« December 2013 | Main | February 2014 »

January 2014 Archives

January 3, 2014

Throwing the Baby Out with the Bath Water

Friday, January 3, 2014

In addition to a continued supply deficit for Platinum, the supply/demand outlook for its sister metal, Palladium, also appears bullish. Palladium is expected to end 2013 with a supply deficit of over 700,000 ounces, as increased demand for the metal for pollution control continues to increase. In addition, sales of Palladium stockpiles by the Russian Government have been decreasing during the past few years, with analysts estimating that only about 100,000 ounces were sold in 2013. This amount is well below the nearly 2 million ounces supplied in the past, and was a major contributor in keeping the supply/demand picture towards equilibrium. Now that Russian sales seem to be on a downward trend, this key supplier of Palladium will be of diminished importance, and we may see a Palladium deficit of over 1 million ounces in the coming years.

Fundamentals

The title of today's Xpresso seems to fit the current trading environment for the precious metals sector, where long liquidation selling in Gold has spilled over to the more industrial of the precious metals group, especially Platinum, and to a lesser extent Palladium, despite supply and demand fundamentals that are not all that bearish. Platinum supplies are not expected to keep up with demand in 2014, with analysts estimating a supply deficit of between 400,000 and 500,000 ounces in 2014. An expected increase in automotive demand next year is expected to increase Platinum's usage in catalytic convertors, with rising pollution levels in major Chinese cities forcing the Chinese government to begin to deal with air pollution problems, which would likely be bullish for both Platinum and Palladium demand in the coming years. While the demand side looks positive for Platinum prices, the supply side of the equation is more variable. Analysts are divided on potential production levels for Platinum in 2014, with the prospects of labor strikes in South Africa potentially curtailing output. Current lower Platinum prices may make some mining operations uneconomical, which could further limit new supplies. However, Platinum supplies from recycling efforts have prevented Platinum inventories from falling to critically low levels. Should the continued global economic recovery surprise to the upside in 2014, we could start to see the Platinum market start to trade on its own merits, and finally move out of the shadow of its more infamous cousin Gold.

Technical Notes

Continuing our longer-term technical outlook for commodities, we are looking at the weekly continuation chart for Platinum futures, where we notice prices have begun to consolidate after the wild price swings seen between 2007 and 2009. Despite prices currently trading nearly 50% below all-time highs, the market has moved into a new price zone the past 10 years, after trading in a relatively narrow, by current price standards, $500-wide band the previous 30 years! This is a similar price scenario that we have seen in many other commodity markets, which does seem contrary to government data that supports the opinion that current inflation levels are muted.

Mike Zarembski, Senior Commodity Analyst


January 6, 2014

Are Soybean Prices on the Verge of a Breakdown?

Monday, January 6, 2014

The biggest wildcard for U.S. Soybean prices in 2014 may hinge on whether Chinese demand for Soybeans will continue to rise sharply this year as the world's most populous nation continues to account for the bulk of U.S. Soybean exports, which have represented over 60% of U.S. sales the past 2 years. The prospects of record production out of South America have some traders fearful that China will cancel some U.S. Soybean purchases in the next few months, as the upcoming South American harvest should make Brazilian and Argentinean Soybean prices more "attractive" for importers. Lost U.S. sales could pressure prices in the next several weeks, especially if it appears that U.S. producers will increase Soybean acreage this spring.

Fundamentals

It certainly has been fun to be a Soybean bull the past 10 years or so, as prices have more than tripled since the lows of the 2002-03 season, with prices reaching an historic peak at nearly $18 per bushel back in 2012. As we move into 2014, it appears that record or near record high prices for Soybeans have finally done their job, and we may be in store for a huge supply increase for Soybeans in the coming year. Recent rainfall in Brazil is expected to boost crop prospects for the upcoming harvest, with current USDA estimates calling for record Soybean production of 88 million tons. In addition to a huge crop from Brazil, the USDA is forecasting Argentinean Soybean production to increase to 54.5 million tons, which would be near record production for the second largest South American Soybean producer. We should begin to receive actual updates for South American Soybean production in the coming weeks when the harvest begins later this month. In the U.S., analysts expect U.S. producers to also look to increase planted Soybean acres this coming season, as a steep fall in Corn prices the past several months is making allocating additional acreage to planting Soybeans a more attractive alternative. We will receive the first "official" USDA estimate for U.S. grain production on March 31st when the USDA releases its widely anticipated prospective plantings report.

Technical Notes

Looking at the weekly continuation chart for Soybeans, we notice prices holding significantly above the average price range seen during the past 40 years. Unlike Corn prices, which appear poised to return to more "normal" price levels, Soybean prices are still in an uptrend, although well below recent historic highs. There is talk among many analysts that commodity prices in general are set to move into a more neutral or even bearish price cycle starting this year, with lower precious metals, softs and even grain prices seen as evidence of a change in trend. Should Soybean prices fall below 1100.00, this may add further credence that the historic Soybean bull market has finally come to an end!

Mike Zarembski, Senior Commodity Analyst


January 7, 2014

Can Gold Rebound After Down Year?

Tuesday,January 7, 2014

Gold futures had their worst showing in 13 years in 2013 and the metal's worst year since 1981. The metal hit bear market conditions during the year and funds were heavy shorting the metal, especially in the last quarter of the year. Traders are now pondering if the sell-off was excessive in light of the economy recovering. The large speculative short position certainly suggests that conditions could be setting up for a short covering rally.

Fundamentals

The fundamental outlook for Gold can be seen as mixed. On one hand, the US economy is recovering sufficiently enough to warrant the Federal Reserve to scale back its asset purchases. This suggests that demand for Gold jewelry and industrial consumption of the metal could be on the upswing. Smaller speculators are not giving up on the metal either. The US Mint sold 56,000 ounces of American Eagle Gold coins in December, which is the highest demand since June. Annually, American Eagle coin demand increased 14 %. On the flipside, the Fed weaning the banking system off of asset purchases suggests that the cheap money era may be nearing an end. This may decrease Gold's value as an inflation hedge. Furthermore, many traders are not convinced that the economy is on as solid of footing as the Federal Reserve would like to believe. Decreasing liquidity could be detrimental and derail the recovery, according to skeptics.

Technical Notes

Turning to the chart, we see the February Gold (GCG14) contract hold support at the $1,200 level. Failure to hold the $1,200 level could be seen as a particularly negative for the Gold market. A breakdown could bring another wave a heavy selling pressure, which could bring about a test of the pivotal $1,000 mark. The oscillators are, for the most part, as neutral as they can be. The 14-day RSI is hovering near the 50 mark, while 20-day momentum sits at the zero line.

Rob Kurzatkowski, Senior Commodity Analyst

January 9, 2014

Is 2014 Another Sour Year for Sugar?

Thursday, February 8, 2014

After taking the latter half of December off, bears have once again taken control of the Sugar market. Sugar prices fell 16% in 2013, which is the third straight annual decline for the sweetener. The market has been lower in four of five trading sessions this year, after briefly recovering late last year. Many analysts are forecasting a fourth consecutive global surplus, which could push inventories beyond already record high levels. This could put continued pressure on the Sugar market.

Fundamentals

Australian Sugar production is expected to top last year's levels, which may contribute to the world glut in the Sugar market. The world's third largest exporter is forecast to produce over 32 million metric tons of Sugar in 2014, up from 30.5 million metric tons in 2013. Brazil, Thailand and India are all expected to export more Sugar in 2014. In addition to rising output, demand for Sugar has remained relatively lackluster to this point. Chinese Sugar production from the fourth quarter was down 7% relative to 2013, which suggests China could import more of the sweetener this year, partially offsetting the increased production elsewhere. Indian farmers have been forced to unload Sugar to pay off debt, which has pushed Indian Sugar prices to their lowest levels in over 3 years.

Technical Notes

The March Sugar contract bounced back in late December, but this proved to simply be a case of a short-covering. The chart did show signs of a possible key reversal., but the market failed to complete a V -shaped reversal and prices consolidated. The recent selling pressure suggests prices are breaking out of the consolidation to the downside. The March contract has broken support at the 16.55 level. Prices later tested this level, but failed to hold the 16.55 mark, establishing the level as resistance. The next support area can be found near 14.70. The RSI indicator has recovered from oversold levels and is now in neutral territory.

Rob Kurzatkowski, Senior Commodity Analyst


January 13, 2014

Markets React to Slow Employment Gains in 2013

Monday, January 13, 2014

Although the U.S. Jobs report for December was viewed as a disappointment by many traders, the employment picture out of Canada was even more dour. In December, Statistics Canada reported 45,900 net-new jobs were lost, which was the largest monthly decline in 9 months. The unemployment rate shot-up to 7.2%, vs. 6.9% in November. For all of 2013, Canadian employment rose by a scant 0.6%, with a total gain of only 102,000 jobs, vs. 310,000 jobs created in 2012.

Fundamentals

The December jobs report was a mix of good news and bad news. First the good news: the unemployment rate fell by a larger than expected 0.3% last month to 6.7%. Also, the November non-farm payrolls figure was revised upward to 241,000 jobs created, vs. 203,000 jobs that were originally reported. Now the bad news: job growth in December was less than stellar, with only 74,000 jobs created according to the Labor Department. This was well below the 200,000 plus jobs most economists were expecting, and a complete miss from the 235,000 private sector jobs created from the ADP report that was released on Wednesday. In addition, that 0.3% decline in the unemployment rate was mainly due to more discouraged job seekers leaving the workforce. The size of the labor force fell to 62.8% in December, which was the lowest reading in 35 years! For all of 2013, job growth averaged 182,000 jobs per month, which was nearly identical to that for 2012 (183,000 jobs per month). This does put into question the belief that job growth is accelerating. While the "poor" payrolls figure may put into question whether the Federal Reserve will continue to slowly ratchet back its Bond purchases in the coming months, it is most likely that the Fed will continue to monitor upcoming economic data and will continue to taper its purchases, although at a more gradual rate, unless we see sustained evidence that the economic recovery is faltering. Market reaction to the jobs report was mixed, with strong gains seen in the U.S. Treasury complex, as well as in Gold futures. But the U.S. Dollar weakened against most of its major peers with the exception of the Canadian Dollar, as our neighbors to the north reported an even more dour jobs report for December (see today's spotlight market). Equity index futures were little changed as the rampant bull market for U.S. stocks continues to trudge along.

Technical Notes

Taking a look at the weekly continuation chart for the S&P 500 futures, we notice that the recent leg in the bull market for equities, which begin at the March 2009 lows, has taken the index value up about 1150 points in nearly 5 year's time. This is nearly the same price movement as that seen starting back in March 1994 to the March 2000 highs. We remember that after the market "peaked" in 2000, the S&P 500 fell by over 750 points in only 30 month's time. We saw a more dramatic point decline in a shorter time period (18 months) from the 2007 highs to the major lows of March 2009 at the height of the global financial crisis. Although we know that "past performance is not necessarily indicative of future results," one does have to ponder if the current leg of the bull move is becoming a bit long in the tooth?

Mike Zarembski, Senior Commodity Analyst

January 14, 2014

Iran Accord Nukes Oil Prices

Tuesday, January 14, 2014

Iran agreed to curb its nuclear program and allow more intrusive inspections beginning on January 20. In exchange, Iran will get partial relief from sanctions imposed by the EU. The OPEC nation suffered a huge reduction in Oil exports as a result of the sanctions. The easing of sanctions against Iran comes at a time when the North American Oil market is very well supplied. There is now a 6 to 12-month timetable to come to a final agreement. While the agreement is not final, it is part of a series of milestones in relations between the US, via its allies, and Iran.

Fundamentals

With the sanctions against Iran being partially lifted, Crude Oil exports from the country should be more than able to fill the vacuum created by the unrest in Libya. Libyan output rose to 592,065 on January 11, so there may not be much of a shortfall for Iran to make up. In addition to adding to current supply, the preliminary nuclear accord has erased some of the fear premium that has been priced in the Crude Oil. This could be a severe blow to the price of Brent Crude Oil, which may pressure the price of the WTI contract. Brent Crude Oil is representative of European Oil prices, and Europe has been much tighter supply-wise than North America. Speculative long positions in Brent Crude Oil have fallen to their lowest level in six months. The speculative long position in the WTI contract has fallen for the first time in six weeks.

Technical Notes

Turning to the chart, we see the February Crude Oil (CLG14) contract continuing to trade lower on the New Year. Prices are trading near support at the 91.25 level. Failure to hold support at 91.25 could bring a test of 90 or, possibly, the mid-80's. The result of recent price action has been oversold conditions on the RSI, which may be supportive of prices. However, it should be noted that downside breakouts in technically oversold conditions could be explosive, as value buyers could do an about face and sell out of their positions.

Rob Kurzatkowski, Senior Commodity Analyst

January 15, 2014

Cocoa Prices Stabilize Ahead of the 4th Quarter "Grindings" Reports

Wednesday, January 15, 2014

Just as grain traders eagerly await the latest USDA crop reports, Cocoa traders are keenly interested in the Cocoa grinding report that is released quarterly. These reports, which measure the amounts of Cocoa processed in the U.S., Europe and Asia, help to measure the global demand for Chocolate and other Cocoa products. Estimates for the 4th quarter European Cocoa "grind" are for an increase of just over 4%, which follows increases of 4.7% and 6 % respectively in the 2nd and 3rd quarters of 2013. North American Cocoa grindings are expected to have increased by 4.1% in the 4th quarter on increased demand for Chocolate for the holiday season. The National Confectioner's Association will release the data at 4 pm ET on January 16th.

Fundamentals

Cocoa bulls are beginning to get nervous, as recent price action is putting the nearly 6-month long uptrend in jeopardy. Recent data on Cocoa arrivals to ports in Western African have been better that expected, which may be a signal that Cocoa production totals will be higher than current traders' estimates. Speculators were holding an aggressively bullish net-position in Cocoa for most of 2013, but recent price weakness and a failure to test the December 2013 highs has caused weak longs to begin to exit the market. The most recent Commitment of Traders report shows non-commercial and non-reportable traders shed over 5,000 net-long positions for the week ending January 7th. This still leaves the net-long speculative position at a rather large 83,715 contracts, which could act as "fuel" for further price weakness if protective sell-stops get triggered if chart support points fail to hold. On the bullish front, 2013 saw global Cocoa demand improve, with higher Cocoa "grinding" totals expected for the 4th quarter in both Europe and North America, although analysts believe that the grinding totals will fall short of the record set for the 3rd quarter of 2013. For the 2014-15 crop year, traders may turn towards the demand side of the Cocoa price equation, as the potential for demand increases from both developed and emerging nations could keep Cocoa futures prices from declining significantly in the coming months.

Technical Notes

Looking at the daily chart for March Cocoa, we notice that the uptrend line drawn from the late June lows have been taken out to the downside. Although prices are off recent lows, we note that trading volume has been light the past several sessions, and prices have had some difficulty, until Tuesday, trading above the 2720 price level. Some of this recent price consolidation might be due to position squaring ahead of the release of both the European and North American 4th quarter Cocoa "grinding" figures to be released this week. Support for March Cocoa is seen at 2629, with resistance found at 2759.

Mike Zarembski, Senior Commodity Analyst


January 16, 2014

Can Record Chinese Demand Shake Bean Bulls Out of their Winter Slumber?

Thursday, January 16th

Soybean futures were higher yesterday, boosted by strong Chinese deliveries. A positive economic outlook from the World Bank also had a positive effect on the market. The World Bank raised its global economic growth forecast from 3.0 % to 3.2 %. The Soybean market was risking testing technical support before rebounding over the past several sessions. Prices are now entering a chart area with heavy congestion, so it will be interesting to see if Soybean bulls will be able to build off of this momentum.

Fundamentals

US weekly export inspections of Soybeans rose to 59.38 million bushels, last week. This is an increase of 45 percent for the same prior last year. Chinese demand represents 73% of exports, according to the USDA. This was a positive surprise for Soybean bulls, who were expecting China to shift their imports to cheaper supplies from South American producers. This is also an indication that there is strong demand for livestock feed in China, suggesting meat demand has been very strong. China is the world's largest hog producer. Chinese demand for Soybeans from all sources was a record 7.4 million metric tons in the month of December. Traders will focus on export data for the time being, as it is a quiet period of the year for USDA data. The next major USDA report will be released on February 10.

Technical Notes

Turning to the chart, we see the May Soybean contract trading in a tightening range. Soybeans have been in a wedge since early fall and the continuous chart has tightened to the point where a breakout looks to come sooner rather than later. However, the direction of the potential breakout is unknown. Prices rebounded over recent sessions due to oversold conditions and the oscillators are sitting at neutral levels.

Rob Kurzatkowski, Senior Commodity Analyst


January 17, 2014

Brazilian Production Key to Coffee Price Outlook for 2014

Friday, January 17, 2014

The potential size of the 2014-15 Brazilian Coffee crop may be the determining factor for whether this global commodity market will be in a surplus or deficit. Late last year it appeared that Coffee supplies would outpace demand by as much as 5 million 60-kilo bags according to analysts. However, recent private forecasts calling for a Brazilian crop as low as 51 million bags could quickly reverse the supply/demand outlook and actually turn the market into a deficit, potentially by as much as 5 million bags, should the most dour production estimates be realized. Front month Arabica Coffee futures prices now appear to be stabilizing near the 120.00 price level, as traders become cautious awaiting further confirmation as to the potential size of this season's Brazilian Coffee crop.

Fundamentals

Coffee traders are being whipsawed by conflicting private forecasts regarding the potential size of the 2014-15 Brazilian Coffee crop. Initially, forecasters were calling for Brazil to produce a record 60 million 60-kilogram bags this coming season, as this season is the "on" year for the Arabica crop. However, the past two weeks have seen some trade houses lower their estimates to between 51 and 53 million bags on the premise that Coffee producers have trimmed production due to heavy tree pruning, as well as reduced spending on inputs such as fertilizer as prices fell to near 5-year lows. The actual size of the Brazilian Coffee harvest will be critical for determining the supply side for Coffee this season, as higher production out of Colombia is being offset by lower Central American output due to a Roya fungal outbreak. Coffee prices recently have been buoyed by slow producer selling out of Vietnam, as growers in the world's largest Robusta Coffee producing country have been holding supplies off-market in hopes of seeing higher prices. However, reports of increased producer selling the past several days are starting to weigh on futures prices, especially after the Coffee Exporter's Council estimated Brazilian Coffee exports of nearly 33 million bags this year, which if accurate should help to alleviate potential tight supplies for Coffee importers.

Technical Notes

Looking at the weekly continuation chart for Arabica Coffee futures (symbol KC), we get a clearer picture of how volatile Coffee prices can be. Prices have ranged from lows below 50 cents per pound to as high as over $3.00 per pound within the span of only a few years! While prices are currently well below the near-record highs seen back in 2011, prices are still well within the "average" price range seen the past 40 years during periods where supply and demand were relatively balanced. Price "extremes" usually do not occur until lead month futures trade above $2.00 per pound or below $1.00 per pound, and prices between these price barriers must be considered within the historic range for this commodity.

Mike Zarembski, Senior Commodity Analyst


January 21, 2014

IEA Forecast Bolsters Oil Bulls

Tuesday, January 21, 2014

Crude Oil futures have been bolstered by an improved demand outlook from the International Energy Administration (IEA). The report from the IEA showed 2013 demand for Crude Oil in developed nations rose for the first time since 2010. This can be construed as being positive for the Oil market, as the economic outlook for the US and other western nations has improved. The positive demand news may partially offset the potentially larger supply of Oil from Libya and Iran. Crude Oil futures also start this shortened holiday week with a bit of positive news from China. The People's Bank of China (PBoC) added funds and expanded accessibility to a lending facility in an effort to bolster economic activity.

Fundamentals

In its Oil Market Report, the IEA expects world Crude Oil demand to expand by 1.3 million barrels a day, which is a 1.4% jump to 92.5 million barrels a day. The IEA also suggested that the export restrictions on Oil may give producers a disincentive to expand production, resulting in the US hitting a "crude wall." The IEA is forecasting that US production will increase from 7.5 million barrels a day in 2013 to 8.5 million barrels a day in 2014, and to 9.3 million barrels a day in 2015. The 2015 forecast, if it comes to fruition, would be the largest output by the US since 1970, when the country produced 9.6 million barrels a day. However, it remains to be seen if producers are willing to increase capacity at this pace when domestic supplies are so high and outside markets are not accessible.

Technical Notes

Turning to the chart, we see the March Crude Oil contract holding above minor support near 91.50 before rebounding in recent sessions. More importantly, the market has held above the 90 mark. Failure to hold this level could result in heavy selling pressure. On the upside, the level that traders may wish to keep an eye on would be the 100 mark. Not only is this a huge psychological resistance level, but a move above 100 would confirm a double-bottom pattern on the daily chart. The RSI indicator remains near oversold levels, which could be seen as supportive for prices.

Rob Kurzatkowski, Senior Commodity Analyst

January 22, 2014

No Bull! Live Cattle Futures "Mooove" to Record Highs!

Wednesday, January 22, 2014

Large speculators have led the bullish charge in Live Cattle futures prices according to the most recent Commitment of Traders report. For the week ending January 14th, non-commercial traders (normally large speculators and commodity funds) were holding a net-long position of 134,577 contracts, which was up 12,631 contracts for the week. This extreme long position is in contrast to the net short position being held by non-reportable traders (small speculators) of 25,899 contracts, as well as commercial traders of 108,678 contracts. The commercial net-short position is due to hedging by producers eager to lock-in historic prices for Cattle. The non-reportable short position appears to be traders trying to "pick a top" in this bull market. However, this position may add further fuel to the fire, as these small traders are forced to exit their short positions on further price gains. Fewer willing sellers can be found currently, as Cattle supplies remain tight and futures prices are trading at a discount to the cash market.

Fundamentals

Speculators have stampeded to the long side of the Live Cattle futures market as a "perfect storm" of tight supplies of market-ready cattle combined with harsh winter weather, which makes transport to market challenging, has ignited another historic commodity price move. Since the beginning of the year, the lead month February futures have rallied over $7 per-hundredweight as cash Cattle prices continue to make new-record highs. The U.S. Cattle herd has been declining for the past several years and has fallen to the lowest levels since the early 1950's according to the USDA. Ironically, record high prices for market-ready Cattle have not curtailed meat packer demand, as wholesale beef prices have kept pace with the rise in Cattle prices and kept packer profit-margins attractive. Harsh winter weather in the Midwest and Central Plains has kept livestock held on feedlots from putting on weight, which has kept lower weight Cattle from being sent to market. One does have to wonder when retail consumers will finally tire of paying ever higher prices for beef and begin to switch their protein consumption to "cheaper" competitors such as pork or chicken. We have already seen some signs that U.S. per capita beef consumption has been falling somewhat the past couple of years, but not enough to help to cap retail prices. The old trading adage that "high prices are the cure for high prices" translating into higher production and/or lower demand for a commodity will normally occur once prices reach extreme levels. However, in the case of the current bull market for Live Cattle futures, it may take a bit longer for production to increase significantly in order to slow the price rise, but we may see the demand side of the price equation play a more significant role in finally extinguishing this historic bull market.

Technical Notes

Looking at the weekly continuation chart for Live Cattle futures (symbols LC), we notice that after spending nearly 24 years trading in a relatively narrow 35-cent per pound price range (approximately 50 cents to 85 cents per pound from 1978 to 2002), Live Cattle prices have been in a gradual uptrend since 2002, with prices now more than doubling in the past 12 years. The up-move in prices is becoming "parabolic" if we measure starting at the most recent low back in June of 2013. The weekly RSI has also moved well into overbought levels, but it is still too early to call a top in the market, especially given the net-short position being held by small speculators. Given that prices are at record levels, it is difficult to forecast a resistance level, although we may see "round" number prices such as 145.000 and 150.000 act as "psychological" resistance points. Support is found at 134.500.

Mike Zarembski, Senior Commodity Analyst

January 23, 2014

Can Livestock Bull Market Save Corn?

Thursday, January 23, 2014

Corn prices have been in a multi-month slump, as the global carryout is expected to be on the high side. Bulls are hoping that higher livestock prices will awaken Corn from its slumber. Milk prices hit a record high of $22.47 per hundredweight. The combination of cheap feed and high meat prices may encourage farmers to use more feed to squeeze the most weight possible out of their livestock.

Fundamentals

While traders are hoping Cattle prices will drive demand for Corn, actual supply and demand has a less rosy tone. Weekly export inspections were at 29.8 million bushels, which is higher than the USDA weekly average prediction of 28.6. This has a slightly bullish tone, but is not exactly earth shattering. Cumulative shipments for the season are at 36.1 % versus the 5-year average of 35.8 % sold during the time frame. The South American crop, most notably in Argentina, got off to a slow start. Dry December conditions put pressure on the Argentinean crop in the early going, but the forecast is showing rain on the horizon. There has been some talk that the Brazilian Corn crop could be larger than that USDA estimate of 70 million tons. Some forecasts are even calling for a crop exceeding 75 million tons. This could hurt US Corn exports, as trade partners could opt to buy cheaper South American exports instead.

Technical Notes

Turning to the chart, we see the March Corn contract continuing to trade near multi-month lows. Thus far, prices have been able to hold above the 400 level, which could be seen as neutral to positive. Failure to hold the 400 level could be seen as a breakdown and may lead to long liquidation. The RSI has recovered from oversold levels and sits in neutral territory.

Rob Kurzatkowski, Senior Commodity Analyst


January 24, 2014

The "Other Bull Market "?

Friday, January 24, 2014

Just like in Live Cattle, large speculative accounts have taken a bullish stance in Lean Hog futures, but not quite to the extent of the record net-long positions being held in the adjacent pit. The most recent Commitment of Traders report shows non-commercial traders (usually large speculators and commodity funds) net-long 67,780 contracts as of January 14th. This was nearly unchanged from the previous week. Both commercial and non-reportable (small speculators) traders are holding an overall net-short position, although the small specs have been liquidating some of the short position the past week, with the commercials adding to the short position.

Fundamentals

In Wednesday's Xpresso newsletter, we took a look at some of the fundamental factors that have influenced the historic bull market in Live Cattle futures. Out of the spotlight has been the "other" major livestock futures market that has quietly been trending higher since 2009: Lean Hogs. Lacking the excitement of the Live Cattle market of late, lead month February Lean Hog futures have moved into a consolidation phase, with prices hovering between 85 cents and 87.5 cents per pound after a price run-up to nearly 95 cents per pound back in October. Higher than expected processing rates and higher weight totals for market ready Hogs have kept cash market prices contained and have allowed futures prices to trade at a 5 to 6 cent per pound premium, as futures traders fear that harsh winter weather and potential herd losses due to virus will eventually limit the amount of Hogs available for marketing. The USDA in its quarterly Hogs and Pigs report released in late December indicated that the pig crop in the September to December period was lower than the total the previous year, which should eventually help to tighten supplies of market ready hogs in the first half of 2014. In addition, some traders believe that record high beef prices will eventually translate into higher retail demand for pork as well as chicken, as consumers begin to tire of paying a premium for beef and look for alternatives to meet their protein needs. Cash market participants report that pork cut-out values have increased this past week, but these price gains were offset by lower prices for pork bellies. The February contract may have some difficulty holding current price levels unless cash prices rally in the next few weeks prior to expiration given the large futures price premium currently in place. This may trigger additional interest from spread traders in the Lean Hog market in the days prior to expiration of the February contract.

Technical Notes

Looking at the weekly continuation chart for Lean Hog futures (root symbol LH), we notice prices have been in a general upward trend since 2002, although the up-move has been in fits and starts. After making historic highs above $1 per pound back in 2011, prices have consolidated within a 30-cent price range, with recent price activity generally centered near the 87 to 90-cent price area. 84.500 is seen as near-term support for the February contract, with resistance found at 87.500.

Mike Zarembski, Senior Commodity Analyst


January 27, 2014

Traders Turn to Bonds as Equities Stumble

Monday, January 27, 2014

Here in the U.S. treasury futures traders appear to be covering short positions ahead of the FOMC meeting scheduled for January 28 and 29th, as well as the upcoming debt ceiling deadline on February 7th. The Commitment of Traders report showed both non-commercial and non-reportable traders holding a net-short position as of January 14th. This sets the stage for potentially futures gains if the flight from emerging market currencies persists.

Fundamentals

Traders and investors who have been panning the ownership of U.S. Treasuries the past several months have all of a sudden taken a renewed interest in this beleaguered asset class as weakness in emerging market currencies coupled with the first "significant" correction in U.S. equity prices in months has investors moving to "safe haven" assets. Ironically, one of the catalysts for this move to more "risk adverse" assets is the expected continued tapering of bond purchases by the Federal Reserve. Some of the excess liquidity created by polices such as "quantitative easing" had found its way into investments in emerging markets in hopes of generating above average returns. Now that it appears that the Fed is beginning to slowly push on the brakes of its monetary stimulus, investors are beginning to move funds out of emerging nations as growth rates have begun to slow and concerns over the political and financial stability of countries such as Turkey, Argentina and even Brazil are now being questioned. The value of the Argentinean Peso has fallen sharply as the country's government has ceased supporting the currency in the forex market. In addition, the value of the Turkish Lira has plunged to a record low versus both the U.S. Dollar and the Euro as traders do not believe that central bank intervention to support the currency will be successful given the low amount of the country's foreign reserves, unless interest rates are raised. U.S. equity markets have also begun to feel the effects of investor nervousness, with the "blue-chip" Down Jones Industrial Average looking to post the largest weekly decline in over 18 months after trading at record levels just a few short weeks ago. Those willing to hold long positions in U.S. Treasuries were beneficiaries of this investor nervousness as the yield on the 10-year Note fell below 2.75% after trading above 3% at the start of the year. As we start the new week it shall be interesting to see if traders' nerves have been calmed over the weekend or if investors will continue to give the "cold shoulder", kind of like this year's harsh winter weather in the U.S, to "risk assets".

Technical Notes

Looking at the weekly continuation chart for 10-year Note futures (symbol TY), we notice that the uptrend drawn from the major 2007 lows have been breached and the market has begun a consolidation phase between 122-00 and 128-00 for the past 6 months. For long-term traders, the bull market is still in force and would take a weekly close below the 110-00 price level to stop the bull in its tracks. Support for the front month March contract is seen at 122-03.5 with resistance found at 126-25.

Mike Zarembski, Senior Commodity Analyst


January 28, 2014

Whipsaw

Tuesday, January 28, 2014

Erratic winter weather patterns have caused a spike in Natural Gas volatility. Given the market's rally to four-year highs and shift in temperatures, volatility is likely to remain unpredictable in the near-term. Colder than normal temperatures have gripped the Midwest and Northeast. However, weather forecasts are calling for normal or above average temperatures for the East Coast in early February, tempering the bullish sentiment brought on by the cold spell. Technically, the market has seen an upside breakout above the 4.50 level. Yesterday's key reversal may make traders a bit cautious regarding the breakout.

Fundamentals

Fundamentally, the Natural Gas market remains well supplied. However, the recent destocking of the inventories has tightened supplies substantially. Traders may want to keep an eye on this Thursday's storage report. The trend has been a destocking of inventories. If this trend continues, the market could take-out yesterday's highs. Traders remain net short the Natural Gas market to the tune of 46,041 contracts, which has decreased by close to 15,000 contracts from the prior week. This suggests additional shorts could potentially be squeezed out of the market. Volatility could be high in coming sessions, as both sides of the market could be shy to pull the trigger. Bulls may view the recent price action as being overdone and may be reluctant to add to positions at these price levels. The bear camp may be worried about a squeeze. This suggests the market could see an uptick in scalping activity.

Technical Notes

Turning to the chart, we see that the March Natural Gas (NGH14) contract blasted through resistance at the 4.50 level with ease. However, yesterday's price action formed what could potentially be seen as a reversal day. The body of yesterday's candlestick is inside the prior day's range, somewhat diluting the reversal indicator. If prices are able to hold the 4.50 level, prices may continue higher. The next resistance area may be found at 5.400.

Rob Kurzatkowski, Senior Commodity Analyst


January 29, 2014

Markets Wait on FOMC

Wednesday, January 29, 2014

Equity futures had a bounce back session after suffering heavy losses over the prior 3 trading sessions. Economic indicators were mixed in the morning, making earnings the deciding factor in market direction. Durable Goods Orders were down 4.3%, which was a 6.4 % swing from analysts' forecast of a positive 2.1% increase. Consumer Confidence, on the other hand, came in at 80.7, besting the market's expectation of 77.5. The Consumer Confidence data held a little more weight than Durable Goods Orders, as the number can be viewed as forward looking instead of backward looking.

Fundamentals

Early trading figures seem to be somewhat subdued, as traders await the FOMC rate decision. Traders will be looking at both the size of the reduction in asset purchases, if any, by the bank and the language of the policy statement. The general consensus is that the Fed will reduce its asset purchases to the tune of $10 billion per month. Market observers are also curious whether the Fed will offer some hints as to when it plans to begin raising interest rates. Outside the US, the People's Bank of China continues to add liquidity, which could be seen as a positive influence. European markets benefitted from an upbeat forecast for German growth and the Q4 UK growth rate climbing to the highest levels in six years. In addition to better than expected US consumer confidence, consumers in Italy and France were more optimistic. We are in the midst of earnings season, which may make the markets a bit more volatile than normal.

Technical Notes

Turning to the chart, we see the March E-mini S&P forming a small M-top on the daily chart, suggesting the market could be in a corrective phase. There is minor support near the 1772.00 level. Prices may trade down to the uptrend line. A violation of this uptrend line could signal an intermediate shift in the direction of the market. Prices are approaching the 100-day moving average. The E-mini is already trading below the 20 and 50-day moving averages, so a breakdown below the 100-day moving average could be seen as fairly negative. The recent market weakness has resulted in oversold technical conditions, which can be seen as positive in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


January 30, 2014

Copper Dulls on Rising Emerging Market Rates

Thursday, January 30, 2014

Copper fell to its lowest levels in close to two months due to traders' concerns that emerging market demand for the metal may drop. Rising borrowing costs in emerging markets could result in lower growth. Unlike China, which has added liquidity, central banks in Turkey and Brazil have raised interest rates.

Fundamentals

In addition to rising rates in emerging economies, the FOMC announced another round of tapering to the tune of $10 billion a month. Starting in February, the Fed will only purchase $65 billion of long-term assets per month. Of that total, $35 billion will be long-term Treasury Bonds. Reading a bit further into the statement, the language the Fed used to describe the current state of the labor market differed. In December, the FOMC statement emphasized that the labor market had shown further improvement. On the other hand, yesterday's statement was a bit more reserved, indicating labor market indicators are mixed. Otherwise, the statement was very similar to December's meeting. China has added liquidity in an effort to stimulate economic growth, which is the slowest the country has seen since 1999. Manufacturing activity has slowed, and there are signs that the factory sector is shrinking, which could deal a blow to Copper demand.

Technical Notes

Turning to the chart, we see the recent sell-off in the March Copper contract (HGH14) doing some chart damage. Prices are approaching the 3.2250 support level. Failure to hold support there could result in prices testing 3.150 or, possibly, even the low 3.00's. The sell-off has resulted in oversold technical conditions, which could be supportive of prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

January 31, 2014

Wheat Woes

Friday, January 31, 2014

Wheat prices were a bit firmer yesterday, despite indications that global production of the grain is expected to rise. According to the International Grains Council (IGC), world Wheat production is expected to rise 7.9% this season. The IGC expects larger crops in Canada, China, and Australia. Emerging market currencies have taken a hit versus the US Dollar, as some traders have begun to have growth concerns for emerging economies. The increase in interest rates in Turkey and Brazil suggests that emerging market countries may be entering into a tightening phase.

Fundamentals

The 2013-14 crop year is forecast to yield 707 million metric tons of Wheat globally. However, the IGC expects 2014-15 production to fall back to 697 million metric tons, which is actually down from last month's estimate of 699 million metric tons. Bulls were hopeful that attractive prices and demand for meats would drive some demand for feed, which has not yet materialized. In fact, many believe that the USDA's forecast of global feed usage is grossly overestimated. Current Corn prices are at low levels, which give feedlots little, if any, incentive to switch to Wheat-based feed. It is somewhat surprising that export demand for US Wheat has been soft, as US prices are among the cheapest in the world.

Technical Notes

Turning to the chart, we see the March Wheat (WH14) contract continuing to trend lower. The next support levels come in near monthly chart support at 500 and 450. While the chart shows a continuation of the downtrend in the Wheat market, the RSI indicator has been rising since late December. This divergence suggests that a reversal may, potentially, be on the horizon. Traders may look to the chart to offer signs of a reversal.

Rob Kurzatkowski, Senior Commodity Analyst