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January 2015 Archives

January 2, 2015

Will U.S. Treasury Yields Prove Analysts Wrong Again in 2015

Friday, January 2, 2015

Speculators, both large and small, are starting to amass a rather large net-short position in 10-year Treasury Note futures. The most recent Commitment of Traders report shows a combined net-short position by non-commercial and non-reportable traders of 433,399 contracts as of December 23rd. This was an addition of over 23,000 contracts for the reporting period. While the net-short position is not yet at extreme levels, it does reflect the mindset of traders that longer-term interest rates are due to rise as we head into 2015.

Fundamentals

To say that interest rate prediction is an inexact science is a bit of an understatement, as nearly every major analyst on Wall Street that gave a prediction for U.S. Treasury yields for 2014 missed the ultimate direction of rates. Analysts were generally looking for yields on 10-year U.S. Treasury Notes to be in the vicinity 3.40% by the end of 2014. However, as of this writing at 11:30 am Chicago time, the yield on the 10-year note is 2.17%, with a yearly range of 3.034% way back on January 2nd to a low of 1.868% on October 15th.. Now as 2015 rapidly approaches, we are already hearing that analysts are -- you guessed it -- sticking to their beliefs that yields will rise, with an average guesstimate of just over 3.00% by the end of 2015. So why were market pundits so wrong on their interest rate predictions for 2014? Well, the biggest reason was divergence in economic conditions between the U.S. and Europe, where deflation concerns in Europe forced the European Central Bank to expand stimulus measures that, in turn, forced yields for most European bonds to decline, with many now trading at yields below that for U.S. Treasuries. This made U.S. rates more attractive to non-U.S. buyers, despite what are still historically low rates. Now that it appears that the Federal Reserve is prepared to raise interest rates sometime in 2015 and there are signs of improving U.S. economic growth, it appears that the pieces might be coming into place to see longer-term Treasury yields begin to rise from historic lows. However, as 2014 proved, one cannot be certain that outside events will once again postpone the end of the Treasury bull market and have bearish traders once again proclaim "wait until next year!"

Technical Notes

Looking at the weekly continuation chart for 10-year Note futures, we notice that the uptrend line drawn from the 2007 lows has failed to hold, as prices have moved into a consolidation phase. Prices are currently hovering between the 20- and 200-day moving averages, with prices generally holding within a 6-point range for most of 2014. The 14-week RSI is neutral, with a current reading of 53.34. Support is seen at the September 2013 low of 122-07, with resistance found at the October 2014 "spike" high of 130-17.

Mike Zarembski, Senior Commodity Analyst


January 5, 2015

Will 2015 be the Year of the Greenback?

Monday, January 5, 2015

Large speculators are becoming more bullish on the U.S. Dollar Index according to the most recent Commitment of Traders report. Non-commercial traders are currently net-long 47,447 contracts for the reporting period ending December 23rd. However, during that same reporting period, the net-long position increased by a whopping 15,888 contracts. This appears to show that trend-following traders are adding to their positions, as the market moved to highs not seen in nearly 10 years.

Fundamentals

Traders who were long the U.S. Dollar (USD) had a terrific New Year, as the greenback soared to 4 ½ year highs vs. the Euro (EUR) and, in fact, posted gains against a group of 16 major currencies at the end of 2014. The USD rally continued at the start of 2015, especially against the EUR following comments by European Central Bank President Mario Draghi that the risk of deflation continues for the Eurozone, so steps may need to be taken including additional stimulus measures such as quantitative easing in an attempt to stimulate growth. So-called commodity currencies, such as the Australian and New Zealand Dollars, were also showing weakness to start the year, following a weaker than expected Chinese purchasing managers' index. With indications that the Federal Reserve is prepared to raise interest rates, possibly by late second quarter of this year, it appears that the U.S. may pull ahead of most, if not all, of the major Central Banks in finally pulling back on the very accommodative monetary policies that have been in place since the end of 2008. This could help to keep Dollar bulls in a good mood throughout the year.

Technical Notes

Taking a longer-term view of the performance for the U.S. Dollar, today we will look at the weekly continuation chart for the U.S. Dollar Index futures (DX). Here we see what could be viewed as a possible head-and-shoulders bottom formation, with the neckline beginning at the highs made back in 2004. The recent rally in the DX has propelled prices toward the "neckline" near the 92.50 price level, which should be a major testing point for the current bull move. Resistance is seen at the November 2004 high of 92.53, with support found at the October 2014 low of 84.52.

Mike Zarembski, Senior Commodity Analyst


January 6, 2015

Dr. Copper Hits Multi-Year Lows

Tuesday, January 6, 2015

Front-month Copper futures hit their lowest price since early June 2010, extending the industrial metal's bear market. Rising inventory levels, concerns over Chinese growth, and the idea that Greece could leave the Euro currency but remain in the European Union have all weighed on Copper prices. Greece leaving the currency could have a devastating impact on the Euro. Some observers surmise that a Greek exit could create an environment that ultimately results in the failure of the currency. The speculation has resulted in a lower Euro and higher US Dollar to begin the year, which may threaten commodity prices.

