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June 2013 Archives

June 3, 2013

Are Treasury Bears Looking through Rose Colored Glasses?

Monday, June 3, 2013

Although there are some signs that the U.S. economy might be starting to show some sustainable economic growth, the data outside of the U.S is much more precarious. On Friday, data on Germany's (the EU's largest economy) retail sales for April came in worse than expected, falling by 0.4% vs. expectations for no change last month. This comes on the heels of a Euro zone unemployment rate of 12.2%: which is the highest level of unemployment since this data was collected back in 1995. Slowing growth expectations in China, Australia, and Canada, as well as Japan's struggles to revive its moribund economy seem to project more headwinds to global economic growth than can be overcome from moderate improvement in U.S. growth.

Fundamentals

Although recent economic data has been mixed as to the extent of strength in the U.S. economy, U.S. Government Bond traders appear to be looking at the bright side of economic reports, with expectations that the Federal Reserve will begin to curtail its bond buying binge sooner rather than later. This view coupled with rising equity markets has sent Bond yields higher in May. A good example of how market sentiment has shifted occurred this past Friday. U.S. Treasury yields initially fell to start the session on Friday, as disappointing data on 1st quarter GDP and higher than expected jobless claims announced on Thursday were followed by weaker than expected data out of Germany and the Euro zone. However, Bond price gains were quickly erased once the Chicago ISM data was announced. Here the data was surprisingly upbeat, with the purchasing manager's index for May rising to 58.7, vs. 49 in April. This figure was sharply higher than the 50.3 reading many analysts were expecting. This data overshadowed more subdued data on personal income and consumer spending, which came in slightly lower than expected. The yield on 10-year Notes rose nearly 50 basis points in May alone, as traders do not want to be left holding large amounts of government debt should the Fed finally start to ease back on its Bond purchases. Friday's Bond market volatility may have been enhanced by repositioning by fund managers who may be shifting more into equities and away from fixed income due to the lopsided performance in favor of equities the past several weeks. Looking ahead this week, we have a slew of economic data, including the ISM Manufacturing (49.5 est.) and Non-Manufacturing (52.5 est) Index readings for May, Construction Spending (0.5% est) for April, and the always highly anticipated but prone to revisions data on Non-Farm Payrolls (+170K est) for May to cap the week on Friday. Given the recent history of economic data, we should probably expect more conflicting readings regarding the strength of the economy and certainly test Bond bears' resolve to continue to sell U.S. Treasuries despite the possibility that the Fed may remain cautious and not begin to withdraw stimulus until most, if not all, of the economic data confirms solid -- perhaps more importantly --sustained growth for the U.S. economy, which may not come for many weeks, or even months into the future.

Technical Notes

Looking at the daily continuation chart for 10-year Note futures, we notice if we draw a trendline from the major lows made back in the early summer of 2007 to the present, prices are still holding about 4-full points above this line. This gives room for yields to increase further, but still not threaten the uptrend that has been in place for nearly 6 years. The 14-day RSI has moved into oversold territory, with a current reading of 29.174. Chart support is seen near the November 2011 low at 127-06, with resistance found at the 200-day moving average, currently near the 132-16 price level.

Mike Zarembski, Senior Commodity Analyst


June 4, 2013

European PMI, Flooding Set Tone for Oil

Tuesday, June 4, 2013

Crude Oil rebounded from one-month lows yesterday, after the US Dollar Index suffered heavy losses. The greenback had been teetering on the brink of a technical breakdown, and some traders have been waiting for confirmation of a bearish reversal. OPEC decided to keep output steady, despite a supply glut in the US, which disappointed Oil bulls looking for a supply reduction. Europe contributed heavily to strength in the Oil market yesterday, with stronger economic data and flooding causing supply disruptions. Even with yesterday's strong showing, the July Crude Oil contract remains vulnerable on the chart. The chart confirmed a small M-top, suggesting prices could test near-term support at the 90.00 level.

Fundamentals

The US Dollar Index was hammered yesterday, after PMI across the Eurozone was much better than expected. The region still saw manufacturing below the magical 50.0 level, but manufacturing in Spain and Greece both hit 24-month highs on the PMI, with readings of 48.1 and 45.3 respectively. France hit a 13-month high of 46.4, while the rest of the EU nations reporting were at 3 to 4-month highs. As a whole, EU manufacturing growth slowed to the slowest pace since February 2013. This gave Crude Oil a boost on two fronts, with the US Dollar falling versus the Euro and optimism that the European recovery may be gaining momentum. Heavy rains across Central and Eastern Europe resulted in supply disruptions along the Rhine River, giving Brent Crude Oil a boost. WTI decided to hop along for the ride. Both RBOB Gasoline and Heating Oil gave signs of a bullish reversal on the daily chart. Some traders were a bit disappointed that OPEC decided to keep production steady, instead of making production cuts. While some traders were likely hoping for a reduction, the cartel's decision to keep production unchanged was not surprising. Prices remain relatively high, despite the US and Canada swimming in a proverbial sea of Oil, suggesting OPEC members were concerned that reductions could drive prices and demand along with it. Russian Oil production set a new post-Soviet record at 10.48 million barrels a day. US economic data was disappointing yesterday, with both the ISM Index and construction spending missing the mark. This is a report-heavy week, capped off by non-farm payrolls on Friday, suggesting intra-day volatility will be high.

