Asia-Pacific Shares Mixed; Shanghai Index Jumps as GDP Beats Expectations; Samsung Plunge Pressures KOSPI

The major Asia-Pacific stock indexes finished mixed on Monday with Hong Kong and China reversing earlier losses to close higher following the release of better-than-expected gross domestic product data from China. Samsung Group dominated the headlines in the region, however, after Reuters reported that Samsung heir Jay Y. Lee has received a 2-1/2 year jail term.

In the cash market on Monday, Japan’s Nikkei 225 Index settled at 28242.21, down 276.97 or -0.97%. Hong Kong’s Hang Seng Index finished at 28862.77, up 288.91 or +1.01% and South Korea’s KOSPI Index closed at 3013.93, down 71.97 or -2.33%.

China’s Shanghai Index settled at 3596.22, up 29.85 or -0.84% and Australia’s S&P/ASX 200 closed at 6663.00, down 52.40 or 0.78%.

Mainland Stocks Higher as China Reports GDP Growth in 2020

Mainland Chinese stocks moved higher after an early setback after China reported its GDP rose 2.3% last year as the world fought to contain the coronavirus pandemic. That compared against economists’ expectations for GDP expansion by just over 2%.

In other economic news out of China, property investment rose 7% year-on-year, industrial output rose 7.3% year-on-year while retail sales missed the forecast, contracting 3.9% for the year.

Reuters also reported that the Trump administration notified several suppliers to Chinese telecommunications giant Huawei – including chipmaker Intel – that it is revoking certain licenses to sell to the Chinese firm. That news comes just days ahead of U.S. President-elect Joe Biden’s inauguration on Wednesday.

South Korea’s KOSPI Index Struggles as Samsung Group Plunges

Shares of firms related to South Korean conglomerate Samsung Group plunged in Monday’s trade after Reuters reported that Samsung heir Jay Y. Lee received a 2-1/2-year jail term.

Industry heavyweight Samsung Electronics plunged more than 4% before clawing back some of those losses, finishing their trading day 3.41% lower. Samsung C&T dived 6.84% while Samsung Heavy Industries declined 2.74%. The Seoul High Court found Lee guilty of bribery, embezzlement and concealment of criminal proceeds, according to Reuters.

Australia Shares End Lower as Fresh COVID-19 Cluster Emerges in Sydney

Australian shares ended lower on Monday, as the emergence of a fresh COVID-19 cluster in the state of New South Wales and news that the country may not fully reopen its international borders this year despite the vaccination drive dented sentiment.

As authorities investigated the source of the latest outbreak in the Sydney suburb, the head of Australia’s health department warned that the country may not fully reopen its international borders this year even if most of the population is vaccinated against coronavirus.

Dour sentiment drove mining stocks lower despite a rise in copper and iron ore prices, with heavyweights BHP Group and Rio Tinto shedding around 3% and 1.5%, respectively.

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

Markets Recover Some Losses, While Eyeing Georgia

Stocks gained on Tuesday (Jan. 5) after the major indices all sold off to start the year on Monday (Jan. 4).

News Recap

  • The Dow Jones closed 167.71 points higher, or 0.6%, at 30,391.60. The S&P 500 advanced 0.7% and the Nasdaq climbed nearly 1%
  • The Georgia Senate run-off elections on Tuesday (Jan. 5) were the main focus of investors. At the time of publication, Democrat candidate Raphael Warnock was declared the winner over the incumbent Republican Kelly Loeffler for the first Senate seat up for grabs. The other contested seat between Democrat Jon Ossoff and incumbent Republican David Perdue had yet to be called.
  • The balance of power in the Senate depends on these results and markets could be volatile. Many believe that if the Democrats sweep the Georgia seats and win control, then higher taxes and progressive policies could hurt the market. On the other hand, others believe that a Democrat sweep could bring on larger and quicker stimulus relief.
  • Better-than-expected ISM U.S. manufacturing data came in and helped stocks higher. According to the ISM, manufacturing rose to 60.7 in December from 57.5 in November. The consensus was that the index would slightly decline to 57.
  • Energy stocks led the S&P higher and soared by 4.5% after Saudi Arabia agreed to voluntary production cuts in February and March. Oil giants such as Chevron (CVX) rose 2.7% as a result.
  • Oil futures surged by 4.9% and briefly broke past $50 a barrel for the first time since February.
  • Copper is a precious metal traditionally seen as a leading indicator for the global economy. On Tuesday (Jan. 5), it hit its highest level in nearly eight years and gained more than 2%.
  • Gold also reached an 8-week high due to more declines from the dollar.
  • Boeing (BA) was the best-performing Dow stock and gained 4.4%.
  • U.K. Prime Minister Boris Johnson on Monday (Jan. 4) announced a national lockdown to slow the spread of a new, more contagious, coronavirus strain. Under these restrictions, people are only allowed to leave their homes for essentials, work (if they can’t from home) and exercise. Most schools, including universities, will also move to remote learning.
  • According to data compiled by Johns Hopkins University , more than 85 million COVID-19 cases have been confirmed globally, including 20.8 million in the U.S. and 2.7 million in the U.K.
  • Meanwhile, over 5 million people in the U.S. have now received a COVID-19 vaccination.

