Libya that the civil-war torn country signaled the potential restart of crude exports. This following months of almost zero production compared with 1.1 million barrels/day last December.

The International Energy Agency (IEA) in their latest ‘Oil Market Report’ sounded upbeat given the recent recovery in demand and OPEC+’s successful efforts to curb supply. However, the recent strong growth in Covid-19 cases has cast a shadow over the outlook, thereby putting at risk the market anticipation of a transformation in the oil market from a substantial surplus in 1H to a deficit in 2H.

A development that led to the IEA to finish off by a warning that the large, and in some countries accelerating, number of Covid-19 cases is a disturbing reminder that the pandemic is not under control and the risk to their market outlook is almost certainly to the downside.

While this week’s range in Brent crude has been close to the narrowest since last September, these latest developments still support our Q3 view: that Brent is likely to remain stuck within a mid-30’s to mid-40’s range.

Copper

HG copper’s impressive 45% rally from the March low has almost taken it back to the January peak at $2.886/lb. What is particularly impressive about copper’s run higher is that it has reached levels that were last seen just before China officially announced to the world they had a coronavirus problem. Since then, global economic growth has collapsed while unemployment has surged.

Copper has nevertheless managed to rally due to three developments. The pandemic has raised expectations for increased demand from infrastructure projects, especially in China. This is something we are however yet to see confirmed through a pick up in the stock market value of construction companies. Adding to this is strong speculative buying, not only on the exchanges in New York and London but most likely also in China given the mentioned surge in risk appetite. The biggest impact however has been a cut in supplies from Chile, the world’s biggest supplier, after thousands of miners have fallen ill with the virus.

While momentum is strong, we are increasingly skeptical about copper’s ability to rally further. The RSI, at its most overbought level since November 2016, is calling for a pullback to somewhere between $2.75/lb and $2.65/lb. The short-term focus in order to determine the next move will be on the behavior of speculators continued appetite for risk and supply developments in Chile.

Robust Commodity Buying Despite Mixed Price Action

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, June 30. During the week, appetite for risk across other asset classes temporarily received a knock with the S&P 500 trading softer while the dollar and bonds rose.

The performance across 24 major commodity futures were mixed with the Bloomberg Commodity Index rising 0.4%. The energy sector saw weaker oil and higher natural gas prices. The metal sector was generally bid with the exception of platinum while the agriculture sector finally received a bid led by corn, coffee and cotton.

Despite the mixed price action hedge funds overall increases bullish bets by 28% to 810k lots with buying seen in 18 out of the 24 commodity futures tracked in this.

Energy

Crude oil was bought despite trading lower by around 3% during the week. The combined net-long in Brent and WTI crude oil rose by 16.8k lots to 583.4k lots,a five-month high. Brent crude oil, which has been lacking the accumulation seen in WTI since the March low, was in demand with the net long rising by 6% on a combination of longs being added and short positions being cut.

The price collapse in natural gas to a multi-decade low on June 26 helped attract profit taking on short positions and fresh buying. Overall the combined net-long of four Henry Hub related swap and futures contract rose by one-quarter to 124k lots.

Metals

Gold was bought for a third week, albeit at a much reduced rate than the previous two weeks. Overall the net long rose by 2% to 180k lots, a nine-week high, but still some 105k lots below the February peak. Silver’s continued roller coaster ride attracted both buyers and sellers, but with the net overall rising by 22% to 36k lots.

The copper net long jumped by 59% to reach 27.7k lots, a two-year high, after the metal continued to rally in response to rising virus related supply concerns from mines in South America.

Agriculture

Buyers finally returned in earnest to corn after the U.S. Department of Agriculture on June 30 estimated plantings would decline about 5 million acres below what farmers told the government they intended to plant in March. The elevated net short was reduced by 27% to 202k lots. Short covering supported coffee with the 3% rally driving an 8% reduction in the net short to 25k lots.

For a look at all of today’s economic events, check out our economic calendar.

 

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold, Silver, Crude Oil and Grains

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
COPPERUSSEP20 – HG Copper
OILUSAUG20 – WTI Crude oil
CORNSEP20 – CBOT Corn


Gold

Gold has reached another new high for the cycle with $1800/oz now within striking distance, a level that the futures contract (GCQ0) has already reached. The market capped its best quarter in four years as the WHO warned that the worst of the pandemic is still to come. The break higher looks intact as long as the daily closes remain north of 1,745-1,750 area. Gold will continue to look for direction either from new policy measures aimed to force inflation higher or negative real rates more negative or some more participation from the US dollar and other commodities, especially silver.

Silver

Silver has outperformed gold this week with the XAUXAG ratio falling below 98 (ounces of silver to one ounce of gold). With copper racing higher to reach $2.75/lb. on virus related supply worries and firming Chinese demand, silver’s short-term upside potentials could be better than golds. Especially on a break above the March high and trend line resistance around $18.40/oz.

Crude Oil

Crude oil trades higher, but within the established range, after the American Petroleum Institute reported a bigger-than-expected stockpile drop last week of 8.2 million barrels. If repeated by the EIA in their weekly report today at 14:30 GMT it may offer some additional support to a market currently worried by the demand impact from renewed lockdowns and the surging number of virus cases in the U.S.

Also supporting the price was the monthly production report from the Energy Information Administration which found that U.S. production dropped by 5.3% in April to 12 million barrels/day. Thereby confirming the slowdown seen in the weekly estimates reported every Thursday in the mentioned inventory report.

A monthly OPEC oil production survey carried out by Reuters found the group collectively cut production to the lowest in two decades last month. The additional deep cuts promised and delivered by Saudi Arabia and other Gulf Arab members helped push the groups compliance above 100%.

We maintain the view that crude oil is likely to remain range-bound while the market tries to figure out the demand impact from renewed virus cases. Weak demand from motorists during the key holiday demand season may pose a threat to the current stability. Not least considering the pressure on OPEC+ to deliver a prolonged and economic painful production cut extension beyond July.

Chart source: Saxo Group

Looking ahead to the inventory report the market, apart from looking for a drop in crude stocks, will be looking for signs of renewed weakness in gasoline and diesel consumption, just as the July 4th holiday signals the beginning of the U.S. summer driving season. As per usual I will post results and charts on my Twitter @Ole_S_Hansen

U.S. grain markets led by corn and soybeans rallied strongly on Wednesday after a government report showed a bigger-than-expected reduction in the planted acreage. Corn jumped 4% after surveys over-estimated the U.S. acreage by the largest amount since at least 2005. U.S. farmers entered the fields this spring at a time of peak uncertainty with low prices, poor outlook and the pandemic raging. As a result they reduced the corn acreage to 92 million acres (95.1 expected) and soybeans to 83.8 from 84.8 expected.

A separate USDA report however showed that domestic quarterly grain stocks were bigger than expected. Primarily due to lower ethanol linked demand for corn and reduced soybean exports to China during the lockdown.

Corn’s dramatic turnaround from a $3.15/bu low on Monday to a $3.45/bu high today could force continued buying from funds holding an elevated short position. Support now at $3.39/bu.
For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodity Weekly: NatGas Slumps, Copper Jumps as Virus Maintain its Grip

Gold continues to challenge a multi-year high, crude oil looks range-bound, copper firm on virus related supply disruptions while too much natural gas has driven the price to a 25-year low.

The commodity market looks set to finish Q2, or the recovery quarter, with strong gains in energy and metals. Overall, however, the Bloomberg Commodity Index which tracks a basket of key commodity futures has only managed a small return relative to other markets. The reason being is the drag from agriculture commodities, some of which have been weighed down by ample stocks and reduced demand from consumers in lockdown.