Technical Notes

Turning to the chart, we see the July Crude Oil contract confirming an M-top formation last week. Yesterday's price action hinted at a possible bullish reversal. Crude Oil has been in a narrowing sideways channel on the daily chart that began in early 2011. The tightening could very well carry into the fall months unless Oil sees a technical breakout. Oversold technical conditions contributed to yesterday's strong day, as the RSI hit the low 30's, which triggered value buying and short-covering. It is interesting to note that the momentum indicator continued to move lower, despite the Oil market being up more than $1.50. This has created bearish divergence and hints at prices possibly moving lower in the coming sessions.

Rob Kurzatkowski, Senior Commodity Analyst

June 5, 2013

RBA Keeps Rates Unchanged, but Further Rate Cuts not Ruled Out

Wednesday, June 5, 2013

The Australian economy is facing some headwinds, especially in the mining sector, where a slowdown in China has large ramifications for employment in this critical sector. The Organization for Economic Cooperation and Development, better known as OECD, warned in its World Economic Outlook that Australia's economic growth rate may fall as low as 2.5% in 2013, as the country economy begins to adjust to lower mining exports. Although the OECD expects gains in the non-mining sector to help offset some of the economic declines seen by slower raw material exports, it may not be until 2014 when the country's annual GDP moves back above a sustainable 3% level.

Fundamentals

It came as little surprise that the Reserve Bank of Australia kept is benchmark overnight rate steady at 2.75% after its most recent meeting, especially after the country's central bank cut rates to record lows last month. However, what was of particular interest to many traders and analysts was the statement released after the rate announcement, which it was hoped would provide guidance regarding whether further rate cuts may be in the cards. Here the RBA was rather dovish, as bank officials believed that current monetary policies were adequate. Moderating inflation levels and slower than expected economic growth levels could open the door for further rate cuts in coming months. In addition, RBA officials still believe that the value of the Australian Dollar remains elevated, especially given slower exports due to slower growth prospects out of China. The statement sent the value of the "Aussie" lower vs. the U.S. Dollar, nearly erasing all of Monday's gains as we write. Some analysts are now looking for a possible rate cut as early as the August RBA meeting, which will occur after key inflation data is released in July. Next up for traders will be data on 1st quarter GDP, with forecasters expecting a year-over-year decrease of 0.4% to 2.7%, from 3.1% last year. The quarter-over-quarter figures are expected to come in at 0.8%, vs. a 0.6% increase the previous quarter. Traders should prepare for increased volatility in the AUD/USD futures should the GDP figures deviate significantly from analysts' expectations.

Technical Notes

Looking at the daily continuation chart for Australian Dollar futures, we notice the recent 0.250 point rally off 19-month lows was halted as prices moved towards the 20-day moving average. Prices fell over 100 pips after the dovish statement by the RBA after its June meeting, despite keeping the overnight rate unchanged. The 14-day RSI has moved above oversold levels but remains weak, with a current reading of 36.16. Support is seen at the recent low of 0.9515, with chart resistance found at the May 21st high of 0.9824.

Mike Zarembski, Senior Commodity Analyst

June 6, 2013

Make or Break Time for Bonds?

Thursday, June 6, 2013

This week has been full of neutral or offsetting economic data, resulting in choppy trading in the Bond market. Many traders have circled Friday on their calendars due to the release of non-farm payrolls data. This can be seen as the proverbial make or break report for Bonds, as the data will likely help shape FOMC policy. Technically, Bonds are in a very vulnerable position, sitting just above the 140-00 level. Prices have traded above the level for over a year, so a downside breakout could be seen as a significant letdown and sets up for a test of the even more technically significant 135-00 level on the daily chart.

Fundamentals

Treasury Bond futures are steady ahead of this morning's initial claims data, which is expected to show a modest decrease in new claims. Analysts have forecast claims falling to 345,000 from 354,000 the prior week. The Treasury Department will release the size of the 3-, 10-, and 30-Year Bond auctions that will begin on June 11th. It will be interesting to see how well subscribed these auctions will be next week. Traders' appetites for treasuries has waned in recent weeks, after the Federal Reserve indicated that it intends to scale back quantitative easing ("QE"). The Fed scaling back QE is contingent on improving economic conditions, with a focus on the labor market. Tomorrow's Non-farm Payrolls report looms very large for Bond traders. Strong job creation data and a lower unemployment rate could bring heavy selling pressure. On the other hand, a weak report could tell the Fed "not so fast" with regard to curbing easing. Some traders may also want to keep an eye on the Chain Deflator figure. A higher than expected figure in the inflation indicator could be seen as bearish for Bond prices.

Technical Notes

Turning to the continuous chart, we see the September Bond contract hanging around the 140-00 critical support level. A solid close above the 142-12 level could be seen as possibly setting up a near-term reversal. Failure to do so could result in the market just grinding sideways in the near-term. Sideways consolidation could be seen as having a bearish tilt, given the preceding downtrend. The RSI indicator remains oversold, suggesting prices could find near-term support.

Rob Kurzatkowski, Senior Commodity Analyst


June 7, 2013

Oil Prices Remain Stable, Bucking Lower Commodity Price Trend

Friday, June 7, 2013

This week's Energy Information Administration (EIA) energy stocks report contained a few surprises for Oil traders, especially relating to U.S. Oil inventories. Analysts underestimated the draw in Oil stocks, as 6.267 million barrels of Oil were drawn from inventories last week. This was significantly more than the pre-report estimate of a draw of only 400,000 barrels. Higher refining rates and a steep decline in Crude imports likely accounted for the higher than expected draw, as attractive refining margins are encouraging refineries to keep production at elevated levels.