Fundamentals

China's lackluster growth has been a major concern among Copper bulls. There has been an absence of Chinese buying by manufacturers, which has resulted in supply surpluses. LME inventories are at their highest level since May, after climbing 0.8% to 178,425 tons. In Shanghai, Copper inventories climbed for the fourth straight week to 111,915, which is the highest stockpile level since April. The ISM index in the US showed the slowest factory activity in 6 months, while the Chinese Purchasing Managers' Index fell to 18-month lows. One bright spot on the manufacturing front comes from Germany, where the Markit/BME Germany Manufacturing Purchasing Managers' Index rose to 51.2 in December, up from November's 49.5 reading. Not only has the index moved back into expansion territory, but manufacturing companies have hired additional workers to meet demand. Whether this is a blip on the radar or the start of further expansion remains to be seen. German progress on the manufacturing front could also be undermined if Greece decides to leave the Euro currency unit or the EU altogether. The US Dollar could continue to gain traction versus the Euro and other currencies. The slump in Oil prices has negatively impacted the Canadian Dollar, while metal prices have hurt the Aussie Dollar. Further gains in the greenback could prevent a rebound in Copper prices.

Technical Notes

Turing to the continuous Copper chart, we see the March contract approaching 2.7660, the relative low from June 7, 2010. If the March contract is unable to hold here, prices could test support near the 2.4200 level. There is not a lot of chart support for Copper after prices broke the pivotal 3.000 level on the downside. The lack of support may prevent a rebound in Copper, as fresh longs could become skittish at any sign of adversity. The RSI indicator is currently at oversold levels, which may be seen as supportive for Copper near-term.

Rob Kurzatkowski, Senior Commodity Analyst

January 7, 2015

Natural Gas Sinks to 2-Year Lows Despite Recent Arctic Blast

Wednesday, January 7, 2015

Record U.S. Natural Gas production has some forecasters calling for a "Gas glut" in 2015, with concerns that rapid increases in production could even surpass the amount of storage capacity by the start of the 4th quarter. If accurate, we may need to see Gas futures prices fall even further to help spur increased demand, particularly for power generation where Natural Gas competes with Coal for fuel to run power stations.

Fundamentals

Winter finally arrived in most parts of the U.S., bringing with it many below normal temperatures as we begin 2015. However, for Natural Gas bulls, the benefits of a price rally due to the cold weather outbreak were short-lived as prices fell towards 2-year lows. It appears that the recent cold snap may be short-lived, as the National Weather Service Climate Prediction Center's 8- to 14-day outlook is forecasting above- to well-above average temperatures for the western half of the U.S,. with a below average chance of precipitation for the northern portions of the lower 48 states. It also appears that traders are becoming more focused on the outlook for record Natural Gas production in 2015 and using any rally attempts due to the prospects of cold weather as a chance to add to a growing speculative net-short position. Gas storage levels, which have been running below last year's totals for most of 2014, are now at or near parity due to a benign start to winter in December. Current adequate supplies of Gas in storage are adding additional pressure to Natural Gas prices, which may be difficult to halt barring a return of the "polar vortex" from last winter.

Technical Notes

Looking at the weekly continuation chart for Natural Gas, we notice that prices have once again returned back into the price range seen prior to 2000, where Gas prices tended to hover between 1.000 and 4.500 per 10,000 MMBTU. One could say that the rise in prices the past decade was mainly the result of a overall bullish phase for commodity prices that peaked in the summer of 2008, and we are starting to see a return to more "normal" price ranges in general for commodities, with Natural Gas being no exception. The next major support level is found at the August 2009 low of 2.409, with resistance not seen until last winter's "spike" high of 6.400.

Mike Zarembski, Senior Commodity Analyst


January 8, 2015

Where Does the Slide End?

Thursday, January 8, 2015

The slide in Crude Oil prices had carried over into the new year, sending the price of the front month contract below the $50 a barrel level. Oil may receive some outside support from stronger equity markets if the current rally has some legs. However, the recurring theme for the Oil market is the oversupply situation. The steep decline in prices has not hindered shale production to this point. If it was Saudi Arabia's intention to torpedo prices to kill off US shale output, their plan has drastically backfired to this point.

Fundamentals

The oversupply in Crude Oil could take months or years to correct itself, according to comments from Suhail bin Mohammed al-Mazrouei , the Oil Minister for the United Arab Emirates. He stated the UAE would not panic and that they have dealt with price fluctuations in the past. Mr. al-Mazrouei also confirmed that the recent price decline will not affect the Emirates' plan to increase production to 3.5 million barrels a day by 2017. This is speaking out of both sides of his mouth, as he also urged non-OPEC producers to curb their plans to increase output. In the US, the rise in shale production has led to Oil exports reaching record levels. US exports were 502,000 barrels a day in November, an increase of 34% over October. This shattered the previous record of 455,000 barrels a day in March 1957. U.S. stockpiles of crude oil, refined fuels and other types of petroleum rose to 1.149 billion barrels in the week ended Jan. 2, according to the EIA. That is the highest level ever in weekly data dating back to 1990. Fundamentally, there is no shortage of Oil traders can point to that would drive the market.