However, as we end what has been a very volatile and at times troubling first-half, driven by the worst pandemic-related slump in global growth since WW2, the outlook for the second-half remains somewhat troubling. The pandemic remains out of control in several regions while the renewed surge across the U.S. and the recent scare in Beijing all highlight the risk this invisible enemy is still posing.

More forward-looking assets like equities, some of which have returned to pre-COVID levels, can look beyond the short-term risks and price in a recovery supported by a wall of money from central banks. Commodities do not have this luxury as they are spot assets which depend on supply and demand. This means that financial investors can control the price for a certain period of time but if the underlying fundamentals fail to catch up a reversal often happens.

Some commodities, such as crude oil and fuel products, have now reached levels where the price may need support from continued improvement in underlying fundamentals to run higher. However, with virus cases continuing to rise some concerns may emerge that could limit the upside.

Natural gas

NG hit a 25-year low after the Energy Information Administration (EIA) reported a bigger-than-expected weekly jump in U.S. inventories. Some of the dynamics that have driven the recent weakness are similar to those that drove crude oil prices sharply lower back in March. Global gas prices have slumped in recent months on a combination of a mild winter leaving too much gas in storage ahead of the pandemic which further cut demand from industrial users.

The biggest risk is the potential for stockpiles in underground caverns hitting capacity before winter demand returns to draw stocks back out. If things continue on the current path we are likely to see even lower prices over the coming weeks and ultimately the only cure may end up being forced production cuts similar to what U.S. shale oil producers experienced recently.

Weak global prices as reflected by the benchmarks in Europe (Dutch TTF) and Asia (Japan/Korea) have reduced the ability for exporters to make money when taking transportation and the liquefaction process into account. As a result, U.S. exports have halved since the late-December peak.

Crude oil’s latest run up

Crude is in it’s the highest levels since March 8 – when Saudi Arabia initiated its short-lived price war – has paused. Instead of focusing on the successful efforts by OPEC+ to support the market through lower supply, the market has instead, for now, turned its attention to risks that a renewed spike in COVID-19 cases may slow the process towards a further recovery in global demand.

Especially in the U.S. where several states, including Texas – the center of the U.S. oil industry – have halted their re-openings after infections jumped and authorities in Houston, Texas, said the ICU wards have reached capacity. In the meantime, U.S. stocks of crude oil continue to surge – reaching a new record of 541 million barrels to which can be added the 19 million barrels that have temporarily been deposited in government-controlled storage facilities.

For that to change much now hinges on the level of gasoline demand during the U.S. summer driving season from July to September. A period during which crude stocks are normally run down as demand from refineries pick up. The latest virus surge may see an even bigger contraction in miles travelled than the 15% year-on-year decline predicted by the American Automobile Association.

The OPEC+ group of producers have been doing a fantastic job in cutting production, highlighted by Russia’s 40% drop in exports from its western ports expected next month. But for the agreement to remain successful, the group also need to see light at the end of the tunnel with regards to when the taps can be turned back on. While we do not expect a repeat of the draconian lockdown measures seen recently, a flare up of new virus cases may further postpone the timing of when production can be raised, thereby potentially challenging the resolve of the group.

We maintain the view, as mentioned in our soon to be published Q3 outlook, that Brent crude oil will most likely trade within a mid-30’s to mid-40’s range during the coming weeks and potentially months.

Gold

Gold finally managed to break higher to reach a fresh 8-year high at $1780/oz, thereby getting tantalisingly close to the next key area of contention around $1800/oz. An area that between 2011 and 2012 proved to be a major battle ground and one that the bulls eventually lost when gold began its year-long slump towards $1050/oz.

While gold suffered a setback, it did not challenge support below at $1745/oz. A weekly close above $1765/oz and increased participation on the long side from hedge funds, who had cut longs by 50% in recent months, may send a positive technical signal to the market.

Source: Saxo Group

The current outlook remains overwhelmingly gold friendly and that’s also why the metal is likely not to go in a straight line. Instead, it will frustrate and at times challenge the resolve among many traders with short-term trading strategies. Our positive view on gold is, however, well known and in recent updates we have highlighted the reasons for this.

Instead, lets focus on why this past week’s attempt struggled almost as soon as the break had occurred. Silver’s inability to break above $18/oz despite the tailwind from gold helped trigger some weakness across these two metals from sellers of recently establish longs, especially in silver. The gold-silver ratio spiked back above 101 while platinum, another metal that often enjoys gold’s tailwind, saw its discount to gold reach a record $970/oz. In order for the rally to have legs we need to see demand for the minor metals pick up as well.

Copper

Copper is an example of a metal that initially suffered only to rally strongly on virus-related developments. The market tanked back in March when the pandemic spread across the world and cut demand. Since then the focus on global stimulus measures, projects and improved demand in top consumer China have supported the price.

More recently the supply side has received increased attention with many mines in South America operating skeleton staff to combat the pandemic.

As a result, the price of High Grade Copper challenged a four-month high on Friday while LME Copper reached the psychological important $6000/t level. Both contracts have now managed to recover more than 75% of the January to March losses with further upside not being ruled out with governments anxiously looking for projects to boost their economies.

Source: Saxo Group
Source: Saxo Group

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Having Suggested the Markets Lacked Inspiration and that Risk Assets would Look to Chop Around in the Short

If I look cross-asset it feels like the bulls have just won a small battle here, with equities working fairly well, especially in the small end of town (the Russell 2000 closed +1.1%) while tech worked nicely (the NAS100 +1.2%), with cash volumes somewhat in line with the 30-day average.

I continue to look at the chart of the NAS100 and see a thing of beauty – Flip to the daily and see a bullish outside day reversal, although the weekly shows the pure rhythm and flow – it’s one where we’ll look back forget valuation, forget any traditional fundamentals and just hold the thing…less thinking, more profits.

The S&P500 lagged a touch (+0.6%), held back by financials (-0.5%) and health care (-0.4%), with the outperformance seen in tech, utilities, and consumer names. Everyone loves a spurious overlap of the current tape versus a key period in time, and this from Bloomberg makes me question if what we’re seeing is really a re-run of the move post-2009 – if this continues to track then equities have far more juice in the tank.

Lower equity volatility ahead?

Vols have been offered, with VIX pushing down 3.38 vols to 31.74%, while on the VIX futures (which is what our price is derived) we see a bearish outside day, and if we see follow-through selling we could see a re-run into 27%. When we consider that the daily implied S&P500 move (higher or lower) portrayed by the VIX index is 2%, then it feels that anecdotally that there are downside risks to the vol index.

Commodities are hot

Our flow in commodities has been strong, with gold getting a strong working over, notably in USD-terms (XAUUSD). We pushed into 1763, although the breakout is not as convincing as I would like to have seen and the 18 May highs are seemingly a tail barrier. It’s hard to be anything but long gold here, especially given the dynamics in the bond market, with 5- and 10-year breakevens (inflation expectations) rising 5bp (0.05%) a piece, and nominal Treasury yields up 1bp across the curve – this has resulted in ‘real’ yields moving lower, and at -79bp (on UST 5yr real) we’re not far from testing the March lows of -84bp.

Real rates are core to markets right now and if yields are going lower then gold will find buyers on weakness and equity will continue to trend.

It’s not just gold, but crude has caught a bid and our XTIUSD price (which basically tracks front-month futures) is not just testing the top of its range, but closing the 6 June gap at $41.05. Traders react to behaviour around gaps, it’s a science in trading, but a break here takes us to the 61.8% fibo and 200-Day MA ($44.18 and $45.47).