Fundamentals

If the bullish "super-cycle" in commodity prices has reached its peak, it seems someone forgot to tell that to Oil traders, as prices remain relatively stable given the current supply and demand situation. WTI Crude futures prices continue to hold above the $90 per barrel price level in the front month contract, as the continued "bullish bias" hangs over the Oil market as traders fear becoming too bearish with the potential for supply disruptions given the current geopolitical climate. In addition, we have conflicting fundamentals at play, with reduced exports out of Iran keeping global supplies tight. In the U.S., ample domestic Oil inventories, currently at 20+ year highs, and increased domestic production have lessened the U.S. reliance on imports -- especially from the Middle East and West Africa. The wild card for Oil prices currently has little to do with the Oil market's fundamentals, but on the actions from Federal Reserve, where the potential curtailing of bond buying by the Fed could spark rising interest rates and a potentially stronger U.S. Dollar. The rise in the "greenback" could hurt the demand for commodities, especially those traded in U.S. Dollars, as it increases the cost for non-dollar consumers. Although we have seen the potential effects of reigning in the Feds accommodative monetary policies in both the Bond and Gold markets, it appears that Oil traders may be willing to ride out what is just now "talk" about slowing bond purchases. We may not see an increase in Oil price volatility until the Federal Reserve actually takes action on reducing economic stimulus.

Technical Notes

Looking at the daily chart for July Crude Oil, we notice what may be a symmetrical triangle formation, as prices have continued to make lower highs and higher lows since the middle of April. We are seeing a convergence between the 20- and 200-day moving averages, which is not uncommon for a market that is in a consolidation mode. The 14-day RSI is confirming the overall neutral price trend, with a current reading of 51.73. Near-term support is seen at the June 3rd low of 91.26, with near-term resistance found at the May 20th high of 97.35.

Mike Zarembski, Senior Commodity Analyst

June 10, 2013

Natural Gas Falls below $4 on Large Storage Build

Monday, June 10, 2013

The first named tropical storm of the season, Andrea, is currently about 35 miles southwest of Cedar Key, Florida as we write, and is expected to bring heavy rains to parts of Eastern Florida and Southeastern Georgia, as well as parts of South and North Carolina. However, the current track of the storm should keep it well away from the Gulf of Mexico, where about 5% of the total U.S. production of Natural Gas is produced.

Fundamentals

The nearly yearlong up-move in Natural Gas prices has started to run into some headwinds of late, as seasonal weather in the U.S. and above average supplies of Gas in storage have sent prices back below $4 per MMBtu. Front month July Natural Gas futures prices fell to nearly 3-month lows, after the Energy Information Administration reported Gas inventories rose by 111 billion cubic feet (bcf) last week, which was well above the 95 bcf storage build most analysts were expecting. The 5-year average for this time of year is for a 92 bcf build. June 1st marks the "unofficial" start to the Atlantic hurricane season, which would in the past have caused the market to price-in a "risk premium" in prices due to the potential infrastructure damage to Gas and Oil rigs in the Gulf of Mexico resulting from storm surges. However, with the advent of hydraulic fracturing or "fracking," which allowed a greater amount of Gas production to move "inland" and away from dependence on the Gulf for Gas supplies, it appears that the risks of any potential "price spike" in prices due to a pending Hurricane entering the Gulf are becoming more muted, and traders should expect Natural Gas price volatility to remain subdued in the coming months.

Technical Notes

Looking at the daily chart for July Natural Gas futures, we notice the sharp sell-off this past Thursday was halted as prices moved close to the 200-day moving average ("MA"). The 14-day RSI has turned weak, but remains above oversold levels, with a current reading of 34.35. Looking at a Fibonacci retracement from the 2013 lows made back in January to the May 1st highs, we notice the recent sell-off is now approaching the 61.8% retracement at 3.779, which is also the next support level should the 200-day MA fail to stop the recent price decline. Resistance is found at the 20-day MA, currently near the 4.084 price area.

Mike Zarembski, Senior Commodity Analyst

June 11, 2013

Will the End of Easing Lead to Further Gold Losses?

Tuesday, June 11, 2013

Gold futures continue to trade in choppy, sideways action amid mixed economic data. US data has been upbeat for the most part, which has done little to stoke inflationary fears, but has Gold bulls concerned that the Fed may be shutting down some of the printing presses sooner rather than later. ETF holdings of the metal continue to decrease, showing a decrease in metal demand from retail traders. The COMEX net long position is a little over 65,000 contracts, which is an increase, but not a significant long position. The US Dollar has been weakening versus the majors, which could give Gold a safety net or, at the very least, a parachute for a soft landing.

Fundamentals

Stronger US economic data suggests that the Fed may attempt to wean the US economy off quantitative easing sooner rather than later, which could adversely affect the price of Gold. Japan declined to advance their own easing efforts, hinting at a trend of more responsible central bank policy. Overall, inflationary figures around the globe have been very mild. Last Friday's Non-farm Payrolls report showed no growth in wages. The Chinese CPI came in at 2.1% in May, year-over-year, which was much lower than expected. Overall, Chinese economic data has been very soft lately, which in and of itself, could be seen as curbing global inflation. In addition to fears that the Fed may be weaning the economy off QE3 and low inflationary pressures, some traders are a bit concerned that Indian Gold demand may be weakening. Since the popular wedding season is over, there is some seasonality to the drop in Gold demand. However, the Indian government's decision to raise taxes on the metal did not sit well with some traders and could further hamper demand. The Indian government raised import taxes on refined Gold to 8% from 6%, and on gold ore and intermediate products to 7% from 5%. The wildcard for the metals market may be the US Dollar Index, which has shown some technical weakness. The Index has recently broken down below the 100-day moving average and sits just above near-term support.

