Slides in many equity indexes are showing a return to slowing economic conditions. Slowing numbers out of EU add to that sentiment. Precious metals may be returning to a “flight-to-quality” role with the inverse relationship with equities returning. Grain markets have some critical numbers this morning with focus on tightening supplies and concerns about ongoing demand.
Archive | September, 2011
Cocoa: Some Strength Lately but Not Enough to Get Out of Recent Range.
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The cocoa market finally showed some resiliency during the past few sessions, although not enough for prices to rise above the recent trading range. December cocoa was able to recover from early pressure yesterday and finish the session with moderate gains. It has been able to close higher in three out of four sessions this week after only having three positive sessions over the previous three weeks. Still, cocoa has lost more that $400 during the month of September. Positive developments on both sides of the Atlantic were able to lift macroeconomic sentiment and trigger a broad-based recovery in cocoa as well as other commodity markets yesterday. The British Pound’s failure to follow through on early strength may have limited gains in cocoa, as that diminished arbitrage buying of ICE futures against the LIFFE contract. Heavy near term cocoa supplies, due in large part to all-time record crops from top cocoa producers Ivory Coast and Ghana, have helped to keep prices grounded near their lowest levels of the year. While next season’s global cocoa production will roughly balance supply and demand, many traders feel that this season’s global cocoa surplus of more than 400,000 tonnes will have to be digested by the market before prices can lift substantially away from their current low levels.
TODAY’S GUIDANCE: Consolidation is normally a continuation pattern and the market could resume the downtrend at any time. The sideways action is helping to alleviate the oversold condition but we can not rule out a further bounce to resistance at the 2,749-2,782 zone basis December cocoa before a resumption of the downtrend.
TODAY’S MARKET IDEAS: Keep 2,562 as the next target.
Coffee: Bearish Supply Outlook Overcomes Improving Macroeconomic Sentiment
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The coffee market has been in a tailspin during the latter part of this week, and prices have now completely given back the entire late August rally. December coffee kept sliding lower during yesterday, with prices reaching their lowest levels since late January. The market failed to find carryover support from a broad-based commodity rally, and a late rebound in the Dollar added to the negative tone. Forecasts for rain showers over Brazilian growing areas were a major factor in coffee’s plunge, as they should bring about the start of the critical flowering period and reinforce market ideas that Brazil’s upcoming coffee crop will match or exceed expectations. The start of the coffee harvest in Vietnam early next month should help to ease that nation’s tight near-term stocks situation. Trade officials in Colombia are still confident their nation will reach a production target of 9 million bags during 2011, in spite of poor weather earlier in the year. ICE exchange coffee stocks were up 1,004 bags to 1.432 million as of September 29th, with no bags pending review.
TODAY’S GUIDANCE: While the market is extremely oversold, the move under the September 23rd lows late yesterday left 224.80 as the next downside target. The bearish supply outlook for the coffee market has clearly overcome recently improving macroeconomic sentiment. The market could consolidate recent gains before it resumes its downtrend.
TODAY’S MARKET IDEAS: Initial resistance for December coffee comes in at 236.80 and 238.65. The steady to higher trend in open interest on the recent downtrend suggests that some fund traders are building up a hefty net short position, so we cannot rule out some increased volatility in both directions just ahead.
Favorable Vote out of Germany; Commodities May Get a Lift
At least in the early going there is a tamping down of the EU crisis with the favorable vote from the Germany. The trade may be thinking, however, that the damage has already been done. Markets may turn now to the US situation and the struggles the Debt Committee is having achieving its goals.
Physical commodities may get a slight lift today with a weaker Dollar and reduced uncertainty out of Europe. There doesn’t seem to be much conviction and a return to September lows is a possibility.