After stocks sharply dropped on Monday (Jan. 4) to kick off 2021, widespread gains on Tuesday (Jan. 5) offset some of these losses. While Monday (Jan. 4) was the first time since 2016 that the Dow Jones started a year off with declines, two major catalysts sent the major averages higher: the oil production agreement reached between OPEC and Russia, and better than expected manufacturing results from December.

This tug of war between good news and bad news can be expected in the early part of this new year. Although Monday (Jan. 4) witnessed a sharp pullback (and in my opinion, a predictable one), Tuesday (Jan. 5) witnessed a reversal. In general, though, I still believe that markets have overheated and that between now and the end of Q1 2020, a correction could likely happen.

Markets have overheated, and I believe that much of the good news ranging from economic stimulus to vaccines has been baked in. Eventually, the reality on the ground will outweigh the positive news in the short-term.

National Securities’ chief market strategist Art Hogan put it best in my opinion, saying that he believes we could see a 5%-8% pullback as early as this month. Hogan said that

“we have a tug of war between virus news and vaccine news the better part of six months, and that’s been balanced off by stimulus…That seems to be behind us, and right now I think the virus news takes over a little bit.”

Additionally, if the Georgia elections on Tuesday (Jan. 5) go as I think they’ll go (Democrat sweep), it could be a short-term catalyst leading to a potential correction. The balance of power in the U.S. Senate is at stake with these elections. Investors are likely to prefer a divided Senate. If the Democrats sweep and wrestle away Senate control from the Republicans, it could leave President Biden’s powers largely unchecked, and enable him to pass more ambitious, progressive, and less market-friendly policies.

At the time of this publication, Democrat candidate Raphael Warnock was declared the winner over the incumbent Republican Kelly Loeffler for the first Senate seat up for grabs. The other contested seat between Democrat Jon Ossoff and incumbent Republican David Perdue had yet to be called.

According to John Stoltzfus , chief investment strategist at Oppenheimer Asset Management , the S&P 500 could fall by 10% if the Democratic candidates sweep the Georgia runoffs.

“It is thought by not just a few folks on Main Street as well as on Wall Street that if tomorrow’s run-off results in a sweep for the Democrats — providing them with control of the Senate as well as the House — that it would bode ill for business with the likelihood that corporate tax rates could rise substantially,” Stoltzfus said.

On the other hand, a Democrat sweep could mean potentially larger stimulus packages – and soon.

There is optimistic potential, but the road towards normality will hit inevitable speed bumps and uncertainty. This Senate election and the potential market reactions reflect that.

If and when a correction does happen, I believe it will be healthy and a good thing. Corrections are normal market behaviors and happen more frequently than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Since we have not had one since March 2020, I believe we are long overdue, and the catalysts are there. Most importantly though, a correction could be a great buying opportunity for what I believe will be a strong second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5) is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Driving

Small-Caps (IWM)

Figure 1 – iShares Russell 2000 ETF (IWM)

After seeing a sharp pullback since Christmas week, the Russell 2000 briefly returned to its winning ways on Tuesday (Jan. 5). The IWM Russell 2000 ETF which tracks the small-cap index witnessed a 1.55% gain – its best day in a while.

Although I genuinely love small-cap stocks in the long-term as the world will eventually reopen, I believe that in the short-term the index has overheated. Until the start of this week, the RSI for the IWM Russell 2000 ETF was at an astronomical 74.54. Although the RSI is at a more manageable 62.84, I still believe that the party of seeing vertical gains is over for now.

Small-caps in the short-term will be more sensitive to bad news, and right now there is a lot. Vaccine gains have possibly been baked in by now and stocks just don’t go up vertically the way that the Russell 2000 did between November and late December. It is very possible that small-caps in the near-term could trade sideways before an eventual larger pullback. I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

For now, SELL and take short-term profits if you can – but do not fully exit positions .