Technical Notes

Turning to the continuous chart, we see the Gold market forming a triangle pattern. Given the preceding downtrend, the triangle pattern could be seen as bearish. The measure of the pattern suggests Gold could potentially tumble more than 200 dollars. Currently, the RSI is relatively flat and in neutral territory, while momentum remains south of the zero line.

Rob Kurzatkowski, Senior Commodity Analyst

June 12, 2013

Will June USDA Crop Report Stymie New-crop Soybean Rally

Wednesday, June 12, 2013

Newer futures traders to the grain markets may wonder why there is a wide difference in prices for expiration months that appear to be only weeks apart. For example, if we look at the futures chain for Soybean futures, we notice that July 2013 Soybeans are trading over $2.00 per bushel above the November 2013 contract. This is due to the seasonal nature of grain prices which is tied to the production cycle. The November 2013 expiration is considered the first fully new-crop expiration month for the 2013-14 crop season in the U.S., and the July 2013 futures is the last of the all old-crop contract months. August and September contracts are considered hybrid months in between the crop years. So in a sense, it is almost like trading two different products when trading old-crop and new-crop grain futures, despite the fact that it is still the same underlying product. The potential differences in supply and demand fundamentals between two different crop years opens up potential trading opportunities for intra-commodity spreads between the different crop year contracts.

Fundamentals

New-crop Soybean futures prices have been in a bullish mode lately, with the November 2013 futures trading nearly $1.50 per bushel higher than its yearly low made back in late April. It appears that new-crop Soybean prices are being dragged higher by current tight supplies of old-crop Soybeans. This can be seen by the over $2 per bushel premium that old-crop July 2013 Soybeans are trading above the first new-crop November 2013 contract. If we take a look at the current fundamentals for the upcoming crop year, the outlook for prices becomes much less bullish. Traders are looking for the USDA to increase its estimate for planted acreage for Soybeans in its June crop production report scheduled to be released later this morning, as wetter than normal conditions this spring may have forced some producers to switch from Corn to Soybeans due to a shorter planting season. We could see an additional 1 to 2 million acres switched to Soybeans above the 77.1 million acres estimated by the USDA in its May crop report. U.S. Soybean plantings are running behind schedule, with 71% of the crop in the ground so far. This is behind the 87% 10-year average for this time of year, but producers could catch up quickly should weather conditions remain favorable. Barring any major U.S. weather issues this season, global Soybean inventories are expected to increase on the back of near-record production from South America, and assuming trendline yields from the U.S. One wild-card for 2013-14 Soybeans prices remains export demand, particularly from China, The USDA expects Chinese Soybean purchases to rise by 10 million tons this coming season, which would be needed to help absorb potentially rising global Soybean inventories. Should export demand fail to live up to current expectations, we could see global Soybean ending stocks soar this coming year, which should be sufficient to keep any major price gains in check.

Technical Notes

Looking at the daily chart for November Soybeans, we notice prices trading near the upper bands of the nearly 7-month long consolidation pattern that was interrupted for a brief time by what now appears to have been a "bear-trap" once the market moved below 1250.00. Prices are now above both the 20- and 200-day moving averages ("MA"), and seemed to have settled in a range between 1300.00 and 1335.00 ahead of the USDA report. The 14-day RSI has recently moved back below overbought levels, with a current reading of 67.14. Near-term support is found at the May 30th low of 1277.50, with near-term resistance seen at the June 7th high of 1333.00.

Mike Zarembski, Senior Commodity Analyst

June 13, 2013

Yen's Fortunes Changing?

Thursday, June 13, 2013

The Japanese Yen has been on a roller coaster ride in recent months, going from a maligned currency to one of the hottest over the past month. The question now becomes whether traders are truly optimistic about the fortunes of the Japanese economy, or if the recent bullish sentiment is simply the product of the Yen being oversold. Certainly, some traders were expecting the BoJ to fire up the printing presses, which made yesterday's announcement that there will be no further expansion of the monetary base in the near-term a surprise. Technically, the Yen has made some progress by trading above the major moving averages. The real test for the market may come at the 1.0800 level.

Fundamentals

Japanese Yen futures continue their recovery, after the Bank of Japan decided against expanding its stimulus efforts. The BoJ sees the Japanese economy improving and would rather keep the possibility of additional easing in its back pocket in the event that it is needed down the road. It is important to note that the central bank is not eliminating stimulus, but rather not expanding it any further. The BoJ believes that it can achieve its current target inflation rate of 2 % by boosting the monetary base by ¥60 trillion to ¥70 trillion annually. The Yen seems to once again be gaining traction as a defensive currency, and may steal some of the greenback's thunder in this regard. There is a bevy of important US economic data today and tomorrow, including claims data, retail sales, industrial production and University of Michigan sentiment. Disappointing US data could drive the Yen higher. Regardless, the data is expected to add to market volatility.

Technical Notes

Turning to the chart, we see the continuous Japanese Yen forming a bottom near the 0.9700 level. Prices have moved briskly higher in recent sessions, resulting in the Yen crossing the major moving averages. Prices closed above the 100-day moving average yesterday, and are well above the average in early trading. The recent gains have resulted in overbought levels on the RSI, which could curb further advances in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


June 14, 2013

Will Bulls Continue to Feast on Pork?

Friday, June 14, 2013

The CME 2-day Lean Hog Index for June 10th was 97.96, which puts the soon-to-expire June futures at a nearly $3.50 per hundredweight premium to the cash index. The most recent Commitment of Traders ("COT") report shows large speculators adding to existing long positions, with non-commercial traders holding a net-long position totaling 39,843 contracts as of June 4th. This was prior to the recent price surge, and we may see additional long positions being added in this afternoon's release of the COT report.