Energy: Crude Complex Remains Vulnerable to Headline Risk
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CRUDE OIL MARKET FUNDAMENTALS: November crude oil made an overnight drive below the $80 level and has since rallied nearly $3.00. It appears that the upside reversal action was fueled by a rally in global equity markets and gains in the Euro currency. The German parliament approved power changes in the Eurozone bailout fund, and that is seen as a positive step toward resolving the European debt crisis. This progress has boosted risk appetites and provided a level of support for risk assets like crude oil, and with the tight correlation between crude and equities, it is possible to see more upside follow through this morning. November crude oil has recouped some of the disappointment from yesterday’s larger than expected EIA inventory build. EIA crude stocks rose 1.915 million barrels, but they remain 16.897 million barrels below year ago levels. Also, crude stocks stand 12.842 million barrels above the five year average. Crude oil imports for the week stood at 9.702 million barrels per day compared to 8.351 million barrels the previous week. The refinery operating rate slipped 0.5% to 87.8%, which compares to 85.8% last year and the five year average of 84.01%. There were reports earlier this morning indicating that a key Singapore refinery has experienced another fire, and that has reduced capacity around 350,000 barrels per day. This could be a factor that tightens up the market in the region and provide an added level of support this morning. Talk of a potential strike at a French refinery appears to have been resolved overnight and production has returned back to normal levels. The technical action in November crude oil turned negative with yesterday’s action, but appears to be stabilizing. We see an upside pivot level for November crude oil at yesterday’s midpoint of $82.56. A further advance above that level this morning would set the stage for a further push toward $83.80.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: November RBOB prices broke down below yesterday’s inside day trading range last night but has since turned back into positive territory. A rebound in crude oil prices, weakness in the US dollar and improvement in risk attitudes this morning have helped inspire the turn higher. Yesterday’s EIA weekly gasoline stock report showed an increase of 791,000 barrels, which was slightly below expectations. Meanwhile, current inventories are 7.723 million barrels below last year, but 10.854 million above the five year average. Average total gasoline demand for the past four weeks was down 2.43% compared to last year. Gasoline imports came in at 541,000 barrels per day compared to 692,000 barrels the previous week. Upside reversal action in November RBOB this morning favors the bull camp for a further advance to $2.6450. There is downside support at the September 27th gap of $2.5441 to $2.5284.
HEATING OIL: November heating oil prices broke down to a new three session low overnight that challenged Tuesday’s gap support at $2.8025. The market was able to rebound from that level, helped in part by a positive turn in risk sentiment and US Dollar weakness. Another positive force offering support in the distillate market comes from an increase in diesel demand from the agricultural sector. Wednesday’s EIA report showed distillate stocks rose 72,000 barrels, which was quite a bit less than expected. This brought current inventory levels to 15.911 million barrels below last year, but 6.656 million above the five year average. Distillate imports came in at 150,000 barrels per day compared to 158,000 barrels the previous week. Average total distillate demand for the past four weeks was down 1.04% compared to last year. EIA heating oil stocks fell 770,000 barrels and are 11.555 million barrels below last year. The upside reversal action this morning favors the bull camp and points to a test of yesterday’s high at $2.8970.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex extended yesterday’s late day sell-off into the overnight session, but has reversed those losses this morning. The crude oil complex faces a number of catalysts this morning, including a decision by European auditors to approve another round of aid for Greece and a final reading on US Q2 GDP. The complex remains vulnerable to headline risk. A weaker than expected read on this morning’s GDP number has the potential to ignite global recession concerns and pressure energy markets down toward last week’s low.
Plans Out of the EU Providing a Lift
Quite a change over the last 24 hours. It seems that the September wash-out in commodities has, at least temporarily, run its course.
Gold & Silver: Upbeat Attitude Towards EU and India Gold Demand Support
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OUTSIDE MARKET DEVELOPMENTS: While equity markets in Asia and Europe were generally stronger during overnight trading, early indications are that US equity markets will open with substantial gains later on today. The US Dollar is weaker against most of the major currencies this morning. The Spanish Prime Minister stated that there was no current proposal to expand the Euro zone bailout fund to 2 trillion Euros but that didn’t seem to dent optimism in many markets. The Greek Prime Minister said that he would “guarantee” that his nation would meet all commitments to receive further bailout funds from the IMF, EU and ECB. A private survey of German Consumer Sentiment during September was 5.2, higher than market expectations. Euro zone money growth during August was 2.8%, higher than forecasts. Major US economic numbers to be released this morning include a private survey of US Home Sales at 8:00, a private survey of US Consumer Confidence at 9:00 AM, and private surveys of store sales released during the session. In addition, Fed Regional Presidents Lockhart and Fisher will give speeches during the session.