If there is a pullback, this is a STRONG BUY for the long-term recovery.

Diving

US Dollar ($USD)

Figure 2 – U.S. Dollar ($USD)

I have zero faith in the U.S. Dollar as a safe asset, even if we may see some short-term volatility and “risk-off” trades. I still am calling out the dollar’s weakness after several weeks despite its low levels. I expect the decline to continue as well thanks to a dovish Fed.

Any time the U.S. Dollar rallies, it is simply “fool’s gold.” Since I started doing these newsletters about a month ago, I have consistently said that any minor rally the dollar would experience would be a mirage. Since the dollar briefly pierced the 91-level on December 9th, it has fallen over 1.8%. Despite the dollar experiencing another mini-rally and nearly piercing the 91-level again on December 22, I remained steadfast in my bearish outlook of the dollar. Since the open on December 23rd, the U.S. Dollar has declined another 1.25%. I believed the dollar would drop back below 90 before the new year, and here we are to start off 2021 with the dollar at 89.41. Since hitting a nearly 3-year high on March 20th, the dollar has plunged nearly 13.8% while emerging markets, foreign currencies, precious metals, and cryptocurrencies continue to strengthen. Gold for example reached an 8-week high on Tuesday (Jan. 5)

On days when COVID-19 fears outweigh any other positive sentiments, dollar exposure might be good to have since it is a safe haven. But in my view, you can do a whole lot better than the U.S. dollar for safety.

I have too many doubts on the effect of interest rates this low for this long, government stimulus, strengthening of emerging markets, and inflation to be remotely bullish on the dollar’s prospects over the next 1-3 years. Meanwhile, the US has $27 trillion of debt, and it’s not going down anytime soon.

Another headwind to consider for the dollar is the Georgia Senate election. If Democrats sweep, there could be more aggressive stimulus in the near term. With Democrats controlling both the House and the Senate, more stimulus could be bearish for the dollar.

Additionally, according to The Sevens Report , if the dollar falls below 89.13, this could potentially raise the prospect of a further 10.5% decline to the next support level of 79.78 reached in April 2014. With the dollar now at 89.41, we are coming dangerously close.

The dollar’s RSI is also nearly oversold once again and is trading significantly below both its 50-day and 200-day moving averages.

For now, where possible, HEDGE OR SELL USD exposure.

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.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, 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, Matthew Levy, 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. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s 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. Matthew Levy, 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.

 

Stocks Are Ready To Test New Highs

Markets Start The Year On A Strong Note

S&P 500 futures are gaining ground in premarket trading as traders continue to bet on a strong economic recovery.

Today, traders had a chance to take a look at the final readings of Manufacturing PMI reports for December. In the Euro Area, Manufacturing PMI increased from 53.8 in November to 55.2 in December. In China, Manufacturing PMI declined from 54.9 to 53.0. In the UK, Manufacturing PMI inreased from 55.6 to 57.5. Numbers above 50 show expansion.

The U.S. will provide the final reading of its Manufacturing PMI report after the market open. Analysts expect that Manufacturing PMI will decline from 56.7 to 56.5.

The economic rebound in the manufacturing segment remains strong despite the second wave of coronavirus which is good for stocks.

Oil Traders Wait For Signals From OPEC+

Oil has recently made an attempt to get to the test of the $50 level but failed to get above $49.80 and declined closer to $48.50. Today, OPEC+ members will discuss the current state of the market and outline their production strategy for February.

Yesterday, OPEC Secretary General Mohammad Barkindo noted that the oil market faced many downside risks. If OPEC+ decides to maintain the current size of production cuts in February, oil and oil-related stocks will get additional support.

However, Russia has previously expressed its interest in gradually raising output, and it remains to be seen whether the group will resist the temptation to increase output at a time when oil prices are moving higher.

U.S. Dollar Tests New Lows At The Beginning Of The Year

The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, has recently tested new lows at 89.42. The U.S. dollar remains under significant pressure as traders bet on a robust recovery and buy riskier currencies.

The falling dollar may serve as an important bullish catalyst for commodity markets, providing material support to oil, gold, silver, copper and other commodities.

Gold has recently managed to get above the psychologically important $1900 level and gained strong upside momentum so gold miners will likely enjoy significant interest during today’s trading session.

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

Toxic options

With such a turbulent year for the global economy, one might expect negative effects on the markets. However, what we’re seeing is quite the opposite, and the options discussed today are a big reason why.