Copper is now +1.2% at $2.65p/lb – there seems to be a clear message we’re getting from the copper market because the moves I am seeing on the daily look bullish. As suggested yesterday, whatever copper is seeing is not shared by the bond market, which doesn’t seem to be buying the recovery play just yet, with yields unaffected and perhaps that is moving full circle into the risk sentiment.

The secret sauce

Consider this – Commodity prices higher, inflation expectations up (5yr breakevens +5bp at 1.12%, 5y5y forward B/E +4bp at 1.53%, 5y5y swap +4bp at 1.83%), high yield credit 2bp tighter, yet nominal bond yields unnerved. This is where I see the bulls winning a short-term battle.

FX moves – the USD sell-off resumes

We can’t leave out FX markets, because the USD is lower by 0.6%, and the dynamics mentioned above have resonated in a bid in risk FX. The lower USD would have fed back into commodity buying and again into lower real yield – it goes full circle. We’ve seen bullish key day reversals in CADJPY, AUDJPY, and EURJPY, so the move to sell JPY shows the bulls are back in the driving seat.

EURUSD stopped shy of printing a bullish outside day, as price failed to make a lower low, but did close firmly above Fridays high – a similar effect. The USDX (USD index) closed through the ST uptrend and we’ll watch for how Asia and EU trade the move – as follow-through will confirm a potential change in structure in the FX market and perhaps allow further USD selling.

For those running EUR or EU equity exposures do consider the key event risk on the docket is the EU PMI data. You can see expectations, and for the EUR to build on the move an upside surprise would clearly help.

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Chris Weston, Head of Global Research at Pepperstone.

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Gold Bought, WTI Sold as COVID-19 Worries Return

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, June 16. During a week where appetite for risk temporarily received a knock amid worries around a re-acceleration of COVID-19 cases and continued uncertainty around the speed of the U.S. and the global recovery.

The S&P 500 ended the reporting week down 2.4% while the yield on U.S. ten-year notes reversed lower to their established 0.6% to 0.8% range. Speculators almost doubled their dollar short despite seeing the Dollar Index rise by 0.7% while the Bloomberg Commodity Index lost 1.5% with all but five of the 24 futures contracts tracked in this update being sold. Overall the net-long was cut by 8% with the biggest reductions seen in WTI crude oil, natural gas, copper, wheat and coffee while gold, corn and sugar attracted fresh buying and short-covering.

Energy

WTI crude oil’s ten week run of rising long bets paused with speculators cutting their net long by 27k lots to 354k. This during a week where U.S. petroleum inventories reached a fresh record. It was however a relative small reduction considering the 255k lots funds had added since early April. With the net long in Brent holding steady at 185k lots traders are likely to have concluded that the recent weakness was nothing more than a long overdue correction and not a reversal.

Also a sign that the market, at least for now, assumes that rising COVID-19 cases or a second wave will not be met with the same draconian lockdown measures seen back in March. Thereby supporting the narrative of a continued recovery in demand and with that higher prices. If the momentum can be carried into this week, the market is likely once again to focus on closing the price gaps ($41.05 on WTI and $45.18 on Brent) left open following the Saudi price war declaration back on March 8.

Bullish natural gas bets were cut by 41% as the price suffered a near 9% loss with demand cuts from milder weather and a pandemic related drop in LNG exports weighing on the market.

Metals

Buyers returned to gold for the first time in four weeks with the net long at 143k lots still close to a one-year low. It was one of the few commodities benefiting from the temporary risk off that hit other markets during the week. With GCc1 ending last week at $1753/oz, the second highest weekly close in this cycle, the stage has been set for a potential fresh attack from bulls over the coming weeks. Unless hedge funds have moved strategic long futures positions to the currently buoyant ETF market, a breakout is likely to force them back into the market after having halved bullish bets since February. Our latest thoughts on gold can be found in our Commodity Weekly from last Friday.

The risk off sentiment that benefited gold helped drive a 35% reduction in recently established copper longs. Silver meanwhile saw a 17% increase in bullish bets with the net at 28k lots still some 60% below the February peak.

During the coming week the market will be watching some key levels in order to gauge the strength of the latest attempt to break higher. Spot gold is this Monday morning at the current level ($1752/oz) on track to record its highest daily close since 2012. For a breakout to occur the price however needs to move above the May 18 high at $1765.50.

Silver meanwhile has yet to break any significant levels with a break above $18.50/oz needed for it to attract enough momentum to potentially challenge the 2019 and Feb-20 highs. Also watch the gold-silver ratio for relative strength between the two metals. Following the recent silver weakness which saw the ratio move from 94.5 to back above 100 it is trading lower to to 98 (ounces of silver to one of ounce of gold) this Monday.

Agriculture

Buyers returned to corn for the first time in three months as the slow price recovery seen since early April finally started to yield short-covering and fresh buying. A rising global stock pile of wheat helped drive the price of CBOT wheat back below $5/bushel and the net-short above 30k lots to a 13 month high.

Cocoa and coffee meanwhile are showing no signs of the V-shaped recovery shown via the strong performance in stocks and general appetite for risk. Coffee has dropped below $1/lb in its longest slump in 10 months as a record Brazilian production and a weak Brazilian real meet muted demand from out of home demand through restaurants and coffee shops. Demand for cocoa, which is closely linked with GDP growth has dropped to a two-month low amid mounting worries that the slowdown will hurt demand. Last week both saw increased selling from funds with the cocoa position switching back to a net short while bearish coffee bets reached the highest since last November.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodity Weekly: Crude Oil Consolidates on Fresh Virus Concerns

A sense of déjà vu emerged across markets this past week with some behaving like they did back in Q1 when the Covid-19 pandemic sent asset prices sharply lower. Since April, the economic impact of months of lockdowns had been painted over by a massive rally in global stock markets. The support, however, from the Fed (wall of liquidity), TINA (there is no alternative) and FOMA (fear of missing out) showed its first cracks this week.

Despite a very dovish message from the U.S. Federal Reserve, markets have returned to risk-off mode with the dollar reclaiming some lost ground and the S&P 500 index on Thursday experiencing its biggest drop since March 6. Treasury yields were heading toward all-time lows thereby supporting gold while crude oil’s somewhat speculatively fueled rally came to halt after the price had run ahead of current fundamentals.

The combination of the U.S. Federal Reserve seeing a long road to recovery and the World Bank confirming the deepest global recession since WW2, and not least the risk of a second wave building in the U.S. and some other countries, has all but confirmed that the much touted V-shaped recovery is going to be very difficult to achieve.

Crude Oil

The outlook for demand for key commodities, not least energy, remains challenged by the not yet under control Covid-19 pandemic. While the situation in Europe, with the exception of the U.K., and China among others has improved, globally it is still worsening with a record number new cases being reported – mostly in the Americas and South Asia.

There are more and more indications that a possible second ware of the pandemic could be taking hold in some U.S. states and that was the key driver behind the latest market developments. Not least considering that most countries experiencing a second wave, including the U.S., are unlikely to adopt renewed lockdowns measures for fears of the economic impact.

These developments helped send crude oil sharply lower to record its first weekly drop since April. The risk of a second wave slowing the recovery in global demand will pose multiple challenges. Not least to the OPEC+ group of producers who just recently managed to agree a one-month production cut extension.