Fundamentals

Some bullish traders are going "hog wild" lately, as Lean Hog futures prices have soared, with the lead month July futures trading above $100 per hundredweight for the first time since December of 2012. Strong seasonal demand for pork and tight near-term hog supplies are underpinning the price rally and catching bearish traders by surprise. Cash market traders reported good interest by meat packers earlier in the week for market ready Hogs to help meet upcoming pork demand tied to the upcoming 4th of July holiday and the heart of the summer grilling season. It appears that more consumers are switching to pork over beef as summer approaches, as prices for "the other white meat" are more attractive when compared to current high prices for beef. Longer-term concerns center on an outbreak of the so-called PED virus, which has been found in 10 states so far. This virus is particularly fatal to young pigs and could affect supplies should the virus spread. In the near-term, it does appear that the market may have become overbought, and we may see hog demand begin to decline once meat processors fulfill the demand for the upcoming holiday. This should help to limit any sharp increases in prices for nearby futures as market participants reassess market fundamentals.

Technical Notes

Looking at the daily chart for July Lean Hogs, we notice that after briefly trading above 100.00 on Wednesday, prices failed to hold above this key resistance level when hedge sellers emerged and weak bulls took the opportunity to close out some of their existing long positions. The 14-day RSI remains in overbought territory, but is off from recent highs, with a current reading of 77.84. Wednesday's high of 100.075 looks to be resistance for the July futures, with support found at the 200-day moving average, currently near the 95.800 price level.

Mike Zarembski, Senior Commodity Analyst


June 17, 2013

New-Crop Cotton at Yearly Highs after USDA Report


Monday, June 17, 2013

The volume of Chinese imports of Cotton this past season has surprised many traders and analysts, as signs of slowing growth in the world's most populous nation were expected to lower the demand for commodities, including Cotton. However, it appears that the Chinese government is rebuilding state-owned stockpiles, and traders are beginning to believe that these supplies will not be put into the domestic market unless prices climb sharply. So this overhang of supplies may not become a market factor this coming season unless demand increases or global production falls well short this coming season.

Fundamentals

Commodity bulls are taking a fancy to the Cotton market, as lower production estimates and a drop in carryout sent prices to 1-year highs. The June crop production and supply/demand report was the latest catalyst for Cotton's up-move, with the USDA lowering its estimate for this season's production to 13.50 million bales, which is down 0.5 million bales from last month's report, as dry conditions in Texas, the leading Cotton producing state, are expected to lower average yields. The USDA also raised old-crop U.S. Cotton export totals by 2.6%, due to strong buying out of China. U.S. Cotton exports for the week ending June 6th totaled 101,100 bales, which is on pace to meet the 2012-13 USDA's 13.6 million bale estimate. New-crop ending stocks will continue to tighten according the USDA, which lowered 2013-14 carryout to 2.6 million bales from 3 million bales in May. Globally, the supply situation for this coming season is not nearly as tight as in the U.S., with the USDA estimating 2013-14 world ending stocks at 92.49 million bales, which if accurate, would be a record.

Technical Notes

Looking at the daily chart for December Cotton, we notice that the general down-move in prices that began in mid-March was negated this past Wednesday after the USDA report was released. Prices are now well above both the 20- and 200-day moving averages ("MA"), and momentum has turned upward, with the 14-day RSI reading 66.26. We should note that trading volume in the December contract has soared the past several sessions, as it appears that momentum traders are entering the Cotton market as prices make multi-month highs. 90.00 looks to be the next resistance level for the December futures, with support found at the 20-day MA, currently near the 84.92 level.

Mike Zarembski, Senior Commodity Analyst


June 18, 2013

Bond Traders Wait to See if the Fed is Committed to Scaling Back

Tuesday, June 18, 2013

Bond Prices have been in a holding pattern near the 140-00 support level in recent sessions, as traders await the FOMC's policy statement. By and large, traders are expecting the central bank to commit to a scaling back of the treasury buybacks, but the central bank has been known to change its tune from time to time. Barring a dovish statement, Bonds may feel selling pressure after the Fed rate decision. CPI data is expected to be fairly tame, but yields could rise if the data shows inflationary pressure. Technically, some traders may want to keep a close eye on the 135-00 level, which can be seen as a make or break point for the Bond market.

Fundamentals

Bond futures are little changed this morning, as traders await inflation data and the FOMC decision. The Fed is unlikely to change rates, however, and the central bank has recently indicated that it will scale back purchases of treasuries. Some traders are expecting the central bank to be consistent with their policy statement. If the Fed follows through, some traders may expect rates to rise across the board and the yield curve to steepen. How much the yield curve will steepen likely depends on how drastically the treasury buybacks are reduced. Today's CPI data is expected to show a modest increase in consumer prices of 0.2%, with a core increase of 0.1%. Higher inflationary readings could sway the Fed to wean the economy off QE3 as soon as possible, to avoid inflation getting away from the bank.

Technical Notes

Turning to the continuous chart, we see the Bond contract trading in a choppy range near the 140-00 support level. Prices must maintain support at the 135-00 level to avoid a potential free fall if the support level is broken. Very little stands in the way of the Bond market reaching the mid-120's if support is broken. Currently, prices are recovering from oversold levels on the RSI, which could be supportive of prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

June 19, 2013

Will Recent Rally Sour Bears on Sugar?