Chief Economist of XTB group discusses key topics and potential market scenarios.

Watch this video to learn:

  • How options are pumping up the Wall Street bubble
  • ECB and EU budget – what do they mean for the euro?
  • 2xhard – Brexit and lockdown in Germany
  • Is Copper headed for record prices?

Some other topics include:

  • Hard lockdown in Germany
  • Risk of hard Brexit
  • Brexit talks extended

Calendar this week:

  • Chinese monthly data (Tuesday)
  • Flash PMIs (Wednesday)
  • US output
  • FOMC
  • US retail sales

Copper & Bonds Telegraphed the 2020 COVID Collapse

A very interesting setup in both Copper and Bonds seemed to have telegraphed the collapse in the US stock market in early 2020.  T-Bonds, which had been consolidating into a downward price channel prior to the COVID outbreak, suddenly broke through the downward price channel and started to accelerate higher. Copper, which is a fairly common commodity for building, infrastructure, and other uses, had been moving higher above a clear upward price channel, then suddenly broke lower in early 2020.  Both Bond and Copper seemed to break these price channels nearly 20+ days before the US stock markets initiated their price decline on February 24, 2020.

My research team and I believe this setup is not inconsequential for technical traders. The breakdown in Copper represents a core “demand” failure, while the breakout in Bonds suggests risks are elevating. This is something we should continue to watch for in the future as Copper and Bond prices typically move before the US stock market begins to react.

THE 2020 COPPER/BONDS DIVERGENCE SETUP

The following Daily chart showing the setups and breakdowns/breakouts of the DOW, Copper and Bonds clearly show the early breakout in Bonds and the subsequent breakdown in Copper – nearly 20+ days before the INDU (Dow Jones Industrial Average) began to breakdown and accelerate lower.

It makes sense that Bonds and a highly utilized commodity like Copper would reflect a change in demand or elevated fear just before a contagion event takes place.  Consumers, manufacturers, and builders, as well as traders and investors, were all able to see the writing on the wall in this case.  Will any future contagion event be similar?  Will Copper and Bonds react to fears and demand concerns 10 to 20+ days before the next downside price event?

THE CURRENT COPPER/BONDS SETUP (STILL BULLISH)

Currently, the US markets are in a bullish price phase.  We’ve written extensively about how the markets are experiencing an unprecedented bullish/rally phase which we believe to be a euphoric/speculative phase of the broader trend.  Still, one can’t ignore the strength and momentum behind this current bullish trend and take a pessimistic view of the markets.

The Current INDU, Copper, and Bonds chart, below, highlights the strength and momentum of the current bullish INDU price trend. Even though Bonds appears to be very close to the downward sloping price channel, we have yet to see a real upside price trend in Bonds which would indicate fear has started to reengage in the markets.  Additionally, Copper is trading solidly above the upward sloping price trend which suggests demand for copper is still quite strong.

As long as the bullish trend continues, we would expect Bonds to continue to consolidate below the downward sloping price trend and continue to drift lower while Copper continues to stay above the upward sloping trend line suggesting demand is strong and future expectations have not changed.

When and IF Bonds move above the downward sloping trend line, then we have to watch Copper very closely for a breakdown event.  If we see this take place quickly (within a 5 to 7 day window), then we need to start to prepare for a broad market decline that may happen within 10 to 15+ days of the Bonds/Copper trigger date.

The arrows on the Current Chart above show you what would happen IF a new contagion event were to happen and IF the Copper/Bonds set up replicates itself.  Bonds would begin to rally, Copper would begin to decline, and about 15+ days later, the US stock market would begin to decline.

Again, we believe this setup may be a good way to determine a change in expectations related to the demand for an industrial commodity (Copper) and risk levels related to debt/credit (Bonds) that may trigger a warning before the major markets change trends.  If our research is correct, and the Copper/Bonds markets react to changing expectations before the broader US stock market reacts to the change in sentiment, then this may be a very valid setup for skilled technical traders to stay ahead of the major market trends.

To be clear, the markets are currently in a strongly bullish price phase.  We are not calling for a top or any type of major downside rotation based on this setup today.  We are showing you what happened prior to the 2020 breakdown and suggesting something similar may happen in the future – which may allow you to have an early warning of a major US stock market reversal in trend.

Either way, a skilled technical trader will be able to find success in an uptrend or a downtrend.  Our proprietary BAN (Best Asset Now) strategy allows us to know which assets are potentially the best performers in any type of market trend.  If you want to learn more about how we can help you with our proprietary tools, strategy, and daily analysis then visit our website.