Technical Notes

Turning to the chart, we see the February Crude Oil contract continuing to move lower. Prices have broken the $50 technical and psychological support level. This can be seen as being a significant setback for Oil prices. Additional support may be found near 48.50 and 41.50.

Rob Kurzatkowski, Senior Commodity Analyst

January 9, 2015

Gold Rises on Superficial Employment Data

Friday, January 9, 2015

December non-farm payrolls were stronger than expected, with the US adding 252,000 jobs in the month of November. The unemployment rate fell to 5.6% from 5.8% in November. The November payroll numbers also received an upward revision of 32,000 jobs to 353,000. On the surface, these numbers show an improving labor market, however, average hourly earnings fell to - 0.2%, indicating that many of the jobs added were low-wage jobs. The drop-off in hourly earnings could be seen as a positive for Gold traders, as the Federal Reserve may put off raising interest rates.

Fundamentals

The recurring theme for metal traders has been the idea that governments from China to Europe plan on injecting further stimulus to spur economic growth. Fed Chairwoman Janet Yellen said the bank was unlikely to raise interest rates until April, at the earliest. Traders are betting that the rate hike will not come until well after April. While metal prices are up for the second consecutive month, many retail investors are not buying into the rebound just yet. Holdings in the SPDR Gold Trust ETF are at their lowest level in more than 6 years. The slide in Crude Oil prices has certainly not helped Gold's rebound, and margin calls in energies could be negatively affecting the precious metals market. Weaker industrial activity also has done little to help demand for Gold and Silver from manufacturing. The lack of physical demand for Gold may not give investors confidence that this rally has real legs behind it.

Technical Notes

Turning to the chart, we see the February Gold contract steadily moving higher since early November. The Feb contract failed the most recent test of the 1225 level, which is near-term resistance. Prices are also testing the 100-day moving average. If prices are able to break through the average, Gold may gain a bit of momentum.

Rob Kurzatkowski, Senior Commodity Analyst

January 12, 2015

When "Safe Haven" Assets are Really Not!

Monday, January 12 , 2015

Both large and small speculators are currently net-short Japanese Yen futures according to the Commitment of Traders report. For the reporting period ending December 30, the combined non-commercial and non-reportable net short position totaled 136,402 contracts. It appears it may be more of short-covering buying than new long positions that has propelled the recent rally in the Yen.

Fundamentals

The recent slide in oil prices and concerns about early elections in Greece are two of the reasons some analysts are attributing for the recent rally in the Japanese Yen, U.S. Treasuries and Gold on the guise that investors are moving into so called "safe haven" assets. Well, one has to wonder how safe holding Gold was since mid-2011 and while the risk of a U.S. default on its government debt is microscopic, 10-year Note yields under 2% sure seems to leave little long-term upside potential. However, the one that really should surprise investors is the Japanese Yen as a "safe-haven" investment. First off, the Japanese economy has been in an economic funk for nearly 30 years now and despite massive buying of Japanese Government Debt by the Bank of Japan (BOJ), the economy barely grew at a snail's pace. So while the risk of deflation looms, Japanese legislatures go and raise the nation's consumption tax! Not a good way to get ones citizens to spend is it? The nation's debt to GDP ratio is approaching 240%! Although to be fair, the amount actually held by the public is probably closer to 130% of GDP. This massive amount of debt forces nearly 1/6 of tax revenue to pay for the interest on the debt, which takes away funds needed for other government programs. With Japanese 10-year Bond yields currently near 0.28% what would the rate of tax revenues have to be to meet interest rates should yields rise even to 1% or nearly 4 times the current yield? With a demographic profile that has over 40% of the population age 50 or older; one has to wonder where the economic gains will come from to help support the nation's currency in the future.

Technical Notes

Looking at the weekly continuation chart for Japanese Yen futures, we notice prices beginning to form a consolidation pattern following the steep selloff that sent the value of the Yen vs. the Dollar lower by approximately 1600 pips. Prices remain well below both the 20 and 200-week moving averages which is keeping Yen bears in charge. We do note that the 14-week RSI has recovered from it's recent lows, but remain in oversold territory with a current reading of 27.87. The recent low at 0.8207 remains key support with resistance found at the chart "gap" at 0.8893.

Mike Zarembski, Senior Commodity Analyst


January 13, 2015

Coffee Bull Market Re-heating?

Tuesday, January 13, 2015

Large speculators are beginning to add to their net-long positions in Arabica Coffee futures according to the most recent Commitment of Traders report. For the reporting period ending January 6th, non-commercial traders added over 1,600 new net-long positions to bring their total to 28,067 contracts. Commercial traders appear to be on the other side of the trade, having added over 2,000 new net-short positions during the same time period. Non-reportable traders, which are normally small speculators, are only moderately bullish, with a net-long position totaling 829 contracts.