Wednesday, June 19, 2013

Speculative traders have been bearish on Sugar prices for quite some time, with the most recent Commitment of Traders report showing a combined large and small speculative net short position of 49,635 contracts as of June 11th. That week, non-commercial traders added an additional 12,543 new net-short positions, as these large speculators seemed to be anticipating further weakness in prices as traders begin to roll out of the soon-to-expire July futures ahead of last trading day on June 28th. Analyst estimates are that deliveries could top 1 million tons against the July contract, which may pressure prices in the coming weeks.

Fundamentals

After grinding lower for nearly 2 years, Sugar futures prices have rebounded, as a near record short speculative positions and signs that more Sugar will be used for fuel sparked a short-covering bounce. Recently, Brazilian Sugar cane mills were using over 58% of the recently harvested crop for ethanol production, vs. nearly 52% this time last year. In addition, low global raw Sugar prices have many analysts looking for lower production levels out of Europe and India, which may help to lower the huge global surplus this coming season. Though we are starting to see some bullish fundamentals entering the market, any sustained rally attempts will likely be facing headwinds from another year of a large global Sugar surplus. In the U.S., the USDA announced on Monday that it would purchase Sugar from domestic producers to help curb a large surplus that has sent domestic Sugar prices to 4-year lows. This is the first USDA intervention into the Sugar market in 13 years. The U.S. is expected to produce about 9 million tons of Sugar this season, and the U.S. market could see a 2 million ton surplus going into 2014.

Technical Notes

Looking at the daily chart for October Sugar, we notice the large price rally that occurred on Friday followed an unsuccessful test by Sugar bears to have prices close below key support at 16.50. Once short-covering commenced, a large number of buy stops appeared to have been triggered, especially once prices moved back above the 16.75 level. A follow-through rally on Monday that took the October futures as high as 17.30 failed to hold, as the market ran into resistance triggered by producer hedge selling. Prices remain above the 20-day moving average ("MA"), but remain over 2 cents per pound below the longer-term 200-day MA. The recent rally as taken the 14-day RSI back above oversold readings, and is now at a more neutral 49.04. Resistance for October Sugar is found at 17.30, with support found at the June 13th low of 16.48.

Mike Zarembski, Senior Commodity Analyst


June 20, 2013

Bond Traders Wait to See if the Fed is Committed to Scaling Back

Thursday, June 20, 2013

Crude Oil futures are lower this morning, after the FOMC announcement in which the Federal Reserve indicated that it intends to curb easing. Oil is also taking a hit due to rising fuel stockpiles and worsening Chinese economic data. It seems that all data is pointing to lower Oil prices for some time, yet prices keep moving higher. This can be attributed to rising equity prices and the Syrian conflict, which had yet to disrupt a single barrel of Crude Oil. It will be interesting to see if stock prices can keep rallying if the Fed follows through with reduced Treasury purchases and stops feeding Monopoly money into the market. Technically, it was not surprising to see Crude Oil prices hitting a wall, as prices came close to testing resistance near the $100 mark.

Fundamentals

Federal Reserve Chairman Ben Bernanke indicated that the central bank may curb Bond buying later this year, and could completely end the buybacks by mid-2014. Bernanke noted the economy is facing significantly less risk, and painted a moderately positive outlook for the US economy. The Fed predicts the unemployment rate will drop to 7.2-7.3% by year's end. The notion that the Fed will scale back Bond purchases was simply conjecture prior to yesterday's policy statement, which is why Oil prices took a hit when the Fed Chairman gave a tentative timeline for scaling back. Inventory levels for Crude Oil rose less than expected yesterday. The EIA reported an increase of 183,000 barrels, versus estimates of a 750,000 barrel build. Cushing, OK stocks actually fell by 669,000 barrels to 48.6 million, which is the lowest since December, according to the EIA. It will be interesting to see if this trend continues. Chinese PMI came in at 49.2, which was softer than expected and below the 50 mark, indicating contraction. A slowdown in Chinese manufacturing could hurt demand from China and its trade partners.

Technical Notes

Turning to the continuous chart, we see the August Crude Oil contract trading up to resistance near the 100 mark before failing. Yesterday's price action formed a spinning top candlestick, suggesting a reversal may be on the horizon. Prices may continue their range-bound trading, which has centered around the 95.00 level. This suggests prices may come down and test the low 90's in the near-term. The RSI is coming into the day showing overbought readings, suggesting prices could come down even further before the indicator retreats to neutral territory.

Rob Kurzatkowski, Senior Commodity Analyst


June 21, 2013

Wild Price Swings Give Cocoa Traders Whiplash

Friday, June 21, 2013

The recent sell-off in Cocoa prices has caught many trend-following traders off guard, as both large and small speculators added to existing long positions just prior to the over $200 per ton sell-off seen during the past few trading sessions. The most recent Commitment of Traders report shows non-commercial and non-reportable traders added just over 5,500 new net-long positions for the week ending June 11th. The ending period was just one day prior to the start of the sell-off, and further weakness may be seen if prices fail to hold recent lows and weak longs rush to the exits.

Fundamentals

Cocoa traders have seen some impressive price swings lately, with the lead month September futures prices rallying nearly 200 points to start the month of June, only to see the entire rally crumble in three trading sessions. A mixed fundamental picture looks to be behind the wild price swings, with improving Cocoa demand out of North America being offset from lower European demand. Weather conditions in the West African Cocoa growing regions have improved lately, which should help the status of the mid-season crop. Port arrivals in the Ivory Coast, which is the world's largest Cocoa producing nation, have been higher than anticipated, which is helping to relieve any near-term supply concerns. One wild-card for the Cocoa market might be found in the currency markets, especially in the emerging market sector. Recent weakness in emerging market currency values versus both the U.S. Dollar and the Euro has the potential to hurt commodity imports from this market segment, as commodities priced in Dollars or Euros become much more expensive for non-holders of these currencies. This factor might be especially important for markets such as Cocoa, where these swing buyers could sway the demand picture in a year where the current supplies are moderately tight but global demand is weak.