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

Stay healthy!

Chris Vermeulen
Chief Market Strategist
www.TheTechnicalTraders.com

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation or solicitation for readers to take any action regarding this research.  We are not registered financial advisors and provide our research for educational and informational purposes only.

 

Stocks Retreat As Traders Take Profits After November Rally

A Busy Week Ahead

S&P 500 futures are losing ground in premarket trading as investors wait for new catalysts which could push stocks to new highs.

November was a great month for stocks so some traders and investors prefer to take some profits off the table near record highs.

The economic calendar is busy this week, and current market optimism will soon get tested by many economic reports. Today, the U.S. will release Pending Home Sales report which is expected to show that Pending Home Sales increased by 1% month-over-month in October.

This report will be followed by Manufacturing PMI report for November which will be published on Tuesday. Traders’ attention will shift to the job market on Wednesday when the U.S. will release ADP Employment Change report. Initial Jobless Claims report will be published on Thursday, followed by Non Farm Payrolls and Unemployment Rate reports on Friday.

Job market reports will likely have a significant impact on the market as they will indicate whether the economy continues to rebound despite the second wave of coronavirus.

U.S. Dollar Falls To New Lows

The U.S. Dollar Index managed to get below the support at the yearly lows at 91.75 and continues to move lower.

The U.S. dollar is under pressure as traders bet that Biden presidency will bring a huge stimulus package while the Fed will keep rates at the bottom for years.

The weak dollar may provide an additional boost for U.S. stocks and commodities. At this point, the main beneficiary of U.S. dollar’s weakness is copper which has managed to get to levels not seen since early 2013.

Interestingly, gold and silver remain under pressure despite the weak dollar as demand for safe haven assets decreased due to recovery hopes.

OPEC+ Begins Two-Day Negotiations

OPEC+ members will have two days to discuss their next move. At this point, the market expects that OPEC+ will extend current production cuts for the first three months of 2021. However, recent reports suggested that OPEC+ is also discussing a gradual increase of production.

WTI oil has recently made an attempt to settle below the psychologically important $45 level but failed to gain downside momentum. Oil will likely be very volatile in the upcoming trading sessions as traders wait for OPEC+ decision.

Meanwhile, oil-related stocks look ready to move lower at the start of today’s trading session as traders continue to take their profits after a massive rally in November.

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

US Stock Market Overview – Stock Rise Led by Technology as the White Ups its Stimulus Bid

Stocks rose sharply on Friday allowing the S&P 500 index to notch up one of the biggest weekly advances in three months. Investors welcomed signs pointing to a decisive result in next month’s presidential election. The market now appears to be pricing in a Biden victor and the likelihood that the senate would also flip to the democrats. The betting markets now show Biden ahead (Predictit) by 30-points, and the Senate to flip to the Democrats by 20-points.

The White House announced that it is willing to increase the amount of the fiscal stimulus to 1.8-trillion which is still shy of the House of Representatives’ number of 2.6-trillion. Most sectors in the S&P 500 index were higher led by Technology and Healthcare, the Energy sector bucked the trend. The dollar sold off sharply helping to buoy gold and silver prices, which helped the mining sector. The VIX volatility index moved lower closing down nearly 9% for the week.

Expectations of continued strong housing data and robust growth in China helped lift copper prices to a 2-year high. Copper prices have been consolidating and now appear ready to resume their uptrend. A weaker dollar is helping commodities such as copper gain traction.

White House Increases Stimulus Offer

The White House has announced that it has increased its stimulus target and is preparing a $1.8 trillion coronavirus relief offer, its largest proposal to date. Treasury Secretary Steven Mnuchin is expected to discuss a new $1.8 trillion proposal with House Speaker Nancy Pelosi. The White House proposal marks a further narrowing of the distance between the administration and Democratic leaders over the bill’s overall price tag. Still, its nearly 0.8 trillion of the level that the House of Representatives wants and investors are unsure if a deal will get done ahead of the election.

U.S. Stocks Set To Open Lower As Initial Jobless Claims Unexpectedly Increase

Stocks Look Ready To Continue Yesterday’s Downside Move

S&P 500 futures are losing ground in premarket trading as traders are worried about the future pace of the economic recovery.

Leading tech stocks are also under pressure in the premarket trading session. Tesla is set to continue yesterday’s sell-off as it is already down by more than 3%.