Fundamentals

Though I prefer my java to be made fresh, it appears that bullish traders are less picky, as dry conditions in Brazil may be the catalyst for a "re-warming" of the Coffee bull market. Since the start of 2015, lead month March Coffee has seen prices rally by nearly 25 cents per pound, as it appears that the severe drought that plagued the Coffee growing regions of Brazil in 2014 may have carried over to this summer. A high pressure system has kept rainfall to a minimum, and recent forecasts are calling for dry conditions to continue into next week. Coffee trees, which are already showing signs of stress from last season's drought, may not be able to withstand another season of dry conditions, which could severely curtail yields if adequate moisture is not received. With 2015 being the "off-year" in the 2-year Arabica production cycle, this season's harvest could struggle to meet even the disappointing totals of 2014. It certainly is possible that Arabica Coffee futures may end up being one of the few commodity markets that produce price gains this year, in what is shaping to be an overall bearish outlook for commodity prices in 2015.

Technical Notes

Looking at the daily chart for March Coffee, we notice a price breakout above the downtrend line that was drawn from the October 2014 highs. This upside price move has also seen prices move above the 20-day moving average for the first time since late November of last year. Bearish traders may counter that the recent up-move could be a "bear-flag" formation; however, we note that trading volume has been increasing on the recent uptrend, which is generally not a characteristic of this technical pattern. The 14-day RSI has moved back into neutral territory, with a current reading of 50.95. The 200-day moving average, currently near the 191.25 price level, looks to be resistance for the March futures, with support found at the January 5th low of 160.10.

Mike Zarembski, Senior Commodity Analyst

January 14, 2015

Calm before the Storm for Soybean Prices?

Wednesday, January 14, 2015

Here are some of the highlights for Soybeans from the USDA January Crop Report:
2014 U.S. Soybean Production 3.969 billion bu. vs. 2013 production 3,358 billion bu.
2014 U.S. Soybean Average Yield 47.8 bu. per acre vs. 2013 Average Yield 44.0 bu per acre
2014-15 U.S. Soybean Stockpiles 410 million bu. vs. 2013-14 Stockpiles 92 million bu.

Fundamentals

There has been little excitement in the Soybean futures market since November, as prices have remained rangebound the past few months. However, Monday's release of the USDA's January Crop report could finally be the catalyst for some market movement in the coming weeks. The biggest surprise for analysts in Monday's report was the size of world Soybean ending stocks, which were estimated at a record 90.78 million tons! This was well over 1 million tons above pre-report estimates and over 20 million tons ahead of the previous record. In addition, it appears that South America will once again produce a bumper Soybean crop this season, which could add pressure to old-crop months when the harvest begins in the coming weeks. With the world apparently awash in Soybeans, one would think that new-crop Soybeans would need to see a sharp price decline to persuade U.S. producers to shift acreage to other crops this spring. However, looking at the November 2015 futures, we see prices hovering just under $10 per bushel, which is a rather lofty price given the global supply of Soybeans. While it appears that traders expect Soybean demand to remain robust, especially from China, it may be difficult for Soybean prices to stage any significant rally in the near-term unless it appears that U.S. Soybean acreage would be curtailed, or if adverse weather significantly affects the South American harvest.

Technical Notes

Looking at the daily chart for March Soybean futures, we notice prices remain in a consolidation phase, as prices have hovered within an approximately $1 per bushel range since November. Prices are currently near the lower end of the recent range, hovering just above 10 dollars per bushel as of this writing. The price sell-off following Monday's USDA report has sent prices below the 20-day moving average, which gives short-term momentum bears the upper hand. The 14-day RSI has tuned lower from more neutral levels, with a current reading of 42.72. Support is seen at the low of the recent consolidation phase at 991.00, with resistance found at the November high of 1089.75.

Mike Zarembski, Senior Commodity Analyst

January 15, 2015

Corn in a Battle for Acreage with Soybeans

Thursday, January 15, 2015

The following are some of the highlights for Corn from USDA January Crop Report:
2014 U.S. Corn Production 14.216 billion bu. vs. 2013 production 13.925 billion bu.
2014 U.S. Corn Average Yield 171.0 bu. per acre vs. 2013 Average Yield 158.8 bu per acre
2014-15 U.S. Corn Stockpiles 1.877 billion bu. vs. 2013-14 Stockpiles 1.236 billion bu.

Fundamentals

Corn futures are apparently not immune from the overall bearish mentality for all thing commodity related that has penetrated the psyche of traders and the financial media of late. We see that clearly in the market reaction the past two sessions that followed a modestly bullish USDA ending stocks figure on Monday. The USDA lowered the 2014-15 U.S. Corn stockpiles estimate to 1.877 billion bushels from the December estimate of 1.998 billion bushels. More importantly the government estimate was below pre-report estimates of traders and analysts of 1.940 billion bushels. The decline in Corn stocks was tied to lower than expected average yields this past season. Even though there is snow on the ground in most of the U.S. Corn belt, this is the time of year when producers contemplate the coming season's crops, including what to plant to hopefully maximize incomes. This becomes an even more important decision now that crop prices are well below record levels seen just a few seasons ago. A current calculation of the new-crop Corn to Soybean ratio shows that the November 2015 Soybean price is approximately 2.40 times that for December 2015 Corn. This ratio is nearly spot-on with the average ratio seen since 1972. However, since 1998 this ratio has averaged closer to 2.20 which could be a sign that producers may tend to lean more towards planting Soybeans than Corn this season. Given what appears to be a record crop for Soybeans from South America, one has to wonder if Corn prices may start to find some support or at least outperform Soybean prices in the coming weeks as Corn may need to bid for acreage this season.