Technical Notes

Looking at the daily chart for September Cocoa, we notice the rollercoaster ride traders have been on since the end of March when yearly lows were made. Cocoa bears currently hold the upper hand, as prices are well below both the 20- and 200-day moving averages and momentum is weak, with the 14-day RSI currently reading 33.20. Key support at 2200 failed to hold, as a commodity wide sell-off following the Federal Reserve announcement on potential tapering of bond purchases later this year has moved the next level of support closer to the 2100 level. Resistance is found at the recent high of 2384, which was made back on June 12th.

Mike Zarembski, Senior Commodity Analyst

June 24, 2013

Precious Metals not so Golden Anymore?

Monday, June 24, 2013

Moving into an era of rising interest rates may have the effect of potentially lowering inflationary concerns. This is one factor that is taking the luster out of owning Gold, with its historic role as an inflation hedge. However, the current weakness in Gold prices may have more to do with the breakdown of emerging market currencies, including the Indian Rupee. India is the world's largest Gold importer, and a weaker Rupee is making Gold more expensive for this major non-Dollar Gold buying nation.

Fundamentals

Gold prices continue to weaken, with the lead month August contract trading below 1300.00, as a commodity wide sell-off has occurred after the Federal Reserve announced a potential timeline for scaling back on its bond buying program. Although Fed Chairman Ben Bernanke made sure to emphasize that any Fed action would be tied to upcoming economic data, it was stated that tapering of bond purchases could begin later this year if the economic outlook continues to show signs of improvement. Risk investments such as equities and commodities sold off after the FOMC press conference, with the U.S. Dollar the biggest beneficiary, as the Fed seems to be one of the few central banks planning on a possible tightening of monetary policy, whereas Central Banks in Europe, Asia and Australia seem to be on an easing path due to stagnant or slowing economies. Gold prices were particularly hard hit, as a rising interest rate environment and a stronger Dollar make holding Gold much less attractive -- especially for non- Dollar buyers. Owning Gold also has opportunity costs associated with it, as it pays no interest or dividends and storage costs for physical buyers are also a cost factor that is amplified when prices are falling.

Technical Notes

Looking at the daily continuation chart for Gold, we notice that if we draw a Fibonacci retracement from the major lows made back in October of 2008 to the contract highs made in September of 2011, the recent sell-off has taken the market to the 50% retracement level. This level is critical for the longer-term outlook for Gold, as a failure to hold this key technical level could be a sign that the multi-year bull market may be near an end. The next chart support level is not seen until the 61.8% retracement which comes in near the 1150.00 price level. The next major resistance area is seen near the 1487.50 price area.

Mike Zarembski, Senior Commodity Analyst


June 25, 2013

Can Cheap Copper Bring Out the Value Buyers?

Tuesday, June 25, 2013

Copper prices have taken a beating in recent months, as many investors remain cautious regarding China's growth. The People's Bank of China is walking a tightrope by squeezing the credit market, as it is typically difficult to target one specific sector with interest rate policy. Keeping the rest of the economy operating at full strength while at the same time slowing housing can be a very tough task. Cheaper prices may attract value buying. Inventory levels of Copper are extremely high at the moment, but orders to remove metal from LME warehouses have risen to record levels. Technically oversold conditions and cheap prices may bring out value buyers.

Fundamentals

Copper futures are trading near their lowest levels since October 2011, likely due to lackluster Chinese industrial data and lack of new construction in the US. Chinese manufacturing data indicates that there is a contraction in industrial production, which has cooled Copper demand. The housing recovery in the US has largely been driven by sales of existing homes instead of new construction, which would drive demand for the red metal. The Chinese real estate market is one of the few bright spots for Copper demand. The Chinese government, fearing a bubble, has tightened credit markets to slow down the housing market. This may slow down housing and the rest of the economy, for that matter. Inventories of Copper have reached 10-year highs, which has also put pressure on the price of the metal. Stockpiles of Copper have more than doubled this year.

Technical Notes

Turning to the continuous chart, we see the July Copper contract trading down to support near the $3 mark. Failure to hold $3 may bring a fresh wave of selling pressure. The next support level can be found near the $2.70 level. The RSI is showing technically oversold conditions, which may offer support to prices in the near-term. However, a downside breakout coupled with oversold RSI could bring a violent sell-off.

Rob Kurzatkowski, Senior Commodity Analyst


June 26, 2013

Lumber Prices Attempt to Stabilize as New Home Sales Rise

Wednesday, June 26, 2013

At least in the near-term, better than anticipated U.S. Housing data seems to have put an end to the vicious bear market in Lumber prices that has been in place for the past 3 months. Large and small speculators have become divided in their opinions as to the direction of the Lumber market, with the most recent Commitment of Traders report showing non-commercial traders (large speculative accounts) net long 142 contracts and non-reportable traders (small speculators) net-short 193 contracts as of June 18th. These small net-totals show just how divided speculators' opinions are within each category, which adds credence to the theory that a period of price consolidation may be necessary until either bullish or bearish opinions on Lumber prices win out.