These cuts now translate into spare capacity which can be brought back when demand has recovered and the global overhang of stocks have been lowered. The group can for a period control supply, but not demand, and a weak recovery in demand may challenge the group’s resolve with the risk of quota cheating emerging.

The impact of Saudi Arabia’s ill-timed price war back in March continues to be felt in the U.S. where millions of extra barrels of imported oil from the Kingdom has helped send commercial stocks to a record high. While these flows will slow over the coming weeks, the positive impact on prices may not materialize for some time due to the combination of elevated gasoline and not least distillate stocks and the slow process with which demand continues to recover. Adding to this the risk that some shale oil producers may start to increase production as long forward prices remain around current levels.

Both WTI and Brent crude oil did not manage to close the gaps that were left open when the markets collapsed in early March after Saudi Arabia embarked on its short-lived price war. Instead, the market behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until end July, ended up signaling the beginning of an overdue correction/consolidation.

Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While our longer-term bullish outlook hasn’t changed the next few months may look a bit more challenging with renewed Covid-19 outbreaks in the U.S. being the trigger that reduces the speculative position.

Precious metals

Gold’s inability, following the dovish FOMC meeting, to find a way through resistance above $1750/oz helped trigger some profit taking before renewed stock market and Covid-19 worries helped provide fresh support. While not offering any new initiatives, such as yield-curve control, the FOMC did provide a supportive outlook for gold. Official rates expected to be kept at zero through 2022 while robust monetary support will be provided through the continued buying of bonds.

We maintain our bullish outlook for silver and not least gold now that its premium to silver has narrowed. The main reasons why we expect to see a minimum move to $1800/oz in 2020 and a fresh record high over the coming years are:

  • Gold acts as a hedge against Central Bank monetization of the financial markets
  • Unprecedented government stimulus and political need for higher inflation to support debt levels
  • The inevitable introduction of yield controls in the US forcing real yields lower
  • A rising global savings glut at a time of negative real interest rates and unsustainably high stock market valuation
  • Raised geo-political tensions on Covid-19 blame game ahead of U.S. November elections
  • A weaker U.S. dollar

Base metals

HG Copper was only surpassed by gold this week as it raced higher to reach $2.71/lb, the highest level since January before drifting lower as virus focus returned. The recent break above $2.50/lb, a key level of support-turned-resistance, finally saw hedge funds join Chinese speculators and turn bullish on the metal. Apart from the fresh accumulation of speculative longs, the rally from the March nadir has been driven by improved industrial demand in China, virus-related supply disruptions in South America and more recently a steady decline in stocks held at exchange-monitored warehouses, both in London and not least in China

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Demand; Gold Longs cut Again

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, June 9. Appetite for risk remained high that week, not least following the better-than-expected US job report on June 5. The S&P 500 rallied 4.2%, the dollar index lost 1.4% while bond yields jumped. The Bloomberg Commodity Index climbed 1.5% with gains seen across all sectors with the exception of precious metals.

A mixed week in commodities which despite broad price gains did not yield much in terms of major position changes. Crude oil continued to be bought albeit at a much reduced pace, fuel products were sold on rising overhang of stocks while natural gas held steady. Precious metals remained out of favor with the gold and silver longs dropping further while enthusiasm for copper attracted strong buying. Grains, led by corn, continued to be sold while the sugar position flipped back to long. Thereby becoming vulnerable to profit taking after the rally’s main engine, crude oil, began looking exhausted.

Energy

Buying of crude oil slowed despite another week of strong gains for both WTI and Brent crude oil. WTI saw the smallest amount of buying in this cycle with bullish bets close to a two-year high. Elevated levels of fuel products in the U.S. drove a reduction in the gasoline (RBOB) net-long to a three-year low and a rise in the distillate (ULSD) short to a three-month high.

Metals

Gold selling extended into a third week with the net long falling by 9k lots to 127k lots, a one-year low and down 55% since the February peak. Copper meanwhile and as expected attracted additional buying following the technical break above $2.50/lb, a key level of support-turned-resistance since 2017. The near five-fold jump took the net-long to 14k lots, a 15-month high.

Agriculture

Ahead of Thursday’s global supply and demand outlook report from the US Department of Agriculture, the corn short had extended to 297k lots, a 13-month high and biggest seasonal short in at least 20 years. This despite a continued steady recovery in the price. The wheat short jumped by 88% ahead of the WASDE report which pinned global stocks next year at a record high. The soybeans long meanwhile more than doubled on increased Chinese buying.

The soft sector was mixed with the oil-related rally in sugar helped flip the position back to a net long while the Arabica coffee short more than doubled in response the deteriorating technical outlook.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

WTI and Copper Bought, Gold sold as Risk on Reigns

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, June 2. A week where appetite for risk driven by stock market euphoria leading to hopes of a V-shaped recovery continued to be the dominant force.

The Bloomberg Commodity Index rose 0.7% with gains in energy, metals and grains being off-set by losses in softs and livestock. Speculators only made small changes to their positions with the net-long across 24 major commodity futures increasing by 2% to 545k lots. Buying of WTI crude oil, gas oil, copper and cotton being off-set by selling of gold, soybeans, corn and coffee.

Energy

Buying of WTI crude oil extended into a 9th week with funds adding 17k lots to bring the net-long to 380k lots or 380 million barrels, the highest since July 2018. Short sellers added small length for a second week thereby keeping the long/short ratio steady. The Brent crude oil net-long saw a small reduction as short-sellers added length for the first time since March. Despite dropping by almost 9% the natural gas long was kept close to unchanged with both long and short positions rising.

OPEC and its oil-producing allies agreed on Saturday to extend the group’s historic 9.7 million barrels/day production cut by one month to the end of July. As we highlighted in our latest update the risk of failure, despite concerns about non-compliance from a handful of producers, was limited given the need to support the price while lockdowns are eased and demand recover. A recovery that potentially risks being slower than the market expects due to the risk of second waves.

According to the latest weekly EIA report, demand for distillates in the US, which is mainly diesel, hit a 1999 low some 30% below the five-year average. Gasoline demand meanwhile has recovered but was 1.9 million barrels/day or 25% below the average for this time of year. With the deal having been all but priced in ahead of the meetings the risk to crude oil remains balanced. Speculative momentum may see both WTI and Brent take aim at closing the gaps to $41.05/b and $45.18/b respectively.

However much higher prices at this early stage in the recovery carries the risk of becoming self defeating as it invites back increased production from high cost producers, not least along the US shale patch. The market may soon also begin to focus on rising production after July from core OPEC members while Libya is showing signs of returning production.

Metals

The lack of short-term tactical opportunities together with the rising risk appetite seen across other asset classes, continued to cut interest in gold. Last week speculators cut bullish bets on COMEX gold futures by 8% to 137k lots, a one-year low. This during a time where demand for gold via bullion backed exchange-traded funds registered a new record with total holdings rising above 100 million ounces. Part of this development may be a product specific challenge that the futures contract currently faces.

The transatlantic disconnect that occurred between gold futures traded in New York and spot gold traded in London back in March left many market makers with heavy losses. This after the spot to futures spread, the so-called Exchange for physical or ETF, blew out thereby forcing cut backs and reduced risk appetite among market makers normally assuring a well functioning market place. These developments are likely to have led to some investors and traders instead focusing on bullion-backed ETFs.

The silver net-long held steady at 27k lots with the near 4% rally failing to attract fresh long positions. Potentially due to the fact that silver’s recent outperformance against gold reached its target as highlighted through the gold-silver ratio. Additional gains in silver may now require support from gold which struggled towards the end of week when a stronger than expected US job report sent real yields higher and gold lower.

HG Coppers continued recovery and flirtation with key resistance at $2.50/lb – that got broken on Thursday – finally saw the net switch to a long position for the first time since January. Dictated by the mentioned breakout funds are likely to add additional speculative length with the price now potentially taking aim at $2.60/lb.

Agriculture

The UN FAO’s Global Food Price Index reached the lowest monthly average since December 2018 last month. Covid19-related declines extended to a fourth month with all sub-indices with the exception of sugar seeing declines. A development which is also being replicated by the speculative exposure with hedge funds holding net-short positions in seven out of the ten grains and softs contracts tracked in this report.

Selling of corn continued with the net reaching a one-year high at 282k lots. This despite signs of a recovering price in response to increased ethanol-linked demand, The rising fuel cost theme also supported another week of short-covering in sugar. Hardest hit was Arabica coffee after the recent technical break below key support wiped out the remaining long with a net-short of 7k lots emerging.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold Sold Despite Multiple Tailwinds

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, May 26. A week were global stocks continued higher with some, especially in the U.S. reaching new cycle highs. Broad weakness hit the dollar, a development if continued could be supportive for commodities.

The Bloomberg Commodity Index was flat on the week with continued gains in energy, not least crude oil, being off-set by weakness across most metals. Despite a relatively neutral price behavior, funds continued to increase bearish exposure in the grain sector. In soft commodities sugar short covering continued while the cocoa short increased just before the price jumped.

Energy

Strong buying of crude oil continued with the combined net-long in WTI (+14.3k) and Brent (+14.7k) reaching 536k lots, a four months high. The WTI long reached 363k lots, the highest since September 2018 while Brent, the recent laggard, reached 173k lots, well below the January peak at 429k lots.

Metals

The week to May 26 was a period where most metals paused with gold and silver both falling by 1.7% while copper was flat on the week. Gold’s lack of hedge fund engagement continued with the net-long seeing another reduction of 14% to 24k lots, the lowest bet on rising prices in almost 12 months.

An exodus from CME gold futures following the March dislocation to spot may have played its part with funds instead moving some of their long term exposure to exchange-traded funds. Total holdings in bullion backed ETFs broke above 100 million ounces for the first time last week.

Silver’s strong rally following the March collapse paused but the established momentum helped increase the net-long by 26% to 27k lots, still 42k lots or 60% below what funds held before the mentioned collapse. Silver’s recent outperformance of gold may slow after the gold-silver ratio reached a technical target at 95 (ounces of silver to one ounce of gold).

The HG copper short was almost cut in half with funds not yet benefiting from the recovery seen in this important industrial metal. Today the price in early trading moved higher again to almost challenge $2.50/lb, a level that provided support from 2017 before becoming resistance following the March collapse below.

Agriculture

Broad selling of the three major grains continued, not least corn where the net-short reached 276k lots, the most bearish position held this time of year in at least ten years. A slump in ethanol demand (now recovering as oil rally), a rapid planting progress and doubts about export strength, have kept corn anchored close to the psychological key support level at $3/bu.

Sugar short-covering continued as bio-fuel related demand recovered. The fund long in coffee was cut by 37% as the technical outlook deteriorated further following the break back below $1/lb.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodity Weekly: Crude Oil Frets Geopolitics, Sluggish Demand Bounce

The energy sector gave back some of their record monthly gains, industrial metals paused while precious metals rose on increased geopolitical concerns, a weaker dollar and lower bond yields.

Commodities trading was mixed during the final week of May. A month that turned out to be the come-back month for many markets following the Covid-19 related collapse seen during Q1. The continued easing of lockdowns around the world have, despite dismal economic data, raised hopes that a V-shaped recovery may occur over the coming months.

This is optimism we unfortunately do not share – with millions of workers unlikely to return to work, together with the risk of the virus re-emerging as some economies attempt to open-up too soon.

The Bloomberg Commodity Index traded lower, with the energy sector giving back some of their record gains seen after the April collapse. Industrial metals also traded softer on rising US-China tensions despite the National People’s Congress introducing new stimulus measures. A challenge to precious metals was quickly reversed with both gold and not least silver continuing to attract demand amid a weaker dollar, lower real yields and friction between the world’s two biggest economies.

Bloomberg ci sector

While silver continued to claw back some of its substantial March losses, gold’s resilience was tested once again this past week. The lack of follow-through momentum from the recent breakout to $1765 had left the market nervous and it culminated when the spot price briefly broke below $1700/oz this past week. However, just like the break to the upside failed to attract fresh buying, the break below support was not met by fresh selling.

Instead, support was quickly reestablished as the dollar and bond yields moved lower on increased US-China tensions. Investors continue to view the yellow metal, and recently also silver, as the go-to metals for protection.

While hedge funds, which often trade on the back of a short-term technical price developments, have been rather quiet in recent months, the demand for ETF’s backed by bullion has continued to go from strength to strength. Global holdings in gold-backed ETF’s have risen non-stop for the past six months with assets at a record level above 3,100 tons.

The same goes for silver which, despite its March slump, has seen total holdings rise strongly to reach fresh records on an almost daily basis during the past couple of months.

Having rallied by 50% since that March low at $11.65/oz, the metal has also managed to claw back some ground against gold. The gold-silver ratio, which expresses the value of one ounce of gold in ounces of silver, has recovered from the record 125 level reached in March to the current 98, still well above the five-year average close to 80.

We maintain our bullish outlook for both metals, not least gold now that its premium to silver has narrowed. The main reasons why we cannot rule out reaching a fresh record high over the coming years are:

Gold acts as a hedge against Central Bank monetization of the financial markets
Unprecedented government stimulus and political need for higher inflation to support debt levels.

The inevitable introduction of yield controls in the US forcing real yields lower
A rising global savings glut at a time of negative real interest rates and unsustainably high stock market valuation. Raised geo-political tensions as the Covid-19 blame game begins Rising inflation and a weaker US dollar.

The crude oil rally that emerged following the sub-zero collapse on April 20 is showing the first signs of pausing. This after the WTI futures contract hit $35 resistance and Brent failed to challenge $37.2/b, both levels being the 38.2% retracement of the January to April sell-off. The brief collapse into negative territory last month on the expiring May WTI contract probably was the single biggest contributor to support the strong rally that followed.

The event on April 20 sent a shockwave through the global oil market with producers realizing that something dramatic had to be done in order to rescue the market from even more pain. This probably led to the very strong and rapid compliance that major producers have been exhibiting during May.

In their latest monthly Oil Market Report the International Energy Agency saw global supply drop by 12 million barrels/day in May to reach a nine-year low at 88 million. Demand meanwhile was expected to recover from being down 22 million barrels/day year-on-year in May to down 13 million in June.

Supporting the process has been the rapid and in most cases involuntary reduction in US shale oil production, now estimated by the IEA to reach 2.8 million barrels/day year-on-year in 2020. Previous production cuts by OPEC+ always attracted some level of hesitancy as members of the group risked yielding further market share to producers in North America. That risk evaporated with the slump in WTI as it left many producers out of pocket, thereby forcing them to halt production.

Having potentially reached the consolidation phase, it is worth considering what could trigger renewed weakness. There are several risks with the most relevant being:

Easing lockdowns sparking a resurgence of Covid-19 outbreaks. Whether OPEC+ can maintain the current high level of compliance. Cash strapped US producers desperate to increase production with WTI back above $30/b.
Post-pandemic changes in global consumer habits (less flying and more working from home). A break above $35/b on the July WTI futures contract could signal a potential extension towards $40/b while support should emerge at $30/b. Only a break below $28/b would raise concerns of a deeper correction.

Apart from the risk of a new trade war between the US and China, as well as a weaker-than-expected demand recovery, the oil market focus in early June will once again turn to Vienna where OPEC and the OPEC+ group convene to discuss a path forward. Some concerns that Russia may struggle to commit to current cuts beyond July may once again create some nervousness prior to the June 8 to 10 meetings. This on the grounds that the recovery in crude oil prices so far has primarily been driven by supply cuts, that can easily be reversed, and not yet a solid recovery in demand.Crude Brent Oil

HG crude oil increasingly, just like crude oil, looks like it needs a period of consolidation. Having almost retraced most of its Covid-19 related sell-off in March, the metal is likely to struggle in its attempt to break back above $2.50/lb, a level which provided support but now resistance, since 2017. The National People’s Congress in China, which has just finished, offered fresh stimulus measures that will increase demand for raw materials in key sectors such as construction and transport.

Overall, however, it was not the fiscal bazooka the market has seen during previous downturns. While perhaps stabilizing the outlook it is unlikely to drive a recovery in growth back to the 6% level. For now, traders are holding onto the prospects for a global economic rebound outweighing increased tensions between the US and China.

Corn, a recent favorite short-sell among hedge funds, was heading for its biggest weekly gain since last October. The recent recovery in crude oil has led to increased demand from ethanol producers who normally consumer close to 40% of the US corn production.

Together with the potential short-term threat of hot and dry weather across the US Midwest, the price has moved higher and it now looks like a floor has been established at the key $3/bushel level. Speculators held a net-short of 245,000 lots (31 million tons) in the week to May 19 and continued short-covering could see the contract challenge an area of resistance above $3.40/bushel. Wheat is also finding a weather-related bid while soybeans remain troubled by US-China tensions hurting the prospect for Chinese demand.

crude oil Covid-19 related rollercoaster has gone full circle. After rallying by 25% during March on worries supply from South America would be disrupted the price has since collapse once again.

The prolonged shutdowns around the world have since reduced demand for quality beans from coffee shops and cafés. This week the price broke support and dropped back below $1/lb and well below the current cost of production for many farmers across South America. Something that may get addressed when the International Coffee Organization hold a virtual meeting of its International Coffee Council from June 1.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Strong Buying of WTI: Subdued Gold Interest

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, May 19. A week were the questionable Moderna vaccine promise and reduced lockdowns spurred continued demand for riskier assets. US stocks resumed their rally with the S&P 500 rising by 2.3% while bond yields traded softer and Dollar index lost 0.6%.

The Bloomberg Commodity Index jumped 2.7% to reach a one month high with all the major energy and metal futures posting strong gains. However, while the energy and metal sectors had a strong week the net-long across the 24 major commodity futures tracked in this was close to unchanged due continued selling of most agriculture commodities.

Energy

Another strong rally in crude oil saw the combine net long in WTI and Brent rise by 26k lots to 507k lots, a 16-week high. Seven consecutive weeks of buying has resulted in bullish WTI bets rising almost three-fold to 348k, a 20-month high, while Brent buyers have only added 102k lots to 158k. While not yet overly stretched, the amount of buying has left the market exposed should the technical and/or fundamental outlook turn less friendly. Buying interest in Brent has been much more muted.

Following a four-week rally WTI crude oil has temporarily been boxed in between resistance at $35.20/bbl, the April high and support at $30.75/bbl, the uptrend from the lows. How the market handle these two levels will give us a clue about the current strength of sentiment in the market.

Buyers returned to natural gas following the recent slump. The 6.4% price jump attracted 24k lots of fresh longs resulting in the net long rising to 136k lots.

Metals

Silver’s 14% surge helped drive a 54% increase in the net-long to 21k lots, the highest since March 17. Gold investors meanwhile continued to flock to bullion-backed ETFs while funds only added 12.3k lots to their futures net-long. Despite hitting a fresh multi-year high on escalating tensions between US and China, and the potential for further stimulus, the net-long at 173k lots remained close to an 11-month low.

Copper traders was the least bearish since January as the price popped higher to reach a two-month high on China housing data and virus hopes. The net-short was cut by 26% to 9.7k lots.

Agriculture

Broad selling of food commodities continued with just four out of 13 futures contracts being bought. All the three major crops were sold, not least corn which saw a 15% increase in the net-short to 245k lots, a one-year high. One of the few exceptions was sugar as the continued rally in crude oil potentially could divert sugar canes back toward ethanol production instead of the sweetener.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

U.S. Stocks Mixed Ahead Of Memorial Day Weekend

U.S. – China Tensions Increase On A Daily Basis

S&P 500 futures were losing ground in early morning trading but then managed to recover.

The major sell-off in Hong Kong impacted early trading. China is set to impose new legislation that will target pro-democracy protests in Hong Kong.

Market participants are afraid that additional clampdown on Hong Kong’s freedoms will lead to a loss of its international finance center status.

The U.S. has already criticized the upcoming law and promised to react if the law is implemented.

While the first phase of the trade deal between the U.S. and China is being implemented despite coronavirus pandemic, the market fears that U.S. efforts to contain rising influence of China will destroy some supply chains and hurt the world economy at a time when it suffers from consequences of virus containment measures.

China Drops GDP Target

Another news that impacts today’s trading also comes from China. Previously, China openly announced its annual GDP growth target and worked to achieve it.

This time, China decided not to set such goals as the coronavirus pandemic created too much uncertainty. China’s Premier Li Kequiang also added that trade situation remained very uncertain, hinting at the increasing tensions with the U.S.

China’s decision not to set GDP growth target is especially negative for the resource sector as China is a major consumer of resources. Crude oil is already correcting from previous highs, while the other China-sensitive resource, copper, is also under pressure.

Argentina Is On The Verge Of Default

Argentina continues negotiations with its creditors in order to restructure $65 billion of debt. Argentina’s finances were in rather poor shape before COVID-19 hit the world economy, and the virus pushed the economy into the abyss.

If Argentina defaults on the upcoming $500 million bond payment, it will have a ninth default. It remains to be seen whether the country will maintain full access to financing after the default, but I’d note that previous defaults did not stop various institutions from lending to Argentina.

Potential negative impact  on the world markets may be limited by the huge monetary stimulus that was implemented by the world central banks to support economies during the current crisis as there’s no liquidity shortage in the world right now.

Silver bought, Gold sold ahead of Breakout

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, May 12. Following a couple of weeks of strong energy-led gains, the Bloomberg Commodity Index traded lower by 1.2% in the week to May 12. In response to this speculator’s cut bullish commodity bets by 9% to 567k lots. Most of the selling was seen in natural gas, Brent crude oil, corn and gold while buyers concentrated their efforts in WTI crude oil, soybeans and live cattle.

Energy

The divergence in speculative interest between WTI and Brent crude oil continued in the week to May 12. The 5% rally in CLM0 attracted another 25k lots of fresh longs with the net rising to 325k lots, the highest since September 2018. Brent crude oil (LCON0) meanwhile traded lower by 3% resulting in the net long being cut by 21k lots to 156k lots. The combined net-long reached a three months high at 481k lots with WTI contributing two-third of the nearly 300k lots funds have added during the past six weeks.

As mentioned in my latest ‘COT, the short-lived collapse to a negative WTI price last month probably saved the market. It helped accelerate dramatic cuts in global production, estimated by the IEA to hit 12 million barrels/day this month. With demand beginning to recover and US producers having made substantial cuts, WTI crude oil has so far been the go to contract for bullish speculators. However, driving the price to high before fundamentals can support a sustained recovery carries the risk of US shale oil producers turning the taps back on to soon.

Natural gas’s failure to sustain a rally above $2/therm helped trigger a 19% correction and a 30% reduction in the net long to 112k lots. The price had rallied strongly from the March low on the outlook for lower production from associated oil production. Milder weather combined with continued lockdowns leading to lower demand and reduced export demand for LNG all helped drive the price lower.

Metals

Gold longs were cut to a fresh 11-month low at 161k lots as the price continued to struggle to break it’s $1700/oz shackle. Silver buyers meanwhile returned to increase the net-long by 35% ahead of the Thursday spike back above $16/oz. The white metal has now retraced more than 61.8% of the February to March collapse thereby attracting renewed demand from speculators who in recent weeks had cut net-longs by 85% from the February peak.

HG Copper traders were the least bearish since January after cutting the net-short by 18% to 13k lots, Further upside however remains doubtful with economic data beginning to show the horrendous damage done to the global economy from many weeks of inactivity. Something that was highlighted by the data showing that the change in position was driven by short-covering and not fresh longs.

Agriculture

Another year of plenty supplies across the three major crops are being projected by the U.S. Department of Agriculture in their latest outlook from May 12. Only a deteriorating weather outlook over the coming months or a pickup in U.S. export sales – unlikely given the strong dollar – can prevent stocks building following another bumper harvest in the U.S. and around the world. Overall the grains sector was net-sold with buying of soybeans (+24k) being off-set by wheat (-0.9k) and not least corn where 24k lots of selling lifted the net-short to a one-year high at 214k lots.

All four soft commodities were net bought despite cotton being the only contract being supported by a higher price. Buying of sugar and coffee occurred despite the headwind from a free falling Brazilian real.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock indexes, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials, the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behavior of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Market Update: Copper and Silver in Focus

What is our trading focus?

  • COPPERUSJUL20 – HG Copper
  • SILVERJUL20 – Silver
  • XAUXAG – Spot Gold-silver ratio

Copper

Industrial metals such as copper started the week on a firm footing, reaching a seven-week high, before retracing lower. Just like crude oil and growth and dependent commodities it has now established an uptrend with rising prices as easing lock-downs support a pickup in demand. Adding to this multiple initiatives from governments and central banks have all helped improved the sentiment among growth dependent commodities. This despite facing the biggest slump in global growth and rise in unemployment since the great depression.

Also supporting metals are reports from China that commodity traders are hoarding tangible assets such as metals. Last week the war of words or COVID-19 blame game between the U.S. and China temporarily saw the off-shore Chinese Renminbi (Yuan) spike to 7.15 before easing to the current 7.10 level.

Whether the hoarding is driven by speculation about a weaker currency or other economic developments remains unclear. This emerging behavior has to a certain extent been supported by the recent price action which has seen demand for some metals being stronger during Asian trading hours.

HG Copper reached an eight-week high on Monday at $2.43/lb before running out of steam. News from China remains encouraging with PBOC promising to do more to support the economy together with a recent drop in inventories monitored by the Shanghai Futures Exchange. The outlook however in our opinion remains one of caution. Rising supply from the reopening of virus hit mining operations raising the question whether the pickup in demand, especially from Chinese manufacturers will be enough to avoid a build in surplus stocks this year.

With this in mind we remain skeptical that HG Copper will be able to mount a sustained rally above key resistance at $2.50/lb, an area that provided support for three years before the March break and collapse to $2/lb. Hedge funds have held a net-short position since January when the COVID-19 outbreak became known outside of China. Continued strength will attract additional short-covering but with the macro economic outlook being challenged, a sustained technical breakout is required for a long position to emerge.

Silver

Silver meanwhile has enjoyed the tailwind from the rally among industrial metals. Having reached a historic discount to gold on March 18 at 127 ounces of silver per ounce of gold, the semi-precious metal has since recovered to 110, the lower end of the established range. The technical set-up following last weeks price action looks promising with the gold-silver ratio pointing lower while silver has made an attempt to break a recently established downtrend.

In terms of investment flows there has been a major divergence between tactical trading firms like most Hedge funds and longer term investors, both retail and institutional, using exchange-traded funds backed by silver. The Commitments of Traders report covering the week to May 5 showed that hedge funds, spooked by the near 40% collapse from February to mid-March, have now cut bullish bets on silver by 85% since February to an 11-month low. Apart from a small dip in March, ETF investors have been continued buyers of silver ETFs since January. Total holdings have reached a record 21,000 tons.

At this stage it is still too early to conclude that silver has gotten enough momentum to capture more of the lost ground, both against the dollar and against gold. For that to happen the metal first needs to break below 109 on the XAUXAG ratio and/or above $16.15/oz on SILVERJUL20, the April high and the 61,8% retracement of the February to March sell-off.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

S&P 500 Bulls Again At Resistance – Now What

Friday’s key data point were the non-farm payrolls. Horrendous and coming in at minus 20,500K, they surprised on the upside. After their release, stocks continued adding to their overnight gains, closing at the 61.8% Fibonacci retracement. Our previous bullish points turned out correct, but the key question is how strong is this rally? Can it power through this key resistance that is reinforced by the early March bearish gap?

S&P 500 in the Medium- and Short-Run

We’ll start this week’s flagship Stock Trading Alert with the weekly chart (charts courtesy of http://stockcharts.com ):

Stocks entered last week’s trading on a weak note, extending previous Friday’s losses in the overnight session to reach the 50% Fibonacci retracement. As Monday progressed however, the bulls cleared off the proximity of this support. The downswing attempt failed, and stocks closed sharply higher last week.

Yes, the weekly indicators are getting tired, but they are still far from flashing sell signals. Importantly, the weekly volume doesn’t show increasing commitment of the sellers, and accounting for the upside momentum, it doesn’t stand in the way of further gains. Apart from the below-mentioned resistances, the 50-week moving average is nearby – can the bulls make it there?

Let’s finetune the perspective on the daily chart.

S&P 500 opened on Friday with another bullish gap, and the uptrend continued throughout the day. The daily indicators are still constructively positioned, and the volume is just about right for an upswing. As the stock bulls closed the day at the 61.8% Fibonacci retracement, how strongly positioned are they to overcome the resistance where they failed not too long ago?

These were our Friday’s thoughts regarding the anticipated reaction to the non-farm payrolls:

(…) The point is that stocks have risen like phoenix from the ashes, and continue taking bad news in their stride. That’s what bull markets do, by the way.

Knowing that this hypothesis will be put to test over the coming weeks, let’s dive into the credit markets.

The Credit Markets’ Point of View

Opening with a bullish gap, high yield corporate debt (HYG ETF) continued leading stocks higher throughout the day. With its late April highs in sight, the daily indicators are in favor of the debt ETF’s upswing to continue. The rising volume coupled with the daily upswing attests to the increasing involvement of the bulls. In short, more upside appears to be the path of least resistance.

The ratio of junk corporate bonds to short-dated Treasuries (HYG:SHY) is also rising. Again, this shows that stocks are well-bid, and bullish spirits are just there at the moment. In other words, we’re rather in the risk-on than the risk-off environment.

The ratio of high yield corporate bonds to investment grade corporate bonds (HYG:LQD) also supports the above assessment.

As for the stock market to Treasuries ratio, this metric also reflects the stock upswing. Will it be able to overcome the late April highs? Judged by the credit markets’ performance, it’s not out of the question.