GOLD MARKET FUNDAMENTALS: In addition to a more upbeat attitude toward the Greek/EU debt situation, the gold market overnight also saw favorable Indian gold demand news from the World Gold Council overnight. Apparently the WGC thinks that Indian demand for gold is set to firm in the wake of a good monsoon season and also because of increased seasonal interest. Not surprisingly, the Indian gold trade was higher overnight, but that move might have simply been the result of the “risk-on” mentality and a wave of higher price action in many physical commodity markets. Record exchange volume in some gold instruments yesterday, might give the recent bounce even more technical credibility, but many traders think the direction of gold is still tightly wound up in the direction of the equity markets. It does seem as if dialogue from the Greek Finance Minister and German dialogue on the debt subject overnight have contributed to a minor wave of optimism on the current EU debt crisis standing. In looking forward, the gold market is likely to see some impact from a rather active slate of US economic readings today, as the gold bulls seem to need favorable economic vibes to keep the sellers at bay. The gold market will probably keep a close eye on the odds of acceptance of the latest ECB plan in voting by member countries. Comex Gold Stocks were 11.367 million ounces up 5,837 ounces.
SILVER MARKET FUNDAMENTALS: Like gold, the silver market has also managed a rather impressive recovery attempt overnight, with the December contract forging a climb above the $32.50 level. Silver seems to have established a tight positive correlation with the equity markets, which seem to be signaling a continuation of “risk-on” from the prior trading session. At least to start, a large measure of the optimism in the markets this morning, seems to be the result of hopes that the EU is coming together on a plan to bolster their back up fund. Since the silver market hasn’t paid that much attention to physical supply side developments recently, the silver market probably isn’t deriving that much support from news overnight of a minor silver production shutdown. All things considered, silver and other physical commodity markets appear to be emboldened by hope for calm waters from the Euro zone debt crisis. Given the recent fear of a global recession, the silver and equity markets are also likely to take some direction from a rather active slate of US economic data today. The 200 day moving average in the December silver contract is seen at $36.06 today, while the initial Fibonacci retracement level off the September slide was regained at $32.77 overnight. Comex Silver Stocks were 107.230 million ounces up 1,461,966 ounces and one has to wonder if that rise is the direct result of the steep liquidation in silver prices this month. Comex Silver Stocks are at the highest levels since 12/08/2010. Stocks have increased 12 of the last 20 days. Comex Silver stocks are at their highest levels in the past 10.
PLATINUM: The platinum market is showing the least impressive short covering bounce of the precious metals complex overnight. A normal retracement off the September slide in October platinum would seem to produce a pivot point up at $1,637, but the failure to hold the prior session’s close of $1,546 could be technically damaging for the platinum trade today. However, there is a positive macro economic vibe in place off hopes of progress for the latest EU debt plan and that has rekindled buying interest in physical commodity markets. In short, a risk on mentality is in place and seeing higher equity prices has added to that bias. Initial resistance in October platinum is seen up at $1,602.10 but seeing inflationary comments from noted analyst Jim Kramer overnight, might give the bull camp some added resolve.
Something of a “Risk On” Tilt but General Outlook not Improving
Something of a “risk on” mentality this morning. Gold, Silver, Platinum and other physical commodities saw big range down moves over night, but are trading above those lows. This could be in response to the hope of moves by the EU to prevent collapse. However, the overall economic outlook has not improved.
Commodity Outlook: 2011.09.26
Unfortunately, it is almost the end of September and the US Special Committee doesn’t seem to be any closer to a compromise to cut deficit spending by the requisite $2 trillion, and that issue continues to hang around the neck of the world economy. On the other hand, with the Euro zone debt crisis also weighing on global investor and consumer sentiment, the track toward recovery continues to encounter serious headwinds.