Today, France and Germany reported that business sentiment improved for the fifth month in a row but this news did not provide any material help to global markets as traders remained focused on the second wave of coronavirus.

Initial Jobless Claims Increase To 870,000

U.S. has just provided Initial Jobless Claims and Continuing Jobless Claims reports.

Initial Jobless Claims increased from 866,000 (revised from 860,000) to 870,000 while analysts expected that Initial Jobless Claims would decline to 840,000.

Continuing Jobless Claims declined from 12.75 million (revised from 12.63 million) to 12.58 million compared to analyst consensus of 12.3 million.

The employment reports were materially worse than expected and put additional pressure on S&P 500 futures.

U.S. Dollar Strength Indicates That Investors Are Seriously Worried About The Pace Of Recovery

The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, managed to rebound from a low of 91.75 that was reached at the beginning of September to 94.50.

This rebound happened despite the Fed’s pledge to keep the rates at the bottom until the end of 2023. The strength of the current rebound indicates that investors are seriously worried about the perspectives of the world economic recovery.

The Volatility Index, VIX, has also rebounded from lows reached in August. VIX is often called a fear index since it rises when traders are worried about economic perspectives.

U.S. dollar upside has already put significant pressure on commodities. Silver and gold have suffered a sell-off while copper declined from recent highs. Only WTI oil managed to stay near the $40 level thanks to the support from the hurricane season.

If the U.S. dollar continues its upside move, commodities will remain under pressure, and commodity-related stocks will likely decline to lower levels.

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

Copper, a Potential Casualty of Further Dollar Strength

What is our trading focus?

HG Copper – COPPERUSDEC20
COPA:xlon – WisdomTree Copper ETC (UCITS eligible)


Copper’s impressive recovery and momentum from the March low, has started to slow with the price struggling to extend its impressive gains beyond 3.10/lb on High Grade copper (COPPERUSDEC20). The rally seen across industrial metals, not least copper, in recent months has been driven by a post-pandemic recovery in Chinese demand supported by credit and scattered supply mine disruptions.

While the fundamental outlook remains supportive, the lack of fresh upward catalysts may now pose a short-term challenge to this poster-child of momentum. Something that has helped attract a substantial amount of speculative long positions from trend following strategies that many hedge funds and CTA’s adhere to.

Copper is currently challenging the uptrend from the March low, but in our opinion the price would have to break below $2.95/lb before it kicks off a correction/consolidation phase. Just like gold’s current correction has more to do with dollar strength than changed fundamentals, an extended period of dollar strength could be the trigger that for now could pause this classic momentum trade.

 

Source: Saxo Group

A key source of inspiration behind the rally has been the continued slump in stocks at warehouses monitored by the three major futures exchanges in New York, London and Shanghai. Not least the drop to a 14-year low in stocks monitored by the London Metal Exchange has supported the market. The tightness that it signaled drove the spot premium over the three-month benchmark to an 18-month high at $40/t last week before easing lower to $28/t yesterday.

During the past week stock levels have stabilized on LME while levels monitored by the SHFE has seen a steady rise since late June. This development combined with softer prices in Shanghai may potentially have shut the arbitrage window for profitably importing copper into China.

The reason why copper risks a non-fundamental supported correction can be found in the weekly Commitments of Traders report. The mention strong momentum has continued to attract an ever increasing net-long position held by speculators such as hedge funds and CTA. Given that many of these positions are purely based on technical analysis a break below $2.95/lb could trigger a correction.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

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 Set To Open Higher As Traders Bet On Robust Recovery

Strong Manufacturing PMI Reports Lift Market Mood Around The World

S&P 500 futures are gaining ground in premarket trading after Manufacturing PMI reports for China and Euro Area indicated that the economic rebound continued.

China’s Manufacturing PMI increased from 52.8 in July to 53.1 in August compared to analyst consensus of 52.6.

Euro Area Manufacturing PMI was in line with analyst expectations, declining from 51.8 in July to 51.7 in August but remaining in the positive territory.

Today, traders will also have a chance to evaluate U.S. Manufacturing PMI data. Analysts expect that U.S. Manufacturing PMI will increase from 50.9 in July to 53.6 in August.

Traders continue to bet on a fast economic rebound supported by the unprecedened monetary stimulus. In this situation, all decent economic reports serve as additional positive catalysts and push stocks higher.

Shares Of Zoom Video Communications Are Set To Open At All-Time Highs

Zoom reported its quarterly results yesterday after the market close, and its shares are currently gaining almost 40% in premarket trading.

Zoom reported revenue of $663.5 million and GAAP earnings of $0.63 per share, easily beating analyst estimates. The company also provided guidance for the third quarter, expecting revenue of $685 million – $690 million and earnings of $0.73 – $0.74 per share.

Analysts rushed to upgrade the stock as the shift to remote work and increased usage of video conferencing appears to be sustainable. Given the current premarket indications, Zoom shares will have a very active trading session today.

U.S. Dollar Remains Under Serious Pressure

The decline of the U.S. dollar is an additional positive catalyst for stocks, especially in the commodity-related space. The U.S. Dollar Index has managed to get below the 92 level and continues its downside move, pushing oil, gold, silver, copper prices higher.

Interestingly, even weak inflation data in the Euro Area did not provide any support to the American currency. Euro Area Inflation Rate was -0.4% month-over month in August, suggesting that the EU economy may need additional stimulus in order to push prices higher.

Traders remain focused on Fed’s decision to aim for an average inflation of 2% and prepare themselves for years of low rates in the U.S. so they ignore short-term data suggesting that other developed countries will have to expand their stimulus programs. If this trend continues, stocks and commodities will get an additional boost.

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

U.S. Stocks Set To Open Higher As Durable Goods Orders Increase By 11.2%

Traders Prepare Themselves For Fed Chair Jerome Powell’s Speech At Jackson Hole Symposium

Markets are rather quiet today as traders wait for the key commentary of Fed Chair Jerome Powell which is set to speak at Jackson Hole Symposium on Thursday.

The key question is whether the Fed is ready to let inflation get above 2% in an effort to support the economic recovery after the acute phase of coronavirus crisis. If Powell signals that the Fed is ready to push inflation higher, stocks will get an additional boost while the U.S. dollar may suffer.

Such a scenario would also be bullish for commodities like oil and copper, as well as precious metals including gold and silver. However, if Powell is not dovish enough, stocks may pull back from record highs.

Hurricane Laura Continues To Support Oil Prices

WTI oil has managed to settle above the $43 level but failed to get above the nearest resistance at $43.50 as Hurricane Laura moved closer to the shore.

Currently, Laura is a Category 3 storm which may ultimately become a Catergory 4 storm when it hits the shore.

The key question for oil traders is whether the storm deals significant damage to refineries. For now, the threat from Laura was not sufficient enough to push oil prices to new highs but the market’s reaction may quickly change once the hurricane makes landfall.

Yesterday’s API Crude Oil Stock Change report was also positive for oil as it indicated that crude inventories decreased by 4.52 million barrels.

Durable Goods Orders Increase By 11.2%

U.S. has just provided Durable Goods Orders data for July. On a month-over-month basis, Durable Goods Orders rose by 11.2% compared to analyst estimates which called for growth of 4.3%.

The Durable Goods Orders report was much stronger than expected which could provide additional support to stocks and the U.S. dollar which continues its attempts to rebound against a broad basket of currencies ahead of Powell’s speech at Jackson Hole Symposium.

S&P 500 futures are gaining some ground in premarket trading after the release of the report.

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

U.S. Stocks Set To Open Lower Ahead Of U.S. PMI Data

Euro Area PMI Reports Disappoint Investors

Today, traders had a chance to evaluate Flash PMI data for the Euro Area. Manufacturing PMI decreased from 51.8 in July to 51.7 in August while analysts expected that it would grow to 52.9.

Meanwhile, Services PMI declined from 54.7 in July to 50.1 in August while analysts expected that it would decline to 54.5. Numbers below 50 show contraction so the Services PMI is very close to the negative territory.

Euro Area PMI reports were much worse than expected and provided significant support to the U.S. dollar which benefited from euro weakness.

The U.S. Dollar Index, which started the day near 92.60, is currently trying to get to the test of 93.50. Not surprisingly, the U.S. dollar strength put pressure on commodities like oil and copper. Precious metals, including gold and silver, are also deep in the red zone.

As a result, this trading session may prove to be challenging for commodity-related stocks. S&P 500 futures are losing ground in premarket trading.

U.S. PMI Reports In Focus

While the disappointing Euro Area PMI reports have provided major support to the U.S. dollar and put material pressure on commodity markets, the situation may quickly change after the release of U.S. PMI reports which are set to be published after the U.S. market open.

U.S. Manufacturing PMI is expected to grow from 50.9 in July to 51.9 in August while Services PMI is projected to increase from 50 to 51.