Technical Notes

Looking at the daily chart for new-crop December Corn, we notice after a brief attempt to rally above the 200-day moving average, prices have trended lower and have now fallen below both the 20 and 200-day moving averages, however, both of these long and short term averages are nearing a convergence. The 14-day RSI has turned weak, with a current reading of 37.42. The next support level is seen at the November 5 low of 402.50, with resistance found at the December 29 high of 440.00.

Mike Zarembski, Senior Commodity Analyst


January 16, 2015

SNB's Folly to Contain the Franc Ends with a Bang

Friday, January 16, 2015

Thursday's move by the Swiss National Bank to remove the "cap" at 1.20 on the EUR/CHF brings back memories of another historic action by a Central Bank, the historic "Black Wednesday" in 1992 when the Bank of England (BOE) withdrew from the European Exchange Rate Mechanism (ERM). Here the BOE was attempting to support the value of the British Pound (GBP) despite a low interest rate and high inflationary environment in Great Britain. The BOE had a desire at the time to keep the currency at a rate of no lower than 2.7 German Marks per British Pound. However, not even a massive hike in interest rates could keep speculators from trying to sell the Pound short as the value was "inflated" due to BOE actions to support the currency. Finally on September 16, 1992, the BOE withdrew from the ERM and let the value of the Pound find its equilibrium based on market forces. In the span of just 3 months from September 1992 to December 1992, the value of the Pound vs. the U.S. Dollar fell from around 2.0000 to 1.5000, marking a major top for the GBP that has not been tested since. That is your history lesson for today.

Fundamentals

Currency traders experienced a major surprise on Thursday, courtesy of the Swiss National Bank SNB, as it announced it was ending the cap that kept the Euro/Swiss (EUR/CHF) cross from moving below 1.20 franc per euro. In addition, the SNB also announced it was lowering the interest rate on sight deposits over a certain amount to a negative 0.75% from negative 0.25%. This move appears to have been totally unexpected by traders as earlier this week, SNB Vice President Jean-Pierre Danthine, spoke during an interview on a Swiss network, the cap was a "pillar of the monetary policy". The price movements were historic with the EUR/CHF futures plunging over 2000 ticks at its worst level. Just to put this into perspective, a move of 100 ticks is considered a large price move. The timing of the move is interesting as the SNB acted about 1 week before the European Central Bank's (ECB) expected announcement about a movement towards quantitative easing. Any moves by the ECB to try to stem potential deflation could trigger additional funds being moved to the Swiss Franc which would put even greater pressure on the SNB in trying to hold back the Franc from rising even further. During the 3 years the "cap" was in place, the SNB was buying Euro's and selling Franc's in order to prevent the EUR/CHF cross from moving below 1.20. The Euro's held by the SNB have fallen in value, with potentially billions in losses already being realized on the banks Euro holdings. So it appears that with the potential for a QE for the Eurozone, the SNB has finally cried "uncle" and let the value of the Franc reach its "fair" value based on market forces.

Technical Notes

Looking at the daily continuation chart for the Swiss Franc futures, there really is very little to say and just let the picture tell the story about how the market was caught off-guard by the SNB move. Now that the Swiss Central Bank is allowing the Franc to move based on market forces, one has to look towards the August 2011 high, above 1.4100 as the next major resistance level for the currency. Below this lofty level, we see some chart resistance at the 1.3000 level, which was the most recent major high that was made back in September 2011. Support is very difficult to ascertain given current market volatility, but we can look towards the 200-day moving average which is currently hovering near the 1.0800 price level, as a potential support area being watched by technical traders.

Mike Zarembski, Senior Commodity Analyst


January 21, 2015

Traders Prepare for Volatile Week ahead of ECB Meeting

Wednesday, January 21, 2015

The Central Banks of both Switzerland and Demark took steps last week to attempt to stem any surge in buying of the Franc and Krone respectively, due to a flight out of the Euro ahead of the European Central Bank (ECB) meeting this week. Many analysts and traders expect the ECB to finally announce a plan to purchase sovereign debt of member nations in an attempt prevent a move towards deflation. One currency that may see some additional inflows is the British Pound (GBP). While the Euro/Pound crossrate fell through support at 0.7700 last week, a look at a longer-term chart shows this pair traded below 0.6000 as late as 2001. With interest rates in Great Britain positive, as opposed to rates in Switzerland and Demark, it would not be unsurprising if the GBP may look like an attractive alternative for those wanting to divest away from the Eurocurrency.

Fundamentals

All eyes will be on European Central Bank (ECB) President Mario Draghi this week, as expectations rise that the ECB will announce some sort of bond buying proposal following a meeting of the Governing Council on January 22nd. Analysts currently expect a bond buying package of at least 550 billion Euro to be announced this week. The extent and process for any type of quantitative easing (QE) is key for many analysts in trying to access the potential success of any bond buying program. Among the concerns is how to go about purchasing government debt of a group of nations with such divergent financial situations. How does one evaluate the risk of owning the sovereign debt of Greece vs. that of, let's say, Germany? Will the Euro nations share the risks jointly or will they be parsed out some way where stronger nations will assume more of the risks off of the back of weaker nations in the common currency union? There have been some reports that a QE plan being discussed will involve individual countries' Central Banks whom will be responsible for purchases of their own nations' bonds or be responsible for a large portion of any losses tied to the debt of a particular country. The only thing that seems certain is that traders will want to be cautious this week. Expectations for an increase in volatility appear likely both before and following this week's ECB meeting.