In fact, traders only need to look at a chart of consumer confidence and/or a recent Commitments of Traders positioning report in the S&P 500 stock index futures contract to see that portions of the market have already factored in the prospect of a return to recession. 
As can be seen in a chart of the S&P non-commercial and nonreportable combined positioning, at least one sector of the stock market recently settled into the most pessimistic posture in “modern” times! Furthermore, classic brick and mortar-type sentiment was also plummeting, as a key bellwether market like copper saw a slide of 85 cents per pound (for a decline in excess of 18%) from the August 1st high to the September 20th low. Without a really serious deterioration in economic conditions, it is possible that some markets might be poised for corrective bounces. On the other hand, despite increased central bank assistance, economic skies are unlikely to brighten unless the euro zone debt calamity is brought under control with a definitive “too big to fail” bond fund and the US gets beyond political ideological battles and arrives at some spending cuts.
Another issue that might have inadvertently pressured physical commodities over the last 4 weeks was a flight of capital into the dollar. Somewhat surprisingly, the US Dollar over the last month become a flight-to-safety instrument (mostly because of the lack of alternatives) in the face of the latest financial disaster in Greece, and that has put an added downside element in physical commodity markets like crude oil, natural gas, gold, silver, corn, wheat, copper and cotton. In the end, all isn’t lost on the international debt front battle, as Greece now appears to have gotten the message on the magnitude of necessary government employment cuts required by the EU Troika. However, it isn’t clear whether those austerity efforts will result in even more violence and rioting or whether Greece will come up with the necessary cuts, live with them and in turn receive the next tranche of aid.
A large measure of negative sentiment has been factored into commodities because of the Euro zone and the US situations, and therefore traders should be on the lookout for even a modest tempering of anxiety, as that could result in rather surprising technical recovery action. In the event of real positive improvements in either of the key headline issues, one could expect to see an extension reaction in commodity markets with supportive fundamental conditions. In our opinion copper, crude oil, natural gas and corn are cheap, while coffee, soybeans and sugar come into the end of September somewhat expensive.
USDA Grain Stocks Review – 2011.09.30
by Terry Roggensack on September 30, 2011
Below is The Hightower Report’s summary of the most recent USDA Quarterly Grain Stocks report. This report is available with your subscription to our Daily Commentary. Sign up for a Free Trail.
Full Report: USDA Quarterly Grains Stocks Review – 2011.09.31
CORN
The USDA report this morning was considered bearish with the market called to open down 15-20 cents lower. September 1st corn stocks were pegged at 1.128 billion bushels, which was 164 million bushels above trade expectations and outside of the wide range of estimates.
PRICE OUTLOOK: A resumption of the downtrend for December corn leaves 616 and 603 1/4 as next support levels.
The USDA reports this morning were considered slightly supportive for the soybean market but a bearish number for corn has caused an opening call of 15-20 cents lower. The USDA pegged September 1st stocks at 214.7 million bushels which was about 10 million bushels below trade expectations. This is the beginning stocks for the 2011/12 season and will tighten the outlook somewhat for the coming season; depending on the October 12th production update.
PRICE OUTLOOK: A resumption of the recent downtrend due to bearish news for the corn market leaves 1187 as next downside target for November soybeans.
The USDA wheat production report this morning was considered positive to the wheat market but this was more than offset by bearish news for wheat stocks and corn stocks and the market is called 5-10 cents lower on the opening. Traders were looking for spring wheat production near 493 million bushels but the report came in at 462.5 million bushels which is supportive. As a result, all wheat production is pegged at 2.008 billion bushels which is 36 million below trade expectations and down from 2.077 billion as the last USDA estimate. However, September 1st stocks came in at 2.15 billion bushels which was 115 million bushels above trade expectations. The report suggests that wheat feeding was not as high as expected.
PRICE OUTLOOK: A resumption of the recent downtrend leaves 606 3/4 as next target for December wheat.