Services PMI data is especially interesting as the services sector is very sensitive to changes in consumer mood which may have worsened due to the continued spread of coronavirus.

In case U.S. PMI reports disappoint the market, the U.S. dollar will likely reverse course which would be bullish for precious metals.

Existing Home Sales Report Will Provide Additional Insight On The Health Of The Housing Market

Soon after the release of U.S. PMI reports, traders will have a chance to evaluate Existing Home Sales for July. Analysts expect that Existing Home Sales have increased by 14.7% on a month-over-month basis.

The reason for this optimism is the potential shift in consumer preferences which was caused by the pandemic. Currently, many analysts believe that consumers will search for bigger living space or a home outside of congested areas.

Strong Existing Home Sales may provide some support to stocks although the impact of PMI reports will be more significant.

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

Metals Sold with Rising Yields Posing a Threat

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, August 11. It was a mixed week in terms of market action with another dose of vaccine hopes and better-than-expected economic data supporting a 0.9% rise in the S&P 500 to move within a whisker of its February record.

A 13 bp rise in U.S. 10-year yields and a removal – using Fed Funds futures – of the risk that the Fed will move towards a negative-rate policy, helped trigger profit taking across interest rate sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.

The Bloomberg Commodity Index dropped 1% during the week to August 11 with rising bond yields and a stronger dollar reducing the appeal, not least for metals from gold and silver to copper. Fifteen out of 24 the commodity futures tracked in this report traded lower while speculators, despite the weakness, added risk in a majority of the contracts. Most noticeable Brent crude oil, natural gas, soft commodities and livestock. Biggest reductions were seen in WTI crude oil, gold, silver, copper, soybeans and wheat.

Energy

The combined crude oil net-long rose by 4,4k lots to 546k lots with a 12.7k lots reduction in WTI crude oil being more than off-set by a 17,1k lots increase in Brent crude oil. Following the April to June surge, both crude oil contracts have been stuck in a slight upward trending channel. Thereby causing no concerns for funds, who have made only small changes to their position since early June. Last week both contracts spent most of week challenging the upside, but with limited success as the 200-day moving average in WTI, last at $42.7/b, provided a line the market could not break.

The natural gas long across four Henry Hub deliverable futures and swap contracts rose by 12% to reach 293k lots, the highest since November 2018 and the seasonal highest level going back at least ten years. U.S. natural gas futures rose to an eight-month high last week on speculation, that a record heat across the western half of the country, will stock increased demand from utilities which would help reduce stockpiles towards their long-term average.

Metals

Two weeks of gold and silver selling became three last week when both metals suffered a long overdue correction, triggered by vaccine hopes, better-than-expected US data, a stronger dollar and not least rising real yields. This following a four-week surge where gold rallied by 15% and silver by 57%. The net longs dropped to an eight-week low after speculators cut the gold net-long by 13.5% to 150k lots and the silver by 27% to 23k lots.

The rising volatility in gold futures spreads and the dislocation to spot gold traded in London have been cited as reasons why funds have moved long exposure from COMEX gold futures (tracked in this report) into Exchange-traded funds instead. The continued reduction in net-longs, however are a potential cause for concern from a gold bullish perspective.

With the brightest minds shunning both metals despite a catalogue of bullish drivers, it may be time to consider the risk of a prolonged period of consolidation/correction. At least in the short-term while economic data continues to improve, the dollar short looking stretched and the U.S. yield curve show signs of steepening.

We have not changed our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

We have not changing our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

The elevated HG copper long was reduced for a second week as the metal stopped rallying after finding resistance at $3/lb. The net-long was reduced from a two-year high, this time by 12% to 47.4k lots.

Agriculture

Weakness before the bullish received WASDE report last Wednesday saw funds cut their net-long in soybeans by 39% while returning to a net short position in wheat. The corn net-short was unchanged but remained the biggest short held by funds across the commodities we track. This before a strong end of week rally after a price friendly WASDE report, bigger than expected unplanted acreage and wind storm damage impacting the potential crop outlook.

Soft commodities were all bought with net long positions currently held in all four contracts. The increase, primarily due to short covering, occurred despite weaker price action during the week. Especially coffee which sank by 8% but still saw the net-long rise by 45% to 23.8k lots.

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.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

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

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.

Start trading now

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.

Start trading now

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.

Start trading now

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.

Start trading now

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.

Sign up here for my Daily Fix or Start trading now

Chris Weston, Head of Global Research at Pepperstone.

(Read Our Pepperstone Review)