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August 2013 Archives

August 1, 2013

Will Coffee Bulls Ever Get a Reprieve?


Thursday, August 1, 2013

It looks as though Coffee bulls may have their hopes of a near-term bottom dashed, as prices are approaching relative lows with some momentum. In addition to extremely oversupplied conditions, Coffee may come under pressure from outside markets. It looks as though the US, a major Coffee consumer, may be stalling economically. Furthermore, investor demand for emerging market currencies could wane. Farmers may be tempted to unload Coffee, fearing a declining Real.

Fundamentals

Coffee bulls have once again been disappointed by an oversupplied cash market, which may drag prices down once again. Coffee exports from Indonesia's Sumatra region have risen to four-year highs, negating some of the positive momentum from tighter near-term stocks in the region. Exchange inventories were slightly destocked last week on strong Asian cash prices, most notably in Vietnam. This, however, is viewed as a short-term phenomenon, and it would not at all be surprising to see this trend reverse and ICE inventories increase in the coming days. Bulls took another hit from Brazil escaping frost damage in the Parana region, which is set to produce 1.7 million bags of Coffee this year, which is roughly 3.5% of total Brazilian output. Frost was reported, but there was no meaningful damage.

Technical Notes

Turning to the chart, we see the September Coffee contract reversing back in mid-July and coming back to test relative lows near the 118.25 level. Prices tested the 50-day moving average no less than three times in recent week, never managing to capture enough momentum to close above the average. Failure to hold near-term support at 118.25 could be selling pressure from speculators. The next support level can be found at relative lows in early 2010 near the 112.00 mark. Currently, the oscillators are giving no clue as to the near-term direction of the market and sit at neutral levels.

Rob Kurzatkowski, Senior Commodity Analyst


August 2, 2013

Equity Indices Choppy Ahead of Employment Data


Friday, August 2, 2013

The statement released after the July FOMC meeting confirmed that the Fed would be keeping in place its $85 billion monthly bond purchases, as the Fed saw the U.S. economy expanding "at a modest pace". Fed members did show some concerns about rising mortgage rates, as well as inflation running below targeted levels. No specific date was announced for the beginning of any tapering of Bond purchases, which should keep traders focused on upcoming economic data, to attempt to predict when the Fed will finally begin to pull back on the aggressive stimulus measures currently in place.

Fundamentals

A big "yawn" has been heard from equity traders lately, as many market participants awaited a slew of economic data to be released this week. On Wednesday, we received the first estimate of second quarter GDP, which expanded at a 1.7% annualized rate and was much better than the 0.9% growth rate most economists were expecting. Despite the better than anticipated GDP reading, consumer spending, which makes up a large part of the GDP figure, rose by 1.8% in the second quarter,down from a 2.3% rise in the previous quarter. A 9% rise in business spending was somewhat offset by a continued decline in government spending, which declined by 0.4%. On the employment front, the private-sector added 200,000 jobs in July, according to the monthly employment report released by payroll processor ADP in conjunction with Moody's Analytics. The jobs gains were slightly better than analysts' forecasts for an increase of 183,000 jobs last month. Service sector jobs made up the bulk of the jobs created last month, with 177,000 jobs added. The closely watched manufacturing sector shed 5,000 jobs last month, which shows that not all parts of the U.S. economy are recovering at the same pace. The better than expected data may contribute to the Federal Reserve beginning to taper back on their Bond purchases, with many analysts looking for a reduction of $20 billion per month, possibly as early as the September 18th FOMC meeting. This morning traders await the monthly release of the Non-Farm Payrolls (NFP) report for July. The consensus from economists and traders is for a gain of 175,000 jobs last month, down from 195,000 jobs created in June. The unemployment rate is expected to decline by 0.1% to 7.5%. The phrase, "The devil is in the details" certainly applies to the NFP report, as revisions to past data are not uncommon and at times give a better perspective to the trend for employment. Upward revisions are typically viewed as a positive for employment and conversely, negative revisions are often viewed as a dour note to the employment picture.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice prices moving sideways the past 2 weeks and taking a well-deserved breather after a torrid, nearly 150-point run-up in the S&P 500 since the latter part of June. Prices remain above both the 20- and 200-day moving averages, and momentum remains positive, with the 14-day RSI currently reading 65.24. Near-term support is seen at the July 17th low of 1665.75, with resistance seen at the contract high of 1695.50.

Mike Zarembski, Senior Commodity Analyst



August 5, 2013

Choppy Price Action for Cocoa Continues

Monday, August 5, 2013

Large and small speculators have been bullish on Cocoa prices lately, with the most recent Commitment of Traders report showing a combined net-long position being held by non-commercial (large speculators) and non-reportable (small speculators) of 46,850 contracts as of July 23rd , with over 9,000 new net-long positions being added during the reporting week. However, this data was taken just prior to the recent price decline, and we may see further price weakness as weak longs exit the market after the recent failed rally attempt.

Fundamentals

The rollercoaster-like ride that Cocoa traders have been on the past several months appears headed for yet another downward slide, as the recent rally attempt has stalled due to improvement in weather conditions in the key growing regions of West Africa. Rainfall has been in the weather forecasts for both the Ivory Coast and Ghana, which are the two key producing countries in Cocoa growing region of West Africa. Rainfall that is occurring should help the development of the main Cocoa crop that will be harvested in the fall. However, too much rainfall is starting to affect the quality of the recently harvested mid-crop in both Cameroon and Nigeria, where the lack of recent sunshine has sparked concerns of a potential outbreak of black pod disease if dry weather remains elusive. Although Cocoa prices have been trading within a rather large $400 per ton price band the past several months, the trend in prices appears to be favoring the bears lately. Since recent highs were made back in May of this year, September Cocoa prices have made two successive lower lows on rally attempts, with hedge selling appearing in the market as prices approach 2400. However, end-users have been willing buyers so far on price declines, as prices for Cocoa powder have begun to stabilize, although at lower levels, which could be a sign of increasing demand for this end product.

Technical Notes

Looking at the daily chart for September Cocoa, we notice a series of lower highs and lower lows has occurred since May. This pattern is leading to a negative bias for prices, which typically favors Cocoa bears. Prices are currently hovering between the 20- and 200-day moving averages, giving little direction to the market's next move. The 14-day RSI is neutral, with a current reading of 51.70. Resistance for September Cocoa is seen at the recent high of 2381, with support found at 2250.

Mike Zarembski, Senior Commodity Analyst



August 6, 2013

Fed Doublespeak Causing Metal Volatility

Tuesday, August 6, 2013

Gold futures have been on a roller coaster ride in recent weeks, as Federal Reserve Board members give conflicting views regarding the timeframe of the wind-down of quantitative easing. During the same timeframe, economic data has continued to weaken, and corporate earnings have been largely disappointing. The weakening treasury market has offered some support to precious metals as a defensive instrument. Metal traders may also want to keep an eye on energy prices, which have shown some signs of near-term topping.

Fundamentals

Gold futures have failed to build off any upside momentum in recent months. Recent comments from the Federal Reserve suggest that the central bank may be one step closer to ending its Bond purchases program. The fact that the statement came from Dallas Fed President Richard Fisher, a vocal critic of QE, suggests that some traders may take the statement with a grain of salt. The Fed has been speaking out of both sides of its mouth over the past few weeks. Last week, the central bank warned that low inflation could hamper economic growth, and that it would maintain its bond-buying program. Regardless of Fedspeak, the economy is showing further signs of slowing down, curbing the appeal for Gold as an inflation hedge. SPDR Gold Trust Holdings reported its lowest holdings of the metal since February 2009.

Technical Notes

Turning to the chart, the October Gold contract has failed to build off the double-bottom near the 1200 level and subsequent rally above 1300. Prices have dipped back below the 1300 level due to the RSI showing overbought technical conditions. The RSI indicator has since moved back into neutral territory. The 50-day moving average has acted as resistance in recent weeks, and the price of the metal has failed to post a significant close above the average.

Rob Kurzatkowski, Senior Commodity Analyst


August 7, 2013

Will Chinese Milk Product Ban Ground the Kiwi?

Wednesday, August 7, 2013

Commodity prices in New Zealand rose in July after two consecutive months of declines. The ANZ Commodity Price Index rose 0.6% to 318 in July, a marked reversal from the 3.7% decline in June. Wool prices showed the largest increase, rising by 4% last month. Commodity exports make up nearly 2/3rds of international sales, and analysts will be watching closely for how the current milk products export ban will affect New Zealand's economic growth. New Zealand has been performing better than its neighbor Australia, which has seen much slower economic growth due to a slowdown of the Chinese economy.

Fundamentals

The New Zealand Dollar, known in FX trading as the "Kiwi", fell to 3-week lows on Monday, as China announced an import ban of milk powder from New Zealand based Fonterra Cooperative Group. The ban occurred after Fonterra announced that 3 batches of whey protein produced last year may contain bacteria that can cause botulism. Milk products are an important part of the New Zealand economy, accounting for about 25% of the country's exports. China is New Zealand's largest trading partner, so any extended ban may cause some significant impact on economic growth. These concerns are causing analysts to lower the chances of the Reserve Bank of New Zealand ("RBNZ") raising interest rates by the end of 2013, from its current record low of 2.5%. Before the milk powder export ban was announced, traders were looking for the RBNZ to hike interest rates by nearly 0.75 basis points in the next 12 months to help calm rising inflation in the housing and construction sector, much of it caused by the rebuilding efforts in Christchurch, which suffered heavy property and infrastructure damage from a powerful earthquake back in 2011. Any major shift in this tightening bias by the RBNZ could cause further weakness in the value of the "Kiwi", especially versus the U.S. Dollar, where the improving economic outlook in the U.S. could cause the Federal Reserve to begin to taper back on its bond purchases later this year.

Technical Notes

Looking at the daily continuation chart for the New Zealand Dollar futures, we notice after falling below 0.7725 in early trade to start the week, buying emerged after the gap down opening as traders determined that any fallout over the Chinese milk product ban may not be long lasting. We must remember that the short-term interest rate differential between the U.S. and New Zealand greatly favors the Kiwi, and as long as inflation concerns and a strong construction sector outweigh in importance any economic fallout from the Chinese powdered milk ban, the RBNZ may remain more "hawkish" on the interest rate front than that of the Federal Reserve. Prices are now testing the 20-day moving average, and momentum has turned neutral, with a current reading of 50.18. The recent low at 0.7638 remains support for the September Kiwi, with resistance found the July 25th high of 0.8079.

Mike Zarembski, Senior Commodity Analyst


August 8, 2013

No Corn to Too Much Corn

Thursday, August 8, 2013


The Corn market's slide has picked up in recent weeks, as forecasts for the current crop year continue to swell. Corn futures have hit a 34-month low as a result of heavy long liquidation. As of the July 30 Commitment of Traders report, the speculative net short position in Corn is over 185,000 contracts. During the week of July 23th to 30th, the non-commercial, reportable (fund) net short increased by roughly 25,000 contracts. Trading will likely be lighter and choppy ahead of the August 12 USDA supply and demand report.