Fundamentals

The bearish run in Lumber prices that began in late March seems to have stalled, as lower cash market prices have started to attract buying interest. Increased Lumber production from North American mills and lower wood exports to China have kept bears in charge since March, when Lumber was trading at historically rich levels of over $400 per 1,000 board feet. However, signs of a much stronger U.S. housing market may help to alleviate some of the supply issues, especially if new home sales continue to strengthen. On Tuesday, the Commerce Department reported that U.S. new home sales rose by 2.1% in May, which translated to a seasonally adjusted rate of 476,000 new homes. This was the highest sales reading in nearly 5 years and might be a sign that the housing market is now well into a recovery mode. Last week's report on existing home sales was also viewed as positive, as sales rose by 4.2% last month. Though U.S. housing momentum is clearly in favor of housing bulls, many Lumber traders are still concerned that the Federal Reserve may remove its economic stimulus bias as early as this fall, which could lead to higher interest rates and potentially choke off the bullish housing market run just when it was starting to gain momentum. In addition, tightening interbank lending rates in China could lead to lower investments in the world's most populous nation, and further dampen the demand for commodities, including Lumber, which could become a longer lasting trend should the global economic environment remain in flux.

Technical Notes

Looking at the daily continuation chart for Lumber futures, we notice that after the steep price decline that took nearly $135 off of Lumber prices, a bout of price consolidation is occurring, with the market holding just below the 300.00 price level after making an unsuccessful test of support just above the 275.00 area. Volume has begin to decline during this recent range bound trade, as it appears that much of the trading activity is tied up in liquidation buying by weak shorts, as well as those spreading out of the July contract and into the more deferred months ahead of last trading day in the next few weeks. The May 30th low of 276.20 should act as support for front month July Lumber, with resistance found at the recent high of 313.10 made back on June 3rd.

Mike Zarembski, Senior Commodity Analyst


June 27, 2013

Corn in Holding Pattern Ahead of USDA

Thursday, June 27, 2013

New crop Corn prices have been rising steadily over the past two months in a slow, grinding manner. Traders have been facing the dilemma of a relatively tight old crop and a potentially large new crop, along with how the contrast in supply outlook will impact demand. Technically, the chart gives very few clues as to the direction of the market, suggesting trading may be news driven.

Fundamentals

Corn futures are little changed ahead of tomorrow's USDA data, which may forecast a record Corn crop. Many are expecting growing conditions to be ideal through the first half of July, at the very least, as dry, hot conditions are not expected. Tomorrow's USDA plantings estimate is actually expected to fall short of the current estimate of 97.282 million acres. The consensus forecast is 95.431 million acres. While the acreage is expected to fall, the mild weather conditions may result in a jump in yields to 156 bushels an acre, which would mark the third highest yield on record. This would boost total production to 13.62 billion bushels, which would be an all-time high. It will be interesting to see how this plays out later today. The market has priced-in these figures, for the most part, and it will be interesting to see how aggressive the USDA is in slashing acreage in the report.

Technical Notes

Turning to the chart, we see the December Corn contract trading in a sideways pattern over the past several months. Prices made a failed attempt to cross the 575 resistance level several times during this period, resulting in a swift pullback to the 525 level. Bulls would like to see the contract cross this level for a potential run at the 650 mark. Failure to test and cross the 575 mark in the near-term could result in choppy, sideways trading. Oscillators are showing neutral readings, giving no hint at near-term market direction.

Rob Kurzatkowski, Senior Commodity Analyst

June 28, 2013

Copper Prices Remain Weak as Chinese Bank Lending Tightens

Friday, June 28, 2013

Both large and small speculators have become raging Copper bears, with the most recent Commitment of Traders report showing non-commercial and non-reportable traders holding a combined net-short positions of 32,327 contracts as of June 18th. This reading was taken prior to the nearly 15 -nt decline that occurred after the Federal Reserve hinted that it may taper back its bond purchases later this year if economic data continues to improve. It is likely that trend following traders were adding to existing short positions as prices faltered last week, and we will need to see further price weakness to prevent a possible short-covering rally as we near the close of the second quarter of 2013.

Fundamentals

Speculators have become extremely negative on the outlook for Copper prices, as the lead-month futures traded at its lowest levels since July of 2012. The continuing recession in Europe and slowing growth prospects out of China have dampened the demand for Copper, despite lower prices. Copper stocks in exchange warehouses have increased, with large storage builds seen on the LME and Shanghai exchanges. This can be a sign that demand is waning and physical holders of Copper are placing inventories in storage awaiting higher prices. Traders will continue to watch economic reports out of China to help gauge the country's actual growth levels. Copper traders and commodity traders in general now have a new concern, as the Chinese interbank lending rate has been soaring, with the overnight repo rate reaching 30% last week as the nation's banking systems is experiencing short-term liquidity issues. Although the Peoples Bank of China can and has added some liquidity to the banking system, it appears to be taking a wait and see attitude and is allowing interest rates to rise in the short-term. This policy shift regarding short-term bank funding could spur a decrease in business investments and, in turn, lower the demand for commodities in general, and particularly Copper, where China is the world's largest consumer of the red metal.

Technical Notes

Looking at the daily chart for September Copper, we notice prices accelerated to the downside after the September futures traded below 3.1500. Prices briefly traded below 3.0000 on Monday and Tuesday, but few sell stops were triggered below this psychological support level. Short-covering buying emerged as the movement below 3.0000 was rejected, which allowed prices to settle well off recent lows. The 14-day RSI was nearing oversold conditions, but has since rebounded somewhat, with a current reading of 34.74. Tuesday's low of 2.9855 is now seen as support for September Copper, with resistance found at the 20-day moving average, currently near the 3.2030 price level.

Mike Zarembski, Senior Commodity Analyst