Technical Notes

Let's take a look at the weekly continuation chart for Euro futures, where we first notice that prices are currently in the midst of a downward channel starting at the all-time highs made back in 2008. With front-month Euro futures trading near 1.1550 as of this writing, we note that a test of the lower trendline of the channel would result in additional weakness of over 1000 ticks! The 14-week RSI is well into oversold territory but off recent lows, with a current reading of 19.04. Trading volume has turned higher, but is still well below volumes seen in 2010 and 2011, which could be a sign that additional selling may appear if prices continue to weaken. The next major support level is seen at the September 2003 low of 1.0773, with resistance found at the 200-week moving average, currently near the 1.3400 price level.

Mike Zarembski, Senior Commodity Analyst


January 22, 2015

Shale Production Heading For a Decline

Thursday, January 22, 2015

Crude Oil futures are a bit higher this morning, bolstered by the idea that the ECB will commit to quantitative easing. BHP Billiton and Total, who are sizable players in the shale Oil business, are reported to be decreasing their investment in shale, which was also well received by the bull camp. Prices seem to have stabilized in recent sessions, as neither bulls nor bears have been able to gain the upper hand. Given the large drop in Oil prices since June, bears may be a bit fatigued, while many bulls have been gun-shy after buying failed rallies over the same period.

Fundamentals

BHP Billiton is expected to cut the number of shale Oil rigs it operates by 40% due to the slump in prices. Nonetheless, the Crude Oil market remains oversupplied and will likely remain oversupplied for the foreseeable future. Today's EIA report is expected to show a weekly increase in Crude Oil inventories of 2.5 million barrels. It was somewhat surprising to see Oil trading over a 1.00 higher this morning ahead of the ECB, as quantitative easing in the Eurozone would likely lead to a stronger US Dollar in the near-term. Longer-term, an asset-purchasing plan could stimulate economic activity in Europe and could be positive for Oil. However, this will take time to make an impact on demand.

Technical Notes

Turning to the chart, we see the March Crude Oil contract consolidating between the 45 and 50 levels. Given the preceding downtrend, the bias may be toward a downside breakout from the range. The RSI has recovered from oversold levels, but not by a wide margin. The 20-day moving average has been acting as resistance in recent sessions. The Oil market could gain some momentum if it can take out the average.

Rob Kurzatkowski, Senior Commodity Analyst


January 23, 2015

Canada Joins Monetary Easing Parade

Friday, January 23, 2015

The Bank of Canada's move to lower the country's key benchmark rate caused some adjustments in rates on long-term government debt. The yield on the 10-year Canadian bond fell to a low yield of 1.365% following the rate announcement. Possibly more interesting for traders, is the current yield differential between Canadian and U.S. 10-year rates. Here the U.S 10-year Notes have a positive yield differential of about 0.34% over the Canadian 10-year which could spur further interest from Canadian investors into U.S. Treasuries given not only the positive yield differential, but also the potential benefit of a stronger U.S. Dollar that would allow Canadian holders to potentially receive more Canadian Dollars when they convert proceeds from U.S. Dollars given the current trend in favor of the greenback.

Fundamentals

Global Central Banks continue to surprise market participants, this time it was the Bank of Canada's (BOC) turn, as the bank cut the overnight loan rate by 0.25 percent to 0.75 percent on Wednesday. The interest rate move was unexpected by most traders and may be a signal that the BOC is becoming very concerned about the state of the Canadian economy, especially given the current weakness in commodity prices and in particular Crude Oil. The BOC also lowered its economic growth forecasts for the first half of 2015 to 1.5% annualized rate due to economic headwinds tied to lower energy prices. Canada remains particularly vulnerable to the movement in Oil prices as a large chunk of its economy, and in particular the province of Alberta, is tied to energy production. Any fallout from a cut-back in energy related projects could spell difficulty for Alberta's employment picture, as well as its housing sector, where prices have been elevated due to tight supplies as workers migrated to the tar sands regions of the province to find higher paying energy jobs. Currency traders reacted quickly to the BOC interest rate cut by sending the Canadian Dollar futures down nearly 2- cents, which is a rather large one day move. With the Canadian Dollar now trading at nearly 6-year lows vs. the U.S. Dollar, it may take some time for the "loonie" to fly higher.

Technical Notes

Looking at the weekly continuation chart for Canadian Dollar futures, we notice the really long-term trend is still higher based on the uptrend line drawn from the major lows formed back in early 2002. However, we do note that prices are currently attempting a 61.8% Fibonacci retracement of the bullish move that began with the 2002 lows that cumulated with the historic highs made in 2007. The 14-week RSI has moved to extremely oversold levels, with a current reading of 11.56. The next major support level is found at the 2009 low of 0.7653, with chart resistance seen at the July 2014 high of 0.9399.