Fundamentals

Healthy growing conditions and lack of extreme weather suggest that there may be an abundance of Corn for this crop year. Next week's USDA report may forecast production of more than 14 billion bushels of Corn, up from 13.95 billion last month. Current weather conditions have been conducive to pollination across the Corn Belt, although there are some areas, such as Iowa, that could use a bit more rain. If the Midwest and Great Plains can avoid a hot, dry August, a 14 billion bushel crop could be almost a foregone conclusion. Goldman Sachs just lowered their 3-month projected Corn price to 4.25 from 4.75, citing that production will probably reach 14.138 billion bushels. Lower prices could potentially attract demand for the grain, but many buyers are content waiting for lower prices and not rushing to buy Corn at this time. The meat industry, in particular, could increase production with the availability of cheap grain. Crude Oil prices north of the $100 mark suggest that ethanol producers may look to take advantage of lower raw material cost and could increase production.

Technical Notes

Turning to the chart, we see the price of the December Corn contract steadily falling since September of last year. This sell-off has accelerated in recent weeks, and the down move in Corn is almost parabolic. Parabolic moves often see corrections or retracements, which may keep shorts on edge. On the downside, the continuation chart shows minor support at the 450 level, with more substantial support at 425 and 400. December Corn would likely have to climb above the 525 level to stem the tide of selling pressure. A move above resistance at 575 would likely be needed to reverse the course of the Corn market. The RSI is currently oversold, near the 18 mark.

Rob Kurzatkowski, Senior Commodity Analyst

August 9, 2013

Canola Prices Consolidate Despite Freeze Concerns

Friday, August 9, 2013

OptionsXpress offers Canola futures which are traded on ICE Futures Canada. The Contract size is 20 metric tons, with prices quoted in Canadian Dollars. A popular spread trade is based on the price differences between Canola and Soybean Oil. Since Soybean Oil is priced in cents per pound denominated in U.S. Dollars, and Canola is priced in Canadian Dollars per ton, the following conversion formula is normally used to compare prices of these two competing products:

1. Multiply the price of Soybean Oil by 22.0462. This will give the price per metric ton (in USD).

2. Take the price of Canola per metric ton and multiply the price by the CAD/USD exchange rate. This will convert the Canola price into USD per ton.

Fundamentals

Canola futures remain firmly in the bear camp, with lead month November trading just above contract lows despite the concerns of some analysts that the Canadian crop could be at risk from an early frost or freeze in the coming weeks. Canadian Canola producers are being plagued by a slow maturing crop this season, mainly due to cooler than normal temperatures this summer that followed late plantings due to a cold and wet spring. This maturity delay could put the crop in danger should below freezing temperatures reach the growing regions of the Canadian Prairie Provinces by early September. Current analysts' estimates are for a Canadian Canola crop totaling 15 million metric tons this season, which assumes weather conditions remain favorable through at least mid-September. An early frost late in August could significantly impact production totals, especially if damaging cold weather becomes widespread. Canadian crop concerns seem to be overshadowed by rising global inventories of vegetable oils, especially palm oil, which is expected to reach record levels. Traders are also expecting increased production of both soybean and sunflower oil this coming season, which is currently expected to be large enough to overcome any minor shortfall in Canada's Canola crop.

Technical Notes

Looking at the daily chart for November Canola, we notice prices making new contract lows, as previous support at 481.00 failed to hold. Prices are now well below both the 20- and 200-day moving averages, and the 14-day RSI has just recently moved back above oversold territory, with a current reading of 36.37. It appears that we may be in for a period of price consolidation within a band of 475.00 on the downside and 500.00 on the upside. The contract low at 472.40 is now seen as the next support level for November Canola, with resistance found at the August 2nd high of 499.00.

Mike Zarembski, Senior Commodity Analyst

August 12, 2013

Market not Listening as BOE Pounds "Dovish" Rate Outlook

Monday, August 12, 2013

It is the start of a new era for the Bank of England (BOE). Starting with the recently appointed Governor, Mark Carney, the first BOE leader from outside the U.K., and now the announcement that the BOE would be tying monetary policy to the country's unemployment rate, a move similar to that announced by the Federal Reserve. However, the announcement came with so called "knockouts" that if triggered, could allow the BOE to be more "hawkish" in its interest rate outlook.

Fundamentals

Looking at the reaction of British Pound futures last week, one would have thought that the Bank of England (BOE) Governor Mark Carney announced an interest rate hike as the Pound surged vs. the U.S. Dollar. However, the exact opposite occurred, as Gov Carney announced on Wednesday that the BOE would be waiting until the employment rate in the U.K has fallen to 7% from its current 7.8% level before considering raising the short-term rates. The BOE believes that this employment target will not be reached until 2016. The goal of this new found clarification on interest rate policy is to calm financial markets from pricing in a sooner than expected rate hike and raising borrowing rates which can be detrimental to any economic recovery. Financial market participants apparently are hearing a different tune from the BOE as short-term interest rate futures are pricing in a rate hike starting in 2015, not 2016 as the BOE comments suggest. The British Pound also rose sharply vs. the USD despite clear signs that the Federal Reserve will likely taper back its accommodative monetary policy sooner than the Bank of England suggests. It appears that traders may be focusing on other parts of the BOE's interest rate statement, including the ability to change direction on interest rates should inflation remain beyond the expected target of 2.0%, or if keeping interest rates at record low levels will be a destabilizing factor for the financial markets. So it appears that traders believe that even though the BOE wants to appear "dovish" in its monetary policies, it might be forced by outside factors to raise rates sooner than it would like.

Technical Notes

Looking at the daily continuation chart for British Pound futures, we notice prices struggling to move higher as we approach the widely watched 200-day moving average (MA). Momentum, while strong, appears to be heading lower with the 14-day RSI currently reading 61.43. Failure to take out resistance just above the May highs of 1.5603 price area could signal a potential near-term top. Support is seen at the August 2nd low of 1.5098.

Mike Zarembski, Senior Commodity Analyst

August 13, 2013

Hot, Dry August May Trim Bean Yields

Tuesday, August 13, 2013

A drier August forecast has boosted the outlook for grain prices, most notably Soybeans. Yesterday's 1.9 bushel per acre reduction to Soybean yields was a rather aggressive cut to the USDA forecast, which takes into account the hot, dry conditions. Traders may want to keep an eye on weather forecasts for the second half of the month. The Soybean Belt has good moisture, and virtually none of the growing region is in drought conditions, as measured by the Palmer Index. However, hot, dry conditions could affect podding, even with good soil moisture.

Fundamentals

Soybean futures surged after the USDA forecast that domestic production would be 3.255 billion bushels, down 165 million bushels from last month's outlook. The USDA cited lower growing area and yields as the basis for their reduction. The US harvested area is predicted to be 76.4 million acres, down half a million acres from the July report. Meanwhile, yields are 1.9 bushels per acre lower than the July report, at 42.6 bushels per acre. Forecast yields are 3 bushels per acre higher than last year's drought conditions. The drier weather forecast for August was the main reason for such a large yield reduction. August is a very important month for Soybean plants, which will be adding new pods and filling them with beans. The USDA also confirmed private sales to China and other locations of 853,000 tonnes of Soybeans, which is going to further work down old-crop stocks.

Technical Notes

Turning to the chart, we see the November Soybean contract forming a spinning-top candlestick on the 7th, following a sharp sell-off. This strongly hinted at a reversal, especially in light of the up-day on the 8th. Yesterday's strong up-day offered confirmation of the reversal. Prices settled right at near-term resistance at 1225.00. If we see follow-through buying, prices could test resistance at 1275.00 and 1350.00 if the market can carry this momentum going forward.

Rob Kurzatkowski, Senior Commodity Analyst

August 14, 2013

Cotton Rallies as USDA Lowers Production Estimates

Wednesday, August 14, 2013

The USDA reduced its estimate for both U.S. and Global Cotton production on Monday as the August crop report was released. The USDA lowered its U.S. Cotton production estimate to 13.05 million bales, down just over 3% from the July estimate. Global production was lowered by 1.4% to 116.38 million bales. Global ending stocks are expected to total 93.77 million bales for the 2013-14 season, down 0.6% from July's estimate, but nearly 8 million bales above the 2013-14 estimated carryout.

Fundamentals

Cotton futures have bucked the bearish trend for lower agricultural prices so far this season, with the new-crop December futures currently trading at nearly 16-month highs. Among the biggest factors sending Cotton prices higher are concerns about Chinese production this season. Record high temperatures in much of China are raising concerns that crop production, including that of Cotton, could fall far short of government estimates, which may lead to increased purchases from the world's most populous nation. The USDA has estimated Chinese Cotton production at 34 million bales, 1 million bales lower than last year. Many traders believe that this figure may need to be revised downward given the extreme heat and dryness. However, even though Chinese production appears to be falling short of expectations, domestic Cotton reserves are more than ample, and China may not be an eager buyer in the coming months, as government officials may prefer to use domestic inventories first, especially if global prices turn higher.

Technical Notes

Looking at the daily chart for December Cotton, we notice prices breaking through the upper boundary of a nearly 5-month consolidation phase. Prices traded above 90 cents per pound after the USDA report was released, but it remains to be seen if some hedge selling will appear at price levels above 90.00. The 14-day RSI is strong and has just moved into overbought territory, with a current reading of 73.74. 92.54 looks to be the next resistance level for December Cotton, with support found at the upper boundary of the recent consolidation at 89.56.

Mike Zarembski, Senior Commodity Analyst


August 15, 2013

Bonds Await Inflation, Manufacturing Reports

Thursday, August 15, 2013

Bonds are little changed ahead of today's report-heavy trading day. In addition to the normal release of claim data, there is inflation, manufacturing, and housing data on today's agenda. As a result, today's session may be extremely volatile intra-day. Traders may want to keep an eye on how the market behaves if and when prices approach the 132-00 level. This could be a pivotal level for Bonds in the near-term. If prices hold here for a third time, the Bond market could build off the momentum. Failure to hold the level could possibly lead to a meltdown in prices.

Fundamentals

Bonds have been trading sideways over the past month and a half, just above the 132-00 level. The market seems to be content trading in a range to take a breather from the 18-handle drop between May and July. Today's trading session may very likely have high intra-day volatility, but it may take a perfect storm of data to push prices below the 132-00 mark. Today's CPI report will give traders a better feel as to the extent consumers are feeling the inflation pinch. A more inflationary number could have a negative impact on Bond prices, as it may influence the FOMC to curb stimulus sooner rather than later. Also, yields would have to rise to keep pace with inflation. The Empire Manufacturing and Philly Fed numbers may also give traders some better insight into the health of the manufacturing sector. Strong numbers here could be seen as bearish for the treasury market. In the near-term, treasury yields can be seen as attractive to investors, as they are reflective of forecasts and not current economic conditions. If the economy fails to show resilience, those forecasts may prove to be too positive and yields could, potentially, fall.

Technical Notes

Turning to the chart, we see the September Bonds consolidating above support at the 132-00 mark. Prices have come down to test support here twice and are flirting with the level once more. If prices manage to hold here for a third time, we could see a near-term bounce. Failure to hold 132-00 could bring another wave of selling pressure, so it may be important for bulls to draw a line in the sand here if prices are to recover. The RSI indicator remains near oversold levels, which could be supportive of prices. However, if a downside breakout occurs with the RSI in oversold conditions, the move could possibly be explosive.

Rob Kurzatkowski, Senior Commodity Analyst


August 16, 2013

Will Traders Flee the Swiss Franc as Euro Economic Data Improves?

Friday, August 16, 2013

The Swiss economy is joining in the improvements seen in the Euro zone lately, with expectations for an economic recovery beginning to rise. The Swiss ZEW survey (economic sentiment indicator) rose to 7.2 in August, up significantly from a 4.8 reading in July. This is the highest reading since April and follows positive data from the Purchasing Manager's Index and the KOF leading indicator (a composite of business surveys from various sectors of the economy that are combined to form an indicator to help project GDP figures for upcoming quarters). Despite the economic improvements seen in Europe, the SNB appears steadfast in supporting the floor for EUR/CHF at 1.2000.

Fundamentals

It appears that the glass is now half full in regards to the Euro-area economy, as 2nd quarter GDP rose by 0.3%. This follows a 0.3% contraction in the 1st quarter and is a sign that Europe may finally be starting to pull out of its recessionary environment. The data was even better for the Euro-zone's two largest economies, with German GDP rising by 0.7% and France posting an increase of 0.5% last quarter. This economic improvement is causing many FX traders to move funds back out of the Swiss Franc, where funds flowed as a "safe haven" during the height of the Euro zone economic crisis. A weaker Franc is good news to the Swiss National Bank (SNB), which has been aggressively purchasing Euros with Francs to help weaken or at least prevent a strengthening of the country's currency. A strong Franc was hurting the competitiveness of Swiss manufactures in the export market, as well as sparking deflationary concerns. These economic issues caused the SNB to defend the EUR/CHF cross at an imposed floor of CHF 1.20 per Euro as well as lower short-term interest rates to zero to help discourage investors from holding Francs. Now that it appears that the Euro zone may be on the road to an economic recovery, we may see further weakness in the value of the Swiss Franc as traders and investors increase their risk tolerances and move away from the "safe haven" of the Franc.

Technical Notes

Looking at the daily continuation chart for the Swiss Franc futures, we notice prices trading near both the 20- and 200-day moving averages, as it appears that both bulls and bears are uncertain as to the direction of the next major move for the currency. Trading volume has been light the past several weeks, which adds to the premise that some traders might be starting to turn away from the Franc due to uncertainty of the market's trend. The 14-day RSI is neutral but has turned higher, with a current reading of 55.22. Support is seen at the chart "gap" found at the 1.0446 price level. Resistance is seen at the recent high of 1.0904 made back on August 8th.

Mike Zarembski, Senior Commodity Analyst

August 19, 2013

Oil Prices Supportive as U.S. Inventories Decline

Monday, August 19, 2013

The price action for oil products is not quite as bullish as that for Crude Oil, although Heating Oil prices are beginning to show some positive signs. U.S. Heating Oil inventories are running over 22 million barrels below the 5-year average for this time of year, despite an increase of 112,000 barrels last week. Heating Oil inventories currently stand at 17.972 million barrels, which is over 9.5 million barrels below last year's totals. Gasoline remains the weakest link, with U.S. inventories running over 13.7 million barrels above the 5-year average, and the peak of the summer driving season nearing an end as the Labor Day holiday approaches.


Fundamentals

The "glut" of Crude Oil in the U.S. is not quite what it was a few months ago, as higher refining rates and movement from the Cushing, Oklahoma hub to the Gulf Coast has cut U.S. stockpiles this summer. Last week the Energy Information Administration (EIA) reported U.S. Crude inventories fell by a larger than expected 2.812 million barrels, which put inventories over 5.6 million barrels below last year's totals. Supplies in Cushing, the delivery point for the NYMEX WTI futures, fell by 1.359 million barrels last week, which put inventories at 38.515 million barrels, which was the lowest inventory level since March of 2012. Tightening supplies in Cushing has turned the Oil futures term structure into backwardation, where near-term prices are higher than deferred months. The 1-year Sep 2013/Sep 2014 spread has moved to a $12.60 Sep 2013 premium vs. prices trading near parity at the start of the year. In addition to domestic Crude inventories starting to tighten, we have continued political turmoil in the Middle East and North Africa on traders' radar screens. In Egypt, a state of emergency has been declared, as anti-government protestors are clashing with police forces. Although Egypt is not a major Oil producer, nearly 4.5 million barrels of Crude pass through the North African nation. Egypt's neighbor to the west, Libya, is a major Oil producing nation and is also experiencing its own internal issues that may be inflamed by the turmoil in Egypt. Libya's Oil production has struggled to return to normal levels, keeping the global benchmark Brent Crude Oil prices near 4-month highs, as well as helping to keep the "bullish bias" for Crude Oil prices well cemented in traders' minds.

Technical Notes

Looking at the daily chart for October Crude Oil, we notice prices trading near the upper bounds of the nearly $5.00-wide consolidation pattern that has been forming since the beginning of July. However, momentum as measured by the 14-day RSI has started to trend lower, though still reading a rather strong 63.08 as of this writing. The recent high of 107.85 remains resistance for the October contract, with support found at the bottom of the recent price range of 101.82.

Mike Zarembski, Senior Commodity Analyst



August 20, 2013

Can Silver Continue to Outshine Gold?

Tuesday, August 20, 2013

Silver prices have been on the rise in recent sessions on a more positive ETF demand outlook and supportive energy prices. The metal has cooled the past two sessions, which was not unexpected, after prices rose very sharply seven of the eight previous sessions. Traders on the long side took profits ahead of Wednesday's release of the FOMC minutes, which will shift the focus back to interest rates and easing. Technically, the solid closes above the 100-day moving average set a positive tone for the Silver market and could be an indication that prices may have bottomed.

Fundamentals

Investors' appetites for precious metals have been on the rise, given attractive price levels and the view held by many that the sell-off may have been excessive. Holdings of the iShares Silver Trust, the world's largest Silver ETF, rose to four-month highs, signaling strong demand from retail traders. Despite the optimistic outlook from speculators, plenty of risks remain for Silver prices. In recent sessions, Silver outperformed Gold. However, flat industrial production and weaker than expected Philly Fed manufacturing data could negatively impact Silver prices, due to the industrial nature of the metal. Positive economy data may make traders forget about these numbers and focus on the future. The FOMC minutes will give traders a better idea of what the individual Fed governors are thinking and will likely hint at a timeline for the conclusion of the $85 billion monthly bond buyback program from the Fed. Traders fear that the Fed may end the program too soon, which may hurt the economic recovery and lower inflationary risks.

Technical Notes

Turning to the chart, we see the September Silver contract posting several closes above the 100-day moving average, which could be seen as a sign of a possible technical shift in the market. Prices have risen over 19.5% over the course of two trading weeks, which has resulted in technically overbought conditions. Prices have closed above resistance at 22.50, but have not yet come down to test this as a newly established support level. These factors suggest that prices may consolidate in the near-term. The next resistance level can be found at 24.50.

Rob Kurzatkowski, Senior Commodity Analyst


August 21, 2013

Speculators Bullish on Lean Hog Futures but Fundamentals Tell a Bearish Tale

Wednesday, August 21, 2013

Although the 4th quarter should see U.S pork supplies increase sharply, the supply picture for the beginning of 2014 could tell a different tale. The USDA expects pork production to fall by nearly 500 million pounds in the 1st quarter, which if true, would be a historic decline. In addition, there is talk among traders that the U.S. hog herd could be much smaller than anticipated if the PED virus that has been spreading throughout the U.S. took its toll on the young pig population.

Fundamentals
The Lean Hog futures market may be at a turning point as a record net-long position by speculators is running against seasonal tendencies for increased pork production. Non-commercial traders (large speculators) are holding a net-long position totaling 93,295 contracts as of August 13th according to the most recent Commitment of Traders report. A big reason for the large long position being held by long specs is the large discount of lead month October futures to the CME Lean Hog Index. The August 15th index value was 102.26 vs. October futures trading at 86.400 as of this writing. This is a discount of nearly 16 cents per pound when the 5-year average for this time of year is closer to 11 cents. It appears that many traders may be expecting October futures prices to rally to help close this rather large discount to cash. However, supply fundaments seem firmly in the bear camp, with the USDA expecting 4th quarter pork production to increase sharply vs. 3rd quarter totals. In addition, it appears that meat packers have secured much of the needed supplies of hogs for the upcoming Labor Day holiday and we may see cash hog values turn weak in the coming weeks, as increased supplies and weaker end user demand keeps buyers in the driver's seat.

Technical Notes

Looking at the daily chart for October Lean Hogs, we notice the recent rally ran into some steep resistance once prices approached the 88.350 price level. Although prices have retraced just over $200 per hundredweight the past few sessions, we should note that the decline is occurring on lower than average trading volume. The 14-day RSI approached overbought levels during the recent price rally, but stalled out just below 66.00 and is now reading a more neutral 55.37. The August 14th high of 88.375 remains resistance for October Hogs, with support found at the August 9th low of 84.575.

Mike Zarembski, Senior Commodity Analyst

August 22, 2013

Will Gold Value Buying Inspire Funds to Get Back in the Game?

Thursday, August 22, 2013

The large sell-off in Gold prices has created opportunities for traders to enter the market relatively cheaply. This is especially true for Asian inventors. In the first half of the year, US investors were exiting the market. At the same time, purchases in China advanced 45%, while Indian purchases climbed 48%. Traders are a bit concerned that the economic recovery may be harmed by the FOMC tapering its bond purchases beginning next month, which would likely also trim the inflation outlook.

Fundamentals

Gold futures have rebounded slightly in early trading, after FOMC minutes set a negative tone for the latter part of yesterday's trading session. There was strong support among the Federal Reserve governors for tapering of the central bank's $85 billion a month bond buy-back program to begin as early as next month. There is some concern among metal traders that this could diminish inflation risks. Gold demand has improved since the early part of this year, when hedge fund managers were dumping their holdings of metal ETFs. However, traders have become a bit concerned by the weak Chinese Gold and Silver imports in July. Outflows from the Gold ETF have slowed in recent weeks, which could be a sign that investors are coming around on metals. Jewelry demand also has been stout, resulting in premiums on Gold jewelry jumping fourfold in China and India. Individuals in these countries are likely buying jewelry as a form of investment.

Technical Notes

Turning to the chart, we see the December Gold contract trading just below the 100-day moving average. If Gold futures are able to hold gains above the moving average, it could be a sign that the market may have bottomed. It may also signal a technical shift from the downtrend for the metal. The 1400 level could be seen as resistance and is the center of the bearish wedge that Gold broke out of in June. On the downside, prices need to hold 1280 or risk testing support at 1200.

Rob Kurzatkowski, Senior Commodity Analyst

August 23, 2013

Bulls Turning a Cold Shoulder to Coffee

Friday, August 23, 2013

Low Coffee prices have caught the attention of the Brazilian government, where programs have been put in place to help support the market. Earlier this month it was announced that the Brazilian government would offer growers options to sell up to 3 million 60-kg bags at 343 Reais for delivery in March of next year. In addition, the government announced a play to purchase Coffee for immediate delivery at a price floor of 307 Reais. However, the details of the plan are yetl to be announced, and some analysts believe that only higher quality Coffee beans will qualify, which will likely act to further tighten the cash market for these high quality beans.

Fundamentals

Arabica Coffee futures prices continue to struggle, with the lead month December futures trading once again below the 120.00 level. Concerns about large future supplies as well as a much weaker Brazilian Real vs. the U.S. Dollar are pressuring prices. Traders cite a weak Brazilian currency as one of the main catalysts for lower Coffee prices, as a lower Real will encourage Brazilian producers and exporters to sell more Coffee for foreign currency, especially U.S. Dollars, as they will receive more Reais back on the FX conversion. Traders are also removing any so called "weather premium" in Coffee futures prices, as this season's Brazilian harvest is nearly complete, which is diminishing any concerns of potential frost or freeze damage. Adding to the current price woes are the prospects for larger crops in both Brazil and Columbia next seaso, as well as lower cash prices for Robusta Coffee in Vietnam.

Technical Notes

Looking at the daily chart for December Coffee, we notice prices sliding to new contract lows on Thursday, with little fundamental support seen. Prices are starting to move away from the 20-day moving average, and momentum as measured by the 14-day RSI is weak, but holding above oversold levels with a current reading of 36.35. The next chart support is not seen until the 111.50 price level, with resistance found at the August 8th high of 127.00.

Mike Zarembski, Senior Commodity Analyst


August 26, 2013

Summer Heat Returns Sparking Natural Gas Rally

Monday, August 26, 2013

Historically, as the calendar approached the month of September, Natural Gas traders pulse rates would increase as we enter the traditional peak of the Atlantic hurricane season. A significant storm threat to the gas rigs in the Gulf of Mexico could send gas prices soaring, especially if production was taken offline for any significant amount of time. However, with the shift of gas production inland, due to the process of hydraulic fracturing or "fracking," as it is more widely known, the "weather premium" that was usually priced into the fall expiration months of Natural Gas futures now appears to have been muted as market participants seem to have less fear of a significant amount of U.S. gas production being affected by a storm threat in the Gulf.

Fundamentals

Natural gas futures prices have recovered from recent lows, as the Midwest is finally receiving some summer heat with above normal temperatures forecasted through the rest of August. With nearly 1/3 of U.S. Natural Gas demand coming from power generation, an increase in cooling demand from major Midwest cities such as Chicago, should help spur a rise in gas usage in the coming weeks. The switch away from coal to natural gas for fuel used in power generation is becoming a bigger factor in gas demand. This was reflected in this past week's EIA Gas storage report which showed an increase of only 57 billion cubic feet (bcf). Traders were looking for a gain of 67 bcf as electricity usage was expected to be lower due to below average temps curtailing the demand for air-conditioning. For comparison, the five year average for this time of year is for a build of 56 bcf. With temperatures expected to reach the mid 90's in the Great Lakes region this week, we could likely see a much smaller storage build next week as it appears that Mother Nature is saving some of its hottest weather for the "unofficial" end of summer as the Labor Day weekend approaches.

Technical Notes

Looking at the daily chart for October Natural Gas, we notice what appears to be a "V" shaped bottom forming on the chart, which corresponds with the 14-day RSI moving into oversold territory. Prices are now trading above the 20-day moving average and momentum has turned positive with a current reading of 53.016. Resistance for the October contract is found at the 200-day moving average currently near the 3.825 level, with support found at the August 8th low of 3.154.

Mike Zarembski, Senior Commodity Analyst


August 27, 2013

Soybean Caution Giving Way to Extreme Concern

Tuesday, August 27, 2013

New crop Soybeans continue to move sharply higher, as hot, dry weather continues to take a toll on the oilseed. Caution has given way to extreme concern about the size of the Bean crop. Yields are expected to fall below the trendline yield, which could significantly reduce the crop size. Technically, the November Soybean contract gained momentum by breaking through resistance at the 1350 mark. The question is now whether the market can build off this momentum.

Fundamentals

Temperatures across much of the Corn Belt, which is also the main Soybean growing region, are expected to be about a dozen degrees or so above normal with no significant rainfall on the horizon. In fact, rainfall in Iowa, Illinois and Indiana is expected to be at the lowest July to August total since 1936. This may have a crushing impact on yields, which were seen as very healthy until this heat wave started back in July. The cash market has already seen some cash buying from consumers hoping a good-sized crop this year could bring prices down, but some are now panicking in light of recent developments. Beans have been talked-up in recent weeks in order to entice Brazil to plant more crop, which has worked to some extent. Bean acreage there is up 4-5%, but would hardly offset a weak US crop.

Technical Notes

Turning to the chart, we see the November Soybean contract blasting through resistance at the 1350 level. Yesterday's violent move higher created a gap on the daily chart between 1331.50 and 1348.00. Prices may come down to fill the gap while validating freshly established support at the 1350.00 mark. The RSI indicator is now at overbought levels due to the sharp move higher, which could be seen as slightly negative in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


August 28, 2013

Live Cattle Futures "Moove" higher after Cattle on Feed Report

Wednesday, August 28, 2013

Beef prices in the U.S. are at record levels, with the average retail price for choice beef in July at $5.357 per pound, which is over 34 cents per pound higher than July 2012 prices. High beef prices have led to increased cow slaughter, as producers are eager to meet demand at record prices. However, the downside to this activity is a lower breeding herd that may affect the supplies of market ready cattle going into 2014.

Fundamentals

Livestock futures traders received some surprisingly bullish data from the USDA last Friday, as the monthly Cattle on Feed (COF) report was released for August. The biggest surprise was in the placements figures for July, which fell by 10.4% from year ago levels. Traders were looking for a more modest 2.5% decline from last year. Cattle on Feed as of August 1st totaled 10.026 million, which was nearly 6% below last year and below the 4% decline most analysts were expecting. With placements at 5-year lows, it appears that Cattle supplies may be significantly smaller heading into the early part of 2014, which should be supportive to cash Cattle prices going into the winter months. Beef prices also received a boost from the Cold Storage report, which showed frozen beef supplies down just over 3.5% from last month. Although the fundamentals are seemingly bullish for winter month futures, the lead month October contract is expected to be influenced more by current ample supplies of market ready Cattle, as well as higher prices for beef potentially curtailing retail demand as consumers switch to less expensive sources for protein, such as chicken or pork. Large speculators have been adding on to a rather large net-long position in Live Cattle futures, with the most recent Commitment of Traders (COT) report showing non-commercial traders net-long 65,345 contracts for the week ending August 20th. This was a gain of just under 15,000 contracts, which occurred as prices traded near recent highs. The COT report was tallied just prior to the release of the Cattle on Feed report, and we may see speculative positions decreased in this coming week's totals due to position squaring prior to the USDA report.

Technical Notes

Looking at the daily chart for February Live Cattle (LCG14), we notice prices starting to bump-up against resistance just below the 132.500 price level. Monday's chart "gap" following the bullish Cattle on Feed report was met by some profit-taking selling by weak longs that rode out the results of the report and booked profits on the higher opening. Momentum is neutral to higher, with a current reading of 57.62. The recent high at 132.300 is acting as resistance for February Live Cattle, with support seen at the August 7th low of 128.375.

Mike Zarembski, Senior Commodity Analyst

August 29, 2013

Rising Tensions Pushing Oil Higher

Thursday, August 29, 2013

Tension over the possibility of military intervention in Syria has triggered a spike in WTI Crude Oil prices to their highest level in two years. Any sort of military action would almost surely lead to a supply disruption, which could be hard on Europe in particular. Geopolitical risks have trumped US fundamentals, which showed US Crude stocks rising 2.99 million barrels on increased domestic production. Without the tensions in Syria and Libya, Oil prices would likely have been lower on the session.

Fundamentals

The US, France and Britain worked hard to lay down the groundwork for legal justification for a military strike on Syria. US officials are adamant that military action would be limited to a one-day operation, amounting to airstrikes. Meanwhile, in Libya, militant groups have shut down the pipeline linking the nation's large western oilfields to ports. Total Libyan Crude Oil output has now fallen to under 200,000 barrels a day, from 1.6 million barrels per day prior to the 2011 civil war. US Crude Oil production, on the other hand, has surged in recent months. US output is now 7.61 million barrels per day, which is the highest production level since 1989. If Middle East tensions are able to blow over without a drawn out military conflict, the spike in US production could pressure Oil prices.

Technical Notes

Turning to the chart, we see the October Crude Oil contract breaking out if its sideways trading range between 103.00 and 108.75 to the upside. Any upward momentum gained from breaching the upper boundary of the trading range may be negated by the weak close to today's trading session, resulting in a candlestick with a long higher shadow. Follow-through selling today could signal prices are ready to settle back into the trading range. The RSI indicator is now at overbought levels, which may put pressure on prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

August 30, 2013

Will GBP Bulls get "Pounded" by Carney's "Dovish" Statements?

Friday, August 30, 2013

Although the Bank of England has announced forward guidance to keep short-term rates at record lows until the unemployment rate falls below 7%, which the BOE believes will not occur until sometime in 2016, it appears that traders are more focused on a so-called inflation "knockout," in which the Bank would be prepared to raise interest rates, no matter the unemployment rate, should inflation remain above 2.5% in the next 18 to 24 months. Even though the U.K. inflation rate is currently running at 2.8% YoY, Bank policymakers believe that the rate will fall back to 2% in the next 2 years. Currency traders, however, appear to believe that it is unrealistic to expect continued economic growth and lower inflation, and they expect the BOE to be forced to raise rates within the next 24 months.

Fundamentals

Bank of England (BOE) Governor Mark Carney is wasting little time in his new position before warning market participants that the Bank is ready to embrace further stimulus measures if rising interest rates startsto slow the still fragile U.K. economic recovery. BOE guidance is calling for short-term interest rates to remain at a record low 0.5% for at least 3 years, or until the nation's unemployment rate falls below 7%. Further, Governor Carney announced that the BOE will begin to relax bank liquidity rules to encourage lending. Long-term U.K rates have been climbing lately, as traders seem to be mirroring the interest rate movement in the U.S., where mid- to long-term rates have soared in anticipation of the Federal Reserve beginning the tapering of Bond purchases, possibly as early as September, due to improvement in the U.S. economy. However, Governor Carney was quick to point out that the U.S. is much further along in its economic improvement, and the sharp movement up in U.K. long-term rates is currently unwarranted. British Pound futures prices have been in a short-tem downtrend the last few sessions, although prices are currently trading off recent lows after Governor Carney's comments. It appears that recent weakness in the Pound may have been profit-taking by weak longs ahead of the Governor Carney's speech, and also that currency traders believe that U.K economic conditions will continue to show improvements much quicker than the BOE currently expected, which could force the Bank to slow its stimulus measures much quicker than previously forecasted.

Technical Notes

Looking at the daily continuation chart for British Pound futures, we notice prices have been trading in a 1000-pip price band since the middle of February and are now currently holding in the upper quarter of this range. The 20- and 200-day moving averages are beginning to converge, but at a lower price level than seen back in February. The 14-day RSI has turned lower, and is now reading a more neutral 51.07. Wednesday's lows of 1.5425 looks to be near-term support for the September futures, with resistance found at the recent high of 1.5716.

Mike Zarembski, Senior Commodity Analyst