Let’s check the key S&P 500 sectors and their ratios – do they agree?

Key S&P 500 Sectors and Ratios in Focus

For the fourth consecutive day, the tech sector opened with a bullish gap on Friday. Adding to its opening gains, this leading sector closed solidly up. A word of caution though – while it’s reaching a new highs, Friday’s daily volume could have been higher. As a result, digesting recent gains wouldn’t suprise us in the very short-term.

Despite the risks being still skewed to the upside, let’s remember no market goes up or down in a straight line.

Let’s quote our Friday’s observations as they’re still valid today:

(…) Healthcare (XLV ETF) isn’t performing as strongly, but it isn’t breaking down either. The sector appears just consolidating. Should we see higher volume with yesterday’s candle, that would be bearish – but it wasn’t there. Thus, consolidation appears to be the most probable scenario here.

Helped by the rising HYG ETF, financials (XLF ETF) rose on Friday. First though, they had to repel the selling pressure – they did, and closed almost unchanged from their opening prices. It must be said that their performance could have been stronger, but they aren’t moving in perfect daily synchro with the debt markets.

The question is whether they’ll catch up over the coming sessions. Despite the lower daily volume, they can still do that – in late April, we’ve seen similarly low volume coupled with trading not too far from the swing lows, resolved with an upswing.

Let’s move on to the stealth bull market trio of sectors (energy, materials and industrials). Can it be said they’re leading higher?

While oil didn’t travel far since Wednesday, the energy sector (XLE ETF) recorded gains over the same period. That’s encouraging, but it hasn’t yet overcome its late April highs. As it’s positioned favorably to take on them, will the upswing attempt be supported by the other two sectors?

While materials (XLB ETF) also acted strongly on the day, they’re trading below the late April highs. Similarly to financials, there is some catching up to do if the stock bulls aim to move higher still.

Virtually the same notes apply to industrials (XLI ETF) as well. As a result, unless these three early bull market sectors keep overcoming their Friday’s highs, the S&P 500 is likely to consolidate its recent gains in the short term.

Do the leading ratios support the cautious tone?

Considering Friday’s strong gains in the index, the financials to utilities ratio (XLF:XLU) could have moved higher. Once it does, the stock advance would be driven more by the risk-on sectors.

The consumer staples to discretionaries ratio (XLY:XLP) could have also performed stronger on Friday, given the stock upswing. Both of these charts reveal a certain rotation in the S&P 500 – just like the strong performance of defensive tech stocks such as Apple (AAPL) or Microsoft (MSFT) does. Considering that the XLY:XLP ratio has made it back to its February levels already, some back-and-forth moves aren’t (and wouldn’t be) too surprising.

Briefly said, a short-term consolidation of recent gains would be favored by both sectoral ratios. And what about other metrics?

The copper to gold ratio would favor continued stock upside in place of consolidation or downswing. It carries no screaming sell implication just yet. Should it keep trading higher, it would actually help drive materials (and by extension also industrials and energy) up over the coming sessions.

That would be the key element if this S&P 500 rally is to go on. The broader the advance, the better for the prospects of further gains. When we see warning signs of more than a few sectors rolling over to the downside, we would know that the whole index would roll over eventually as well – and sooner rather than later.

With the above in mind, let’s overlay the S&P 500 moves with the key smallcap index, the Russell 2000.

While the two don’t move in perfect lockstep on a day-to-day basis, the Russell 2000 index (IWM ETF) sends valuable signals of either confirmation or non-confirmation of the S&P 500 move over the selected time period.

Having recovered just as steeply from the late March lows, the IWM ETF early April plunge turned out a bear trap. During the stock struggles with the 50% Fibonacci retracement, IWM went sideways, only to spurt higher as stocks raced to the 61.8% Fibonacci retracement. On the stock selloff early last week, IWM made a higher high – that’s a bullish sign of buying pressure returning to the smallcaps.

Should IWM continue catching up relative to the S&P 500 (after all, they haven’t retraced as much of the downside move), that would support the stock upswing to continue – regardless of whatever S&P 500 consolidation we might get over the very short-term.

This works just like the Dow theory or the credit market cues – it’s a process of catching up that shows which way the non-confirmation will be resolved. And such times can take not only weeks, but months. Currently, the IWM signal gives a gentle nod to the bullish camp.

Summary

Summing up, stocks again proved resilient in the face of Friday’s grim employment data. While the key metrics of the debt markets (high yield corporate bonds and its ratios) continue supporting the stock upswing to go on, the stocks to Treasuries ratio spells short-term caution. The message of key S&P 500 sectors is mixed but still with bullish overtones. While we might not see such a strong weekly close this Friday as we did the previous Friday, the risks at the moment continue being skewed to the upside. That would be especially true should the smallcaps continue catching up relatively to the S&P 500. Accounting for the premarket developments (bearish gap and upswing rejection, we’ve already closed the long position and taken respectable profits off the table).

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Monica Kingsley

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Wagers on WTI Crude Oil Reach Highest in a Year

The Bloomberg Commodity Index meanwhile returned 4.5% as the energy complex and bio-fuel linked agriculture commodities rallied strongly.

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, May 5. It found that funds maintained strong buying interest in crude oil and natural gas while precious metals longs were reduced further. The agriculture sector continued to be traded with a short bias led by corn, sugar and cotton.

Overall the net-long across the 24 commodity futures jumped by 10% to 620k lots. Longs in energy (690k lots) and precious metals (182k lots) more than off-setting short positions in grains (-188k lots) and softs (-71k lots). The livestock sector was net-sold despite news about emerging meat shortages due to virus related closures of major U.S. processing plants.

Energy

Crude oil’s accelerated rally attracted continued buying with funds lifting the combined long in Brent and WTI crude oil by 50k lots to 477k lots, a three-months high. Short positions continued to be reduced while fresh longs were added. Not least in WTI where the net long reached a one-year high while the gross long hit a level last seen in September 2018.

A rapid reduction in U.S. shale oil production highlighted by last week’s plunge in the active drilling rig fleet to an 11-year low, a pickup in global demand and the beginning of the OPEC+ deal to curb production have all supported renewed recovery hopes.  At six longs per one short the long/short ratio in WTI has further room to go before reaching the recent peak at 10 from last December.

Speculators added further length to their natural gas position on speculation that the price would benefit from a drop in shale oil-related production. Ten weeks of buying has lifted the net-long in four Henry Hub deliverable futures and swap contracts to 163k lots. The sharp correction that followed last Tuesday after the price rallied but failed to hold onto a $2 handle highlights the two-way risks emerging with slowing production being countered by weaker LNG exports and lower domestic demand as parts of the US remain in lock-down.

Metals

Gold’s net-long was cut by 12k lots to 172k lots, the lowest in 11 months. While investors with a long-term horizon have continued to buy bullion-backed ETF’s, momentum and price sensitive leveraged funds have grown weary of golds inability to break away from $1700/oz. Silver has done even worse with the net-long having been cut by 85% since February.

Silver is worth keeping an eye on next week on emerging signs of strength against gold after the XAUXAG ratio broke the recent strongly. Copper had a quiet week with lack of momentum driving reductions in both long and short positions, thereby leaving the net close to unchanged.

Agriculture

Corn continued to be sold with the net-short reaching a one-year high at 190k lots. Weak demand from ethanol producers and a strong beginning to the coming crop season has kept the price close to a multi-year low just above $3/bu. Wheat returned to neutral while sugar’s oil-related surge from 9 to 11 cents/lb helped cut the net-short by 22%.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire