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March 2014 Archives

March 3, 2014

When Pigs Fly to New All-Time Highs!

Monday, March 3, 2014

Being a carnivore in the U.S is going to get more expensive this year, as both Cattle and Hog prices are at record levels. Cattle inventories are at their lowest levels since the early 1950's, and smaller supplies of market-ready cattle are expected to lower beef production by over 5% this year. Hog inventories are expected to decline, as an outbreak of PED virus has already killed over 4 million pigs since the virus was confirmed in the U.S in the spring of 2013. With no vaccine found so far to deal with the virus, producers are doing their best to try to contain the disease. However, it is likely that some producers will be forced out of business, which will hamper herd rebuilding efforts.

Fundamentals

It's not only beef prices that will be giving consumers sticker-shock at the grocery store this spring, but pork prices are expected to rise as well, as hog supplies are expected to tighten due to an outbreak of the PED virus. This virus which has a high mortality rate among young pigs is expected to put a significant dent in the size of the Hog herd in the coming months. This reduction in Hog supplies comes at a time when U.S. pork exports are inspected to increase, especially with Russia expected to resume U.S. pork purchases later this month. Cash market participants report that pork cut-out values have risen sharply this past week, trading over $101.00 per hundredweight at week's end. Even though Lean Hog futures are at record price levels, the market may still have some room to move higher, as the full effects of potentially lower slaughter rates have not yet occurred. U.S. pork production is still above last year's totals for the first 2 months of the year, as higher Hog weights have made up for lower supplies of market ready Hogs. Buyers still appear willing to pay higher prices for pork, as it remains a better "value" when compared to the price of beef. With both Cattle and Hog prices at record highs, we should not be surprised to see more poultry served at barbecues this summer.

Technical Notes

Looking at the daily chart for April Lean Hogs, we notice prices trending sharply higher following a 3-week consolidation period in which the market hovered between 92.500 and 95.000. For the past 2 weeks, we have seen prices rally by over $10 per hundredweight, as trend-following traders became aggressive buyers. April futures continue to trade at a premium to the 2-day CME Lean Hog Index, although the index value has posted gains the past 7 days. Non-commercial traders have been adding to their rather large net-long positions the past week, according to the Commitment of Traders report, with commercial traders taking the other side of the trades. Prices continue to move further away from both the 20- and 200-day moving averages, but the 14-day RSI has moved to extremely overbought levels, which currently stand at 87.44. With prices beginning to move in a "parabolic" fashion, traders should prepare for a potential increase in price volatility in the coming days. Near-term resistance levels are tough to evaluate, as we are in record territory, but psychological resistance may be found at "round number" price levels from 107.00 to 110.00. Support is seen near 95.000.

Mike Zarembski, Senior Commodity Analyst


March 4, 2014

Ukraine Crisis "Putin" a Charge into Oil Prices

Tuesday, March 4, 2014

The political turmoil in the Ukraine has shifted from a violent internal conflict into an international one. Russia, the Ukraine's neighbor and world's largest Crude Oil producing nation, has seized control of the Black Sea region of Crimea. This brazen act not only violated Ukrainian sovereignty, but also puts the US and Russia at the worst political standoff since the end of the Cold War. Russia has threatened to invade the Ukraine to "protect Russian citizens." This is a rather alarming move seen by many as a way to consolidate power and keep the Ukraine within its sphere of influence. The conflict threatens to disrupt petroleum outflows from Russia. The US has already threatened to remove Russia from the G8, and the White House is weighing its options to punish Russia economically.

Fundamentals

The geopolitical news from the Ukraine has been a major driver for the Crude Oil market. Other news has not been as bullish. Chinese manufacturing PMI fell to 50.2 in February, which is slightly higher than the consensus estimate of 50.1, but is at 8-month lows. On the surface, the People's Bank of China, or PBOC, has been lowering interest rates. However, evidence from the manufacturing sector suggests that banks have been tightening. The Crude Oil market may find itself vulnerable when the crisis in the Ukraine is sorted out. Given how Russia has dug in, the conflict may drag out for an extended period of time.

Technical Notes

Turning to the chart, we see the April Crude Oil contract breaking out of a pennant on the daily chart, suggesting a continuation of the recent uptrend. This comes on the heels of confirming a double-bottom formation. The measure of the double-bottom suggests prices may test the 108 level or, possibly even the 110 mark on the upside. The RSI indicator remains overbought, which could weigh on prices in the near -term.

Rob Kurzatkowski, Senior Commodity Analyst


March 5, 2014

Wheat Rallies on Ukraine Concerns

Wednesday, March 5, 2014

Both large and small speculators have been holding net-short positions in Chicago Wheat futures according to the most recent Commitment of Traders report. Non-commercial traders were net-short just over 18,000 contracts for the week ending February 25th. This was down over 15,000 contracts for the week, and it appears that these large speculators were already in a short-covering mode prior to the "spike" in prices starting Sunday evening.

Fundamentals

The escalation of tensions in Ukraine has affected a number of global futures markets including Wheat futures, as traders fear a potential slowdown of grain exports from the Black Sea region. Ukraine is ranked 5th among the leading Wheat exporting nations, with an estimated 10 million tons of Wheat expected to be shipped in 2014. However, the recent collapse of the nation's currency, the hryvnia, against the U.S. Dollar may cause many Ukrainian grain producers to withhold grain sales -- at least until some stability in the value of the hryvnia occurs. Lower than expected Wheat exports from the Black Sea region could help export sales from both the U.S. and Europe, as traditional buyers in both the Middle East and North Africa may be forced to look towards the west to obtain needed Wheat supplies. On the other side of the coin, we have heard from some traders who believe the Ukrainian uprising will cause the nation to accelerate grain sales to obtain much needed hard currency. If true, this could be a bearish development for Wheat as well as Corn prices, at least in the near-term.

Technical Notes

Looking at the daily chart for May Wheat, we notice prices rebounding off the Jan 30th low prior to the "gap" higher opening on Sunday. It appears that speculators were caught short the Wheat market, causing the sharp rally to start the week as traders exited short positions. Prices have now moved above the 20-day moving average (MA) but still have some upside headwinds to overcome before testing the longer-term 200-day MA which is currently near the 665.00 price level. The 14-day RSI is strong, with a current reading of 64.58. Significant chart resistance is found near the 654.00 price level, with support seen at the February 27th low of 588.25.

Mike Zarembski, Senior Commodity Analyst


March 6, 2014

Market Focus Shifts Back to Jobs

Thursday, March 6, 2014

The S&P 500 had a choppy session yesterday, after surging to record levels on Tuesday. Monday and Tuesday were extremely turbulent trading sessions, led by fear that Russia was prepared to launch a full-scale military action. On Tuesday, a statement by Russian President Vladimir Putin that invading the Ukraine was the final option helped quell fears for stock traders. There is, however, an air of uneasiness among traders, which will only dissipate once the matter is resolved. The apparent softening of rhetoric does afford traders the luxury of being able to refocus their attention to economic data instead of geopolitics.

Fundamentals

The ADP National Employment Report set a negative tone for equities in pre-market trading. The report showed the private sector adding 139,000 jobs in February, which fell short of analyst estimates of 150,000 jobs added. The January numbers were also revised down from a healthy 175,000 jobs added to a less than impressive 127,000 figure. This could be setting-up for a potentially disappointing non-farm payroll number on Friday, but it is important to note that the two reports do not always have the strongest correlation. The ISM Services Index also missed its estimate at 51.6. This was below the analyst estimate of 53.5 and below January's 54.0 reading. This was not very surprising, as cold weather and snow had a negative impact on the service industry. The Fed Beige Book also noted the detrimental impact the weather had on the overall economy. In the Beige book, Fed Chairwoman Janet Yellen indicated that the Fed intends to continue reducing asset purchases but will keep interest rates near zero. She had stated that it could be "months" before the Fed could quantify the impact of the reduced asset purchases. In the report, Yellen also indicated that the employment rate could be seen as a misleading number, with many jobless people simply not looking for jobs or working part-time. With the ADP and Beige Book out of the way, all eyes will be on the Friday's non-farm payroll data. The only notable earnings reports over the next two sessions are both in the retail space, with Staples reporting today and Big Lots reporting tomorrow.

Technical Notes

Turning to the chart, we see prices establishing support near the previous resistance mark of 1841.25. Failure to hold 1841.25 could result in prices testing 1800. Given the fact that the market is in uncharted territory, prices may come up to test the next round number at 1900. The RSI indicator is showing overbought levels, which could curb some of the market's momentum. The combination of being in uncharted territory and overbought conditions may test the resolve of the bull camp in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


March 7, 2014

Blame it on the Weather

Friday, March 7, 2014

Wednesday's disappointing employment report from ADP appears to have done little to sway analysts and traders expectations for the February non-farm payrolls report. 163,000 new jobs were expected to be created in February, which would be a recovery from the anemic 113,000 jobs reported for January. The unemployment rate is expected to remain steady at 6.6%. Traders may wish to look behind the headline figures and focus on the details of the report, in particular on which employment sectors showed the greatest gains or losses in employment as well as the direction of the monthly revisions to the previous two months of employment data. This can be a clue to whether the actual employment trend is improving or slowing.
Fundamentals

February was apparently a cruel month for job seekers as U.S. employers were slow to add to payrolls last month. Private sector employers added 139,000 new jobs in February according to a report compiled by Automatic Data Processing (ADP) and Moody's Analytics. This was lower than the pre-report forecast of 160,000 new jobs created. Small firms added the largest number of new workers last month at 59,000 jobs created. Service sector jobs rose by 120,000, but the all important manufacturing industry added a scant 1,000 jobs in February. Among the reasons cited for the slow employment growth the past few months was the harsh winter weather experienced in vast swaths of the country. Apparently, the Federal Reserve is not too concerned about the weak employment data of late, as there appears to be little talk of the Fed slowing down its recent tapering of bond purchases. Harsh winter weather was also cited as a major factor for a drop in the ISM nonmanufacturing Index in February. The index fell to 51.6 vs. 54.0 in January, with many respondents noting that winter weather conditions were a factor in subdued business activity. There was some good news on the employment front with weekly jobless claims falling by a larger than expected 26,000 to a seasonally adjusted 323,000 for the week ending March 1st. Traders will now turn their attention to this morning's highly anticipated non-farm payrolls report, with analysts lowering their expectations once again for the number of new jobs created due to bad winter weather. However, one must wonder what will be the market's reaction should the employment picture not improve significantly in the coming months, without the "weather" as a "scapegoat" for a slowing employment recovery.

Technical Notes

One of the markets where participants take a key interest in the employment data is that for U.S. Treasuries. So taking a look at the weekly continuation chart for 10-year Note futures, we notice prices trading within the consolidation pattern established following the steep price decline back in June of last year. Prices are above the 20-day moving average (MA), but remain below the widely watched 200-day MA. The 14-week RSI is neutral to weak with a current reading of 42.45. Support is found at 122-07, with resistance seen at 128-02.

Mike Zarembski, Senior Commodity Analyst


March 10, 2014

Finally a "Good" U.S. Employment Report?

Monday, March 10, 2014

Although the U.S. employment data showed a modest improvement in February, our neighbors to the north were not so fortunate. Statistics Canada reported that 7,000 jobs were lost in February, vs. a 29,400 gain in January. The job loss took traders by surprise, as the pre-report estimate was for a gain of 15,000 jobs. The unemployment rate held steady at 7.0%. The headline figure may be a bit misleading, as the job losses seemed to be concentrated in part-time employment, which fell by 25,900. Full-time employment rose by 18,900 in February. The Canadian Dollar took it on the chin after the report was released, with the "loonie" declining nearly 1 cent vs. the "greenback".

Fundamentals

The U.S. economy got a bit of good news on the labor front, as U.S. payrolls rose more than expected last month. The Labor Department reported that U.S. payrolls rose by 175,000 jobs in February, which was slightly above the pre-report estimate of between 150,000 and 160,000 jobs. The unemployment rate ticked up 0.1% to 6.7%, as an increase in the labor force was more than offset by the number of workers still looking for jobs. The monthly revisions were also positive, with January's payrolls revised higher by 16,000 jobs and December's payrolls increased by 9,000. Digging deeper into the report, we note that the construction sector, which can be affected by weather conditions, added 15,000 jobs in February, and the all-important manufacturing sector gained 6,000 jobs last month. Even government payrolls rose last month with a gain of 13,000 jobs, although the Federal Government shed 6,000 jobs. Market reaction was mixed after the employment data was released, with gains seen in the equity indices, Oil, and the U.S. Dollar, with U.S treasuries and Gold among the markets posting declines.

Technical Notes

Looking at the weekly yield chart for 30-year Treasuries, we notice yields seem to have stalled between 3.50% and 4.00% since mid-June of last year. Yields are hovering just above the 200-week moving average (MA), but remain just below the 20-week MA. The 14-week RSI is neutral, with a current reading of 51.56. Given the mixed economic data seen of late, it appears that bond yields may remain range-bound until a clear trend as to the direction of the U.S. economy appears.
Mike Zarembski, Senior Commodity Analyst

March 11, 2014

Copper Suffers Heavy Losses

Tuesday, March 11, 2014

Copper futures suffered its heaviest two days of selling pressure in almost three years, as traders continue to worry about China. Traders are also concerned over the ongoing situation in the Ukraine and the negative impact on world economy a military conflict would have. Despite making statements to the contrary last week, Russia has dug in deeper into the Crimea region. Ukrainian troops there have been surrendering to Russian forces and the Russian army has taken over military bases and hospitals.

Fundamentals

February Chinese imports declined by the largest amount since 2009, stoking concerns over a Chinese economic slowdown. The soft import data is just the most recent of a troubling pattern of economic data from China. Manufacturing and construction activity has been slowing down; indicating demand for Copper may be softening. On the surface, the People's Bank of China has been keeping interest rates low. However, companies in the construction and manufacturing sectors have been having a difficult time obtaining financing, suggesting the government will continue to facilitate a cool down of construction behind the scenes. Shanghai inventory levels have climbed for the eighth straight week, the longest stretch in over two years.

Technical Notes

Turning to the chart, we see the May Copper contract falling below the continuation chart support at the 3.1450 level. Prices are now converging on the 3.000 level, which can be seen as significant support. Prices have broken out of a wedge on the chart and have made the measure of the move. The recent selloff has resulted in the RSI being in oversold territory, which suggests prices could find some support in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


March 12, 2014

Calm Before the Storm for Gold Prices?

Wednesday, March 12, 2014

Large speculators have been in a bullish mindset of late after adding to their overall net-long positions in Gold the past week. The most recent Commitment of Traders report shows non-commercial traders adding over 6,000 net-long positions during the week ending March 4th. On the other side of the trade were small speculators, who were reported to have liquidated just over 2,800 net-long positions, as well as commercial traders, who increased their overall short position by over 3,200 contracts during this time period.

Fundamentals

Following a price move below 1200.00 to start the year, front month Gold futures have staged a quiet recovery, rallying over $150 per ounce since January. With prices now hovering near 4-month highs, we have seen prices begin to consolidate within a $35 per ounce price band the past 2 weeks as neither bulls nor bears seems to have gained the upper hand at the moment. Among the top concerns being voiced by Gold traders is the apparent sluggishness in the Chinese economy, which was highlighted by a surprising decline in Chinese exports which fell by 18% in February. Slower growth levels may force analysts to lower their estimates for Chinese commodity demand in the coming months, which can be viewed as a negative for Gold prices. China is believed to be the 3rd largest holder of Gold with an estimated reserve of 2,710 metric tons. Aggressive Chinese Gold purchases the past 5 years had some analysts looking for China to eventually hold as much Gold as that of the U.S., currently at 8,133.5 metric tons. But the timing of additional Chinese purchases remains unknown and it could take decades for the world's most populous nation to accumulate that much of the yellow metal. On the positive side for Gold prices, traders note some increased interest in Gold as a "safe haven" investment of late, as heightened geopolitical risks have emerged in Eastern Europe with Russian troops having occupied the Crimean region of Ukraine following the ouster of the nation's President Viktor Yanukovych. This has led to calls by some political leaders for economic sanctions against Russia, which if implemented, could result in some sort of retaliation by Russia against western nations and potentially heighten global tensions which could trigger a flight back towards Gold by nervous investors.

Technical Notes

Looking at the daily continuation chart for Gold futures, we notice the bullish price move off the January lows has taken a bit of breather following a rally of over $150 per ounce. Prices have consolidated just above both the 20 and 200-day moving average although the 14-day moving average has moved out of overbought territory with a current reading of 62.00. On a longer-term view, there appears to be a "double-bottom" formation on the daily chart going back to the July 2013 low. This could be a sign that a major bottom is in place but we would need to see a close above the intermediate high of 1428.00 to further validate this bullish chart formation. Near-term support is seen at 1317.40, with resistance found at 1355.00.

Mike Zarembski, Senior Commodity Analyst


March 13, 2014

Oil Prices Retreat as Inventories Increase for Eight Consecutive Weeks

Thursday, March 13, 2014

U.S. Crude inventories continue to rise with the Energy Information Administration (EIA) reporting that U.S. Oil inventories rose by a larger than expected 6.180 million barrels last week. This was the eight consecutive week of Oil inventory increases according to the EIA, which reflects lower end-user demand from refineries due to seasonal maintenance. The EIA did report that Crude inventories in Cushing Oklahoma, the delivery point for NYMEX WTI Crude, continue to decline with 1.341 million barrels drawn from storage last week. Normally this would be considered bullish for NYMEX Crude but traders note that Oil supplies from Cushing are not necessarily being consumed, but are instead making their way to storage in the Gulf Coast, where it awaits for refining demand to increase once spring maintenance is complete.

Fundamentals

Front month Crude Oil futures have fallen once again below the psychologically important $100 per barrel price level as U.S. inventories rose for an eighth consecutive week. March is traditionally a slow month for U.S. Crude demand, as refining operations are taken off-line for maintenance, just prior to the start of production of specialty "summer blends" of gasoline required by the EPA. Oil prices have come under some pressure on concerns that the Chinese economy will experience slower growth this year, which could help to slow the growth rate for global oil demand this year. This theory is in contrast to the recent oil demand forecast from the Organization of Petroleum Exporting Countries (OPEC). In its monthly market report, OPEC raised its estimate for global Oil demand by 1.14 million barrels per day as the cartel expects Oil consumption to increases in North America and Europe. However, OPEC does note that the rate of Oil demand growth will depend on the strength of emerging market economies. While Oil prices have turned weak across various grades, the global benchmark Brent Crude has widened it's premium to the U.S. benchmark West Texas Intermediate (WTI) Crude the past several sessions, as traders are beginning to price a "risk premium" in Brent due to potential European sanctions against Russia for its involvement in Ukraine. With the speculative long position in Crude Oil at extreme levels Oil prices may be vulnerable to a further price correction until U.S. inventories begin to decline or global economic growth prospects, especially in emerging markets begins to improve.

Technical Notes

Looking at the daily chart for April Crude Oil, we notice prices topping out just above the $105 per barrel price level, which has cumulated in a nearly $7 per barrel price decline the past week. Prices have fallen below the 20-day moving average (MA) but remain above the 200-day MA which is currently hovering just above $97 per barrel. We also note that prices have reached the 50% Fibonacci retracement level calculated from the January lows near $91.50 to the recent highs just above $105. The 14-day RSI has turned weak but has not yet reached oversold levels with a current reading of 42.24. Support is seen at 97.05, with resistance found at 101.80.

Mike Zarembski, Senior Commodity Analyst


March 14, 2014

Cotton Bull Market Beginning to Soften?

Friday, March 14, 2014

Even though China is the world's largest consumer and producer of Cotton, the world's most populous nation is expected to trim its Cotton-planted acreage this year. The China Cotton Association expected Chinese Cotton acreage to fall to 4.2 million hectares, as domestic demand is expected to slow. In addition, the Chinese Government is believed to control over 50% of the global Cotton stockpile, which could prove problematic for U.S. Cotton sales should China release the surplus on to the domestic market.

Fundamentals

The strength in the Cotton futures market has surprised may traders as export demand remains strong. The USDA raised its estimate for U.S. Cotton exports earlier this week by 1.9% to 10.7 million bales. If true, this will leave U.S. Cotton carryover at a tight 2.8 million bales. Last week's cotton exports totaled 60,000 bales, while lower than the 4-week average, is still large enough to raise concerns that supplies will become extremely tight prior to this season's harvest. While old-crop Cotton prices continue their bull market stampede, the price reaction for new-crop months is more muted. The December 2014 contract is hovering near the 80 cent price level vs. nearly 93 cents for the old-crop May 2014 contract as it appears that U.S. producers will increase their Cotton planted acreage this season. The National Cotton Council's annual survey stated that producers expect to plant just over 11 million acres of upland cotton, up over 8% from last year. The majority of the additional acreage is expected to be planted in the Mid-South and Southwest regions of the U.S. where Cotton acreage is expected to increase by 12.5% and 12% respectively. Although increased acreage should set a bearish tone for new-crop Cotton futures, we should remember that the all-important Southwest region has suffered through a multi-year drought and actual production totals will be highly dependent on the weather.

Technical Notes

Looking at the daily chart for May Cotton, we notice the 3-month long Cotton rally may be showing the beginning of a topping phase as Thursday's move to over one year's high was met with selling pressure causing prices to close lower on the day. Trading volume has also been light the past several sessions which may be a sign that recent buying was short-covering in nature. The chart "gap" created on March 5th remains open but could be a potential price target on a well-overdue price correction. There appears to be a "bearish divergence: forming in the 14-day RSI after readings retreated from overbought levels. Thursday's high of 93.75 looks to be the next area of resistance for the May futures, with support found at the beginning of the chart "gap at 89.57.

Mike Zarembski, Senior Commodity Analyst


March 17, 2014

Keeps Driving Gold Up, Will Trend Continue?

Monday, March 17, 2014

Gold futures are at their highest levels since early September due to increased tension in the Crimea region. The referendum on the status of Crimea, which was passed by the local legislature, serves to further complicate the crisis. The referendum gives the region the option to join Russia in the future. At the same time, Russia has continued to amass troops near the border with Crimea, while stating that it has no intention of a "backdoor annexation." The actions of Russia have drawn sharp criticism and possible sanctions from the US and Europe.

Fundamentals

The standoff between Russia and the Ukraine can be seen as boosting Gold's demand as a defensive instrument in the near-term. However, the exact effect on the Gold market may be difficult to gauge, especially over the longer term. US and European sanctions on Russia has the potential to negatively impact economic activity in Russia and the West. There may be political posturing on both sides, but, ultimately, the chance of any sort of military aggression between Russia and Europe or the US is slim to nil, which could set a ceiling for Gold prices. The real danger lies if Russian aggression spreads to other Baltic states. Outside of the Crimean crisis, Gold fundamentals can be seen as lackluster. US economic data has been relatively soft, but not to the extent that the Federal Reserve would consider slowing tapering. Chinese economic data was pretty much in line with expectations with no upside surprises. Behind the scenes, the People's Bank of China has been limiting access to credit for certain market segments. However, the recent softness in indicators suggests the Chinese government may be poised to take steps to bolster the economy.

Technical Notes

Turning to the chart, we see the April Gold contract breaking through resistance near the 1350 region. Prices may now be set to test resistance at the 1420 level. Prices are trading well above the major moving averages at this time. It is interesting to note the extreme divergence between the price of Gold and both the RSI and Momentum indicators. The RSI divergence suggests that prices may be set to reverse. This, however, is not a timing indicator, so traders may wish to look for indications of a reversal on the daily chart or other oscillators.

Rob Kurzatkowski, Senior Commodity Analyst


March 18, 2014

Bond Traders Waiting on Tapering, Rate Outlook

Tuesday, March 18, 2014

The Ukrainian/Russian standoff has offered the Bond market a reprieve from selling pressure. Some traders have headed for higher ground, exiting more risky instruments in favor of defensive ones while they wait for the situation to sort itself out. The EU and US have imposed sanctions on Russia after the Crimean referendum paving the way for a Russian annexation of the region. The US and EU view the vote "illegal." Economic data has been very choppy of late, which has made it difficult for Bond traders to gauge the present state of economy.

Fundamentals

The power struggle over the Crimean region has certainly given the Bond market a boost, however, the upside for the Bond market may be limited. The FOMC releases its interest rate decision tomorrow, which will also include information about the central bank's plan for curbing asset purchases. The Fed is expected to taper down to $55 billion of asset purchases per month and provide future guidance with regard to interest rate increases. This could sour traders on the Bond market in the near-term. The People's Bank of China has decided to expand the trading range of the Yuan. There is also expected to be a push for more investment in urbanization, indicating banks may once again start lending to construction firms. This seems to have wet traders' appetite for risk once again, which could have a negative impact on the Bond market.

Technical Notes

Turning to the chart, we see the June Bond contract forming a gravestone doji during Friday's session followed up by a moderately sized down candle. This suggests prices may continue down in the near-term. The Bonds had confirmed a double top at the beginning of the month, suggesting prices may come down to test sub-130 levels. Yesterday's prices action puts the June contract back below the 200 day moving average, marking the second time in as many weeks the market failed to hold a move above the average.

Rob Kurzatkowski, Senior Commodity Analyst


March 19, 2014

Corn Prices Hold Steady as Traders Shrug-off Crimean Succession Vote

Wednesday, March 19, 2014

Concerns of a potential slowing of grain exports from the Black Sea region have been seen in the price reaction of old-crop/new-crop Corn spreads. The May 2014 vs. December 2014 Corn spread has rallied over 25 cents since February, with the May contract trading at a premium to the December futures last week. The most recent Commitment of Traders report shows non-commercial traders (large speculators) adding over 50,000 new-net-long positions for the week ending March 11th. Commercial traders were on the other side of this trade as producers were taking advantage of the recent price rally to unload "old crop Corn" prior to the USDA prospective plantings report due out at the end of March.

Fundamentals

This past weekend's referendum regarding the succession of the Ukrainian region of Crimea was met with shrugs by Corn traders as Ukrainian grain shipments have been unaffected so far. Ukraine loaded 700,000 metric tons of Corn for export last week, with few signs that grain shipments are starting to slow. Ukraine is a major global grain exporter and is currently ranked 3rd in Corn shipments. Speculators have been somewhat aggressive buyers of Corn recently, mainly on the potential that grain shipments from the Black Sea region could be affected by current political instability in Ukraine. This supply uncertainty combined with short-covering buying allowed May Corn to briefly trade above $5 per bushel earlier this month. This was the highest price paid for lead month Corn futures since August of last year and has turned short-term momentum positive for Corn prices. Old-crop Corn futures also received some support from the March USDA supply/demand report which raised projected Corn exports by 25 million bushels and lowered old-crop carryover estimates by the same amount. Grain traders should expect choppy trading activity the next several sessions as market participants begin to position themselves for the release of the USDA prospective plantings report. Trading activity following the release of this report has been historically volatile, with limit price moves not uncommon. Average estimates are for between 92 and 93 million acres of Corn to be planted in the U.S. this season, with some bullish traders looking for a smaller number closer to 91 million acres. Given the recent run-up in prices from recent lows, it may take a sub 90 million acre number from the USDA to get Corn traders aggressively bullish going into the spring planting season.

Technical Notes

Looking at the daily chart for December Corn, we notice what appears to be a rounded bottom formation. If true, this could be a sign that a major low has been put in place. In the short-term we note that prices have formed a consolidation pattern as recent market moves have prices sandwiched between the 20 and 200-day moving averages. Volume has fallen during the formation of the consolidation pattern which is fairly normal for this technical formation. The 14-day RSI has moved below overbought levels but remains fairly strong with a current reading of 59.11. Support is seen at 471.25, with resistance seen at 493.75.

Mike Zarembski, Senior Commodity Analyst


March 20, 2014

Hog Prices Continue to Move Higher

Thursday, March 20, 2014

Lean Hogs have rallied to record levels on fears that a deadly pig virus could wreak havoc on the supply of hogs. The exact toll of the virus is yet to be known. Next week's quarterly USDA hogs and pigs report may offer traders some insight as to the scale of the damage the disease has done. The report is slated to be released on Friday, March 28th at 2:00 pm central time, which is after the market close. Until the report is released, volatility may remain high, as traders will be working on speculation and guesstimates.

Fundamentals

The Procine Epidemic Diarrhea virus has killed roughly 6 % of the Hog population, according to private estimates. Prices have moved higher in anticipation that this number could be bigger. If the deadly virus only affected 6 or less % of the Hog population, the market could find itself vulnerable to selling off. Smithfield Foods, Inc, the world's largest processor of pork suspended Hog slaughter at one of its North Carolina plants due to PEDv. The Lean Hogs market finds itself overbought, both technically and fundamentally. In addition to RSI readings in the 90's, the Commitment of Traders report indicates that speculative net long positions have reached 98,252 contracts, which is a record net long position. This could make the market extremely vulnerable to selling pressure, as traders could rush to take profits. The cash market for Hogs remains very strong, as processors are paying hefty premiums to get pigs to slaughter, fearing that a larger outbreak could disrupt supplies.

Technical Notes

Turning to the chart, we see the April Lean Hogs contract making a parabolic move higher. More often than not, parabolic moves are followed by violent sell-offs, which could simply be a correction or bona fide reversal. The chart does not yet give an indication of a reversal, so traders may be monitoring the chart and oscillators for signs that the market direction could shift. It is of interest to note that the 14-day RSI indicator has peaked on March 4th and the indicator has been moving sideways to lower since. Prices, on the other hand, have continued to move violently higher, only notching two negative sessions since the RSI had peaked. This divergence may be offering a hint that a reversal could be on the horizon.

Rob Kurzatkowski, Senior Commodity Analyst


March 21, 2014

Fed Expected to Raise Rates......Possibly in 2015?

Friday, March 21, 2014

For those traders looking for a way to control a position based on any potential changes in short-term interest rates due to a shift in the Federal Reserve's monetary policy, the CME Group offers trading in the 30-Day Fed Funds futures. This contract is designed to show the current market outlook for the average daily Fed Funds effective rate each month going out 3 years into the future. Market participants, according to Fed Fund futures prices on Thursday, were calculating a 61% chance of a 0.25 interest rate hike following the June 17th 2015 FOMC meeting. This was the earliest time frame where the potential probability of a rate hike was over 50%.

Fundamentals

Financial futures traders have waited all month for the release of the statement following the conclusion of the March FOMC meeting this past Wednesday to gauge the temperament of Fed officials as to the extent of further tapering of Bond purchases, as well as a look into a possible start date when short-term interest rates will be raised. As expected, the Fed announced that its Bond purchasing program will be decreased by $10 billion per month to $55 billion. It is believed that the Fed will continue to slowly lower the amount of Bond purchases throughout the year, with a possible end date in the 4th quarter of 2014. What really peaked traders' interest was in the projections from FOMC voting members relating to where interest rates will be in the next several years. Although the statement was clear that the Fed would keep short-term rates at below "normal" levels for an extended period, even if employment and inflation levels rise, a majority of Fed officials saw the Fed Funds rate at or below 1% by the end of 2015, and 12 of 16 saw the Fed Funds rate at 2% or above by the end of 2016. This was viewed by analysts as a more "hawkish" stance on interest rates by the Fed and sparked an upward revision by traders on the timing of any short-term interest rate increase. Fed Fund futures are now forecasting the likelihood of a 0.25 rate increase towards the end of the 2nd quarter of 2015, with a 0.94% likelihood by the end of 2015. Fed officials continued to blame sluggish economic activity so far in the first quarter of the year on harsh weather conditions this winter, but the expectation is still for GDP growth to range between 2.8 and 3% at the end of 2014. However, should economic growth continue to struggle, without Mother Nature to blame it remains to be seen if the Fed will be willing to adjust their projection for interest rates or even resume Bond purchases if necessary now that the "taper" is gaining momentum.

Technical Notes

This morning we are going to take a look at the term structure chart for Fed Fund futures. Notice the rate of decline begins to steepen starting with the February 2015 futures contract, where the probability of a 0.25% rate hike is near 25%. Looking out 12 months from this date, we note the market pricing-in 2 or 3 additional 0.25 rate hikes by the end of the 1st quarter of 2016. However, should economic data continue to show the U.S. economy struggling to gain positive momentum, we could see traders begin to postpone their expectations relating to when the Fed will finally raise rates, which could produce a flattening of the Fed Funds rate curve.

Mike Zarembski, Senior Commodity Analyst

March 24, 2014

Are Coffee Bulls Switching to Decafe?

Monday, March 24, 2014

Large speculators added nearly 4,000 contracts to existing net-long positions last week according to the most recent Commitment of Traders report. This is a bit surprising given that the period being reported corresponded to the start of the recent price correction. Commercial traders added to their short positions, as prices above $2 per pound apparently were enough for producers to add to their short hedges.

Fundamentals

The recent bull move for Arabica Coffee futures was "good till the last drop", as prices nearly doubled the past 4 months, as hot and dry weather conditions harmed Brazilian Coffee production this season. However, with front-month May Coffee trading well above $2 per pound last week, commercial buyers were hesitant to chase prices higher, which pulled support from the market just as private estimates began to revise upward their estimates for the size of this year's harvest. The upshot of all this activity was a severe price correction, with prices falling over 14% for the week. This was the largest 1-week loss for Coffee prices in nearly 15 years and may have signaled the end to the recent bull move. Rain has finally reached some of the parched Coffee growing areas in Brazil the past several days, and weather forecasts are calling for additional moisture in the coming days. Although some traders believe that the rains may have come too late to boost production this season, it was enough to shake weak longs out of the market. In addition, there has been talk that the Brazilian crop may end up above 50 million bags, despite the drought, which if true would help to elevate potentially tight supplies. Signs of a potential near-term top for Coffee prices may spur producers to release supplies into the market, especially in Vietnam, where Coffee growers were holding supplies off the market in hopes of realizing higher prices. With Coffee's notorious reputation for volatile price movements, it may be too early to rule out further price advances, especially until we get a clearer picture as to the actual size of the Brazilian Coffee harvest.

Technical Notes

Looking at the daily chart for May Coffee, we notice how quickly prices have corrected from recent highs, as the "gravity effect" has once again taken its toll following a steep upward price move. The current sell-off has taken prices back towards the 38.2% Fibonacci retracement level calculated from the November 2013 lows to the March 12th highs. Trading volume has not been as heavy as expected on the recent correction, which may be a sign that large speculators have not yet liquidated their long positions in any major way. After a move to extremely overbought levels earlier in the month, the 14-day RSI has slipped below 50, with a current reading of 44.08. 156.65 is seen as the next support level for May Coffee, with resistance found at 190.00.

Mike Zarembski, Senior Commodity Analyst


March 25, 2014

Gold Back to Tracking the Economy?

Tuesday, March 25, 2014

Gold futures have fallen in recent sessions, as trade reflects more of a correlation with economic activity rather than trading on uncertainty. Weaker economic data in China as well as weakness in NASDAQ stocks set a negative tone for trading yesterday. It will be interesting to see if Gold resumes trading lockstep with economic activity instead of fear-based trading. The Group of Seven will not be joining the G8 meeting in Sochi, instead opting to meet in Brussels in June. The EU and US are weighing additional sanctions to discourage Russia from making incursions beyond Crimea, which could revive the defensive demand for Gold.

Fundamentals

Chinese manufacturing data showed negative growth for the third consecutive month, suggesting that physical demand for the metal could be weaker than previously expected. While this could be seen as a negative sign for Gold, the weakness in manufacturing may spur the People's Bank of China to move forward with a fresh round of stimulus. NASDAQ stocks took a hit after biotech stocks sank. The high-flying sector took a roughly 4.7% hit. If biotechs continue to sag, the broad market may be a bit softer, which could lessen Gold's near-term appeal. Statements from Fed Chairwoman Janet Yellen about the US employment situation set a negative near-term slant on Gold. However, the Fed also plans to remove its employment rate targeting.

Technical Notes

Turning to the chart, we see the April Gold futures contract forming a reversal last Monday. Preceding the reversal, we see the RSI was diverging from prices. The recent sell-off has resulted in the RSI going from overbought to near oversold levels. Prices are approaching the 50-day moving average. Failure to stay above the average could be seen as negative. Prices are also approaching the 1289.00 and 1270.00 support levels. 1270 could be seen as significant, as prices could test the 1200.00 level on the downside.

Rob Kurzatkowski, Senior Commodity Analyst


March 26, 2014

Cocoa Prices Consolidate as Bullish Momentum Wanes

Wednesday, March 26, 2014

One potential wild card for Cocoa production this coming year is the formation "El Nino". This weather phenomenon produces changes in atmospheric pressure and contributes to rising water temperatures in the tropical regions of the Eastern Pacific Ocean. These changes can significantly alter weather patterns for large parts of the globe. In the past, particularly strong El Nino events have caused hot and dry conditions in the Cocoa growing regions of Africa, which if were to occur this year, could sharply curtail production. However, weather forecasters are still uncertain as to the potential intensity of any El Nino this year, but it does appear that the probability is increasing of an appearance of El Nino in the coming months.

Fundamentals

Commodity bull markets need a continual dose of bullish news to keep upward momentum intact. This is especially true for markets that have been trending higher for some time. The current price action in Cocoa futures is a perfect example of a bull market in need of a dose of fresh bullish news. After trading at its highest level since the summer of 2011, lead-month May Cocoa prices have stalled after fresh selling emerged once prices crossed above the psychologically important $3000 per ton level. Weather forecasts from the important Cocoa production areas of West Africa have taken a bearish tone as it has rained in the Ivory Coast, which is the world's leading Cocoa producing nation. Recent rainfall should help mid-crop production which should allow for the mid-crop harvest to surpass last year's 370,000 ton production total. With prices nearing $3000 per ton, there have been some concerns raised by analysts that Cocoa demand could be hurt by current high prices. Some evidence of lower commercial demand may be appearing at exchange approved warehouses where Cocoa inventories have risen sharply of late and currently stand at their highest levels in nearly 8-months. Although both large and small speculators combined are currently holding a rather large net-long position in Cocoa futures, we should note that some long-liquidation selling was noted in the most recent Commitment of Traders report which may confirm that weak longs are starting to exit the Cocoa market for the lack of further bullish news.

Technical Notes

Looking at the daily chart for May Cocoa, we notice that prices have moved into a consolidation pattern the past several weeks, with only a brief "bull trap" taking prices outside of its recent $110 per ton price range. We do note what appears to be the formation of a bearish divergence in the 14-day RSI as new highs were not made on this momentum indicator during the price move to multi-month highs. Resistance is seen at the March 17th high of 3039, with support found at the January 29th low of 2874.

Mike Zarembski, Senior Commodity Analyst


March 28, 2014

Lean Hog Bulls in Charge Ahead of USDA Report

Friday, March 28, 2014

Large speculators continue to add to existing long positions according to the Commitment of Traders (COT) report. For the week ending March 18th, non-commercial traders held a net-long position of 107,440 contracts. This is an extremely large net-position for Lean Hogs, which appears to signal that large trend following traders are still anticipating further upside price potential despite prices that are at or near all-time highs. Commercial traders are mainly on the other side of the trade, which is not surprising given the current profitability margins of both producers and meat packers given current prices being paid for cash Hogs as well as wholesale pork. Small speculators appear to be playing the role of top-pickers in Lean Hogs, as the relatively small net-short position seen in the COT report suggests.

Fundamentals

Following a much needed price correction earlier this week, Lean Hog futures prices have resumed their bullish trend, as traders square their positions ahead of the Quarterly Hogs and Pigs report due out this afternoon. Analysts and traders expect a significant decline in the size of the Hog Herd as of March 1st, with average estimates of a 5% plus decline from last year. Hogs kept for marketing are expected to show an even bigger decline on the order of a 6% drop from year ago totals. Strong Hog producer profit margins should allow the number of Hogs kept for Breeding near last year's totals, with average estimates calling for a modest 0.5% decline. The devastating effect of the PED virus may be fully realized in late summer when the potential for very tight hog supplies could cause slaughter rates to decline sharply heading into the Labor Day Holiday. While 2014 should see retail pork prices near or at record levels due to tight supplies, the outlook for 2015 is a bit more favorable for the consumer as the U.S. Hog herd begins to recover.

Technical Notes

Looking at the daily chart for June Lean Hogs, we notice the parabolic price move, as prices moved quickly from just over 105.000 to nearly 134.000 in about 4 weeks time. Prices have since corrected somewhat, but a limit-up move the trading session prior to the USDA Quarterly Hogs and Pigs Report shows that bearish traders are heading to the exits in what is anticipated to be a bullish report. We note that the recent price correction was halted by an unsuccessful test of the 20-day moving average, which should put this indicator on the radar of short-term technical traders. The 14-day RSI has finally moved below extreme overbought readings seen last week but remains at a very strong 69.21 as of Thursday's close. Contract highs at 133.425 remains the next resistance level for the June futures, with support seen at the March 26th low of 123.000.

Mike Zarembski, Senior Commodity Analyst


March 31, 2014

Grain Prices Mixed Ahead of USDA Reports

Monday, March 31, 2014

Grain traders may have had a restless night's sleep over the weekend in anticipation of the release of a key government report. We will have the first "official" forecast of expected grain plantings by the USDA released in the Prospective Planting Report. Planted acreage for Soybeans is expected to be around 81 million acres vs. 76.5 million acres last season. For Corn, traders expect acreage to decline this year with an average forecast of 92.5 million acres to be planted vs. 95.4 million acres last year. Total wheat acreage is expected to be little changed from last year's 56.15 million acres planted.

Fundamentals

The "official" start to the 2014 grain production season begins today as the USDA releases its outlook for grain plantings this year. The "Prospective Plantings" reports as it is known in the trade will provide the first glimpse on the amount of acreage producers will dedicate to crops such as Corn, Soybeans, Spring Wheat, and Cotton. Historically, there have been large price moves following the release of the USDA plantings data, with limit price moves in either direction not unusual. This potential for heightened price volatility causes many traders to scale back on their positions in the days prior to the release of the report. Many traders also turn to the futures options market for hedging purposes, as well as to establish positions that may benefit from changes in market volatility levels. In addition to an estimate of prospective plantings, the USDA will also release its estimates for U.S. Grain Stocks as of March 1st. While not as "exciting" as the plantings figures, the grain stocks figures are also widely watch by traders can trigger significant price moves, especially for old-crop months, if the USDA totals differ significantly from pre-report estimates. Soybean inventories as of March 1st are expected to be a total of 990 million bushels vs. 998 million bushels last year. Corn inventories are expected near 7.1 billion bushels, which would be over 30% above U.S. inventory totals last year. Wheat stocks are expected to total 1.04 billion bushels, down nearly 200 million bushels from this time last year.

Technical Notes

Today we are going to take a quick look at both the new-crop November Soybean chart as well as the new-crop December Corn chart. We first notice a similar price pattern the past several months that has now cumulated in a consolidation pattern just prior to the USDA plantings report. Current prices have the new-crop Soybean vs. Corn ratio at 2.43 to 1. This is fairly neutral ratio that does not favor Soybeans or Corn for marginal acreage. Support for November Soybeans is seen at 1147.25, with resistance found at 1198.00. For December Corn, support is found at 471.25, with resistance seen at 493.75.

Mike Zarembski, Senior Commodity Analyst