Mike Zarembski, Senior Commodity Analyst


January 26, 2015

Enough of QE for the Moment, Let's Talk Sugar

Monday, January 26, 2015

Non-commercial traders have been net-short of Sugar futures of late, but the recent price rally has seen this overall short-position begin to dwindle. The most recent Commitment of Traders report shows non-commercial traders net-short just over 3,800 contracts for the reporting period ending January 13. However, this short position was reduced by over 17,000 contracts during this period as prices rallied sharply from recent lows. Non-commercial traders, which are normally small speculative accounts, also reduced their net-short position by over 2,000 contracts during the same time period.

Fundamentals

I don't know about our readers, but I am ready to move on from all the European QE talk and get back to talking markets and today let's look at a market we have not discussed in some time--Sugar. The Sugar futures market has been in bearish control since early in 2011 when prices reached heights not seen since 1980. Once again the cure for high prices was indeed high prices, as global production increased and demand waned which helped to send prices tumbling from a high of over 36 cents per pound in 2011 to just above 13 cents late last year. Recently there have been signs that the Sugar market may be attempting to form a bottom. First we have the upcoming gasoline and diesel tax hike in Brazil that is set to begin on February1. This move is expected to spur increased demand for cane based Ethanol in Brazil, which is the global leader in Sugarcane production. Additional cane Ethanol production will curtail the supplies of Sugarcane available for use in raw Sugar production, which could help to lessen the expected global production surplus this year. In addition, below average rainfall in the center-south region of Brazil, where the vast majority of the nation's cane crop is grown, have some analysts concerned about production totals this season, which is helping to add an additional bullish factor towards a potential near-term bottom in the market.

Technical Notes

Looking at the weekly continuation chart for Sugar futures, prices attempting to form a near-term bottom after the price-decline to start the year, failed to test the most recent lows made back in September of last year. The most recent up-move has allowed prices to rise above the 20-week moving average, as well as trade above the major down-trend line drawn from the major high made back in 2011. The 14-week RSI has moved to a more neutral reading of 52.43. There is some chart resistance near the 17.00 price level although major resistance is not found until closer to18.00. Support is found at the 2015 low of 14.07, with major chart support found at 13.32.

Mike Zarembski, Senior Commodity Analyst


January 27, 2015

Too Quick to Pick a Bottom?

Tuesday, January 27, 2015

Crude Oil futures rebounded after comments from OPEC suggested that the price of petroleum could increase due to reduced investment. With inventory levels at comfortable levels and the Oil cartel, as well as non-OPEC nations, maintaining production, OPEC can do little to try and prop up the price of Crude other than cheerlead. It is a predicament that can lead to further oversupply issues, as Russia and other non-OPEC nations do not want to curb output in light of their economic hardships. The death of King Abdullah of Saudi Arabia does add a bit of uncertainty to the nation's policy going forward. King Salman has said he will maintain current policy - at least for the time being.

Fundamentals

Given the 58% decline in prices since June, many traders have been anxious to pick a basement level for Crude Oil prices. Climbing inventory levels and reluctance of Oil producing nations to curb their production suggests that it may be foolhardy to pick the bottom. OPEC has been banking on low price levels quashing investment in shale production, as well as other conventional extraction technology. Also, the cartel hopes that an economic recovery will bring the price of Crude Oil up naturally rather than having to cut production, which could inhibit growth and prolong the pain. US production may continue to increase, even as companies reduce their investment in shale Oil. Improved deep sea drilling technology could continue to increase output with existing equipment. Some offshore rigs are producing double what they were just three years ago.

Technical Notes

Turning to the chart, we see the March Crude Oil contract lingering around the 45.00-50.00 level in recent sessions. When the market consolidates like this, the bias tends to lean toward the prior trend, which, in this case, is down. It is interesting to note that the RSI is slightly diverging from prices and the momentum indicator, which could be a sign that the market could turn higher in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

January 28, 2015

Are Bulls Losing their Chocolate Craving?

Wednesday, January 28, 2015

Large speculators have been rather heavily bullish on Cocoa, with the most recent Commitment of Traders report showing the non-commercial positon totaling nearly 65,000 contracts. This sets the stage for some potentially serious long liquidation selling pressure, especially if prices fail to hold above the 200-day moving average, which is currently hovering a mere 100 dollars per ton below current price levels.

Fundamentals

Commodity bulls were counting on the Cocoa market to help supply gains this year, as many analysts were expecting a continuation of the upward price momentum seen in 2014 due to production concerns. However, 2015 is not starting out as many analysts expected, with supplies from the West African growing regions running ahead of expectations and Cocoa grinding data from Asia showing a slowdown in demand. The result has been a sharp decline in prices, with the lead month March contract trading below 2750 for the first time in over a year. Relatively high Cocoa prices appear to have helped curtail demand, as European Cocoa processors crushed over 7% fewer Cocoa beans year over year in the 4th quarter, as processor margins for both Cocoa powder and Cocoa butter were weak. The International Cocoa Organization (ICCO) reported that world Cocoa bean inventories totaled 1.508 million tons at the end of the 2013-14 season, which concluded at the end of September. This was 19,000 tons lower than the previous season. However, there is some uncertainty as to the actual inventory of old-crop Cocoa beans held globally, with some analysts expecting the actual totals to be higher than the ICCO data due to supplies being held in locations, such as Indonesia, that are not included in the ICCO data. The ICCO will publish their update in late February, which should hopefully help clarify whether theCocoa market is actually in a surplus or deficit going into the 2014-15 season.

Technical Notes

Looking at the weekly continuation chart for Cocoa futures, we notice prices have moved below the 20-week moving average (MA,) which may have triggered some recent selling pressure by momentum traders. Cocoa bulls may counter that the recent price decline is nothing more than a bull flag formation, especially if prices continue to hold above the long-term 200-week MA. The 14-week RSI has turned weak, but is currently holding above oversold levels, with a current reading of 35.67. 2625 is seen as support for the lead month futures, with resistance found at 3016.

Mike Zarembski, Senior Commodity Analyst

January 30, 2015

No Love for Wheat as Prices Continue to Retreat

Friday, January 30, 2015

On January 12th, the USDA released its estimate for U.S. Winter Wheat seeding for the 2014-15 season. Approximately 40.5 million acres were planted according to the USDA, which is down 5% from 2014. Hard Red Winter Wheat accounted for 29.5 million acres, which is down 3% from 2014. Soft Red Winter Wheat totaled 7.5 million acres, which is down 12% from last year's totals.

Fundamentals

Wheat futures have been in a price slump since 2012, as prices have moved steadily lower and are starting to approach more "historic" price ranges. Prior to 2007, Wheat prices generally have traded in a price range between 250.00 and 500.00. However, the commodity-wide bull market of 2008 propelled many commodities, including Wheat, to historic highs. Now to start 2015, we are seeing a general commodity-wide bearish trend developing, with a slew of reasons being given including slowing global growth and a strong U.S. Dollar. The rising value of the greenback is hurting U.S. Wheat exports, as it makes U.S. purchases more expensive for non-dollar users. However for Wheat bulls, there may be some light at the end of the bearish tunnel. First, the International Grains Council is expecting global Wheat production to decline by 16.0 million metric tons in 2015, as it expects lower production from both the U.S. and Russia this coming season. Global Wheat consumption is expected to remain steady at 708 million tons, but the expected decrease in production could see the market possibly move towards a deficit by year end. The biggest wildcards in 2015 for Wheat prices will be how both Russia and Ukraine, who are both major grain producers and exporters, are able to supply the export market given the continued military conflict by these Black Sea neighbors.

Technical Notes

Looking at the daily chart for new-crop July Wheat, we notice prices continuing to drift lower after peaking above 660.00 back in December. Prices remain well below both the 20- and 200-day moving averages, and the 14-day RSI has entered oversold territory, with a current reading of 22.88. Old-crop/new-crop spreads continue to favor the bears, as July is trading at a 10-cent premium to the March futures, mainly tied to poor U.S. old-crop exports. Support is found at the September 2015 lows near the 496.00 price level, with resistance found at the January 21st high of 551.25.

Mike Zarembski, Senior Commodity Analyst

January 29, 2015

Dr. Copper in Need of Some Medicine?

Thursday, January 29, 2015

Copper futures have fallen to multi-year lows amid economic uncertainty and the idea that the Federal Reserve will tighten by mid-year. The Fed changed the language it used for the labor market. The central bank is usually very careful when it comes to wording any public communications, so traders took notice when the Fed used the word "strong" instead of "solid" in its assessment of the labor market. Some traders viewed this as a sign that interest rates will tighten this year, most likely by mid-year.

Fundamentals

Copper bulls have had very little to cheer about, as inventory levels continue to climb. The LME has seen 13 straight inventory builds, as there is not enough demand to stimulate load-outs. Chinese buyers did purchase 200,000 tons of the industrial metal for 2015, giving bulls a ray of hope. However, overall demand could remain lackluster for the red metal. With the Federal Reserve tightening interest rates, there could be very tame demand for new residential construction. In China, profits by industrial firms increased by 3.3% in 2014. This is the lowest industrial profits have been since data began being compiled in 2000. Furthermore, profits by industrial companies contracted in the month of December, marking the third consecutive monthly decline. This is significant, as China is the world's largest consumer of base metals. The Fed leaning toward tightening by mid-year could further propel the US Dollar, which could keep demand soft. It is interesting to note the very large non-commercial short position in Copper, which may be seen as potentially bullish for Copper in the near-term. In all, the spec net-short position is 49,893 contracts. Funds account for 36,761 contracts of that short position, which suggests profit- taking and short-covering could potentially lift prices. Fundamentals remain firmly in favor of the bulls, but it may be prudent for shorts to monitor changes in the Commitment of Traders report.

Technical Notes

Turning to the chart, we see the March Copper contract continuing to plummet, reaching the lowest levels since July 2009. There is very little chart support in this area. The market could find some support at the 2/5/2007 relative low at 2.4165. The RSI is currently showing oversold levels, which could be supportive in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst