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June 2016 Archives

June 1, 2016

Cotton Prices Rally but is a Hard Fall Coming?

Wednesday, June 1, 2016

Both large and small speculative accounts have been adding to their net-long positions the past week, despite relatively mixed views on the supply and demand picture. According to the most recent Commitment of Traders report, non-commercial and non-reportable traders added 4,695 new net-long positions during the reporting period ending May 24. This brings the overall net-long position of speculators to 46,600 contracts. Commercial traders have been net-sellers on the recent price rally, taking the other side of the speculative trade.

Fundamentals

Cotton futures have joined the recent rally in many commodity prices, with the lead month July futures trading near the upper boundary of the recent trading range. However, a look at the current market fundamentals may put into question whether the rally is sustainable. When discussing the Cotton market, one must always look towards China, which is the largest producer and consumer of the fiber. Traders likely will be paying close attention to the Chinese government's auction of the nation's strategic Cotton reserves. So far it has been estimated that China has sold about 2 million bales from its reserves, but still controls nearly half of the global supplies. In addition, many analysts believe that China will curtail their Cotton imports this year, which could cause U.S. Cotton inventories to increase. The USDA is currently forecasting this coming season's ending stocks at approximately 4.7 million bales. However, this assumes that U.S. Cotton production and yields will fall below recent averages and U.S Cotton exports will surpass this past season's and move above 10 million bales. With Chinese imports expected to fall and many areas in the so called "Cotton Belt", including Texas, seeing good moisture levels early in the season, it is quite possible that the USDA may have to revise its U.S. production numbers upward as the season progresses and revise its U.S. export numbers lower, unless we see additional buying emerge from other major textile producing nations in Southeast Asia to overcome reduced Chinese buying.


Technical Notes

Looking at the daily chart for July Cotton, we notice prices trading near 1-month highs, as the market has been in a general uptrend since recent lows were made back in late February. Prices are above both the 20- and 200-day moving averages, and the 14-day RSI is rather strong, with a current reading of 60.17. Trading volume has started to trend lower the past few weeks, and we will need to see prices successfully breakout above resistance at 64.74, preferably on above-average trading volume, in order to draw additional buying from trend-following trading systems, in order to add additional support to the recent uptrend. The May 13 low of 60.25 remains chart support for the July contract. Chart resistance remains at the aforementioned April 26 high of 64.75.

Mike Zarembski, Senior Commodity Analyst

June 3, 2016

It's All About the Details

Friday, June 3, 2016

It appears the private sector created more jobs that anticipated in May, as the monthly jobs report from payroll provider ADP showed 173,000 jobs created last month. This was higher than the average analyst forecast for a gain of 165,000 jobs. In addition, ADP revised higher its April jobs total by 10,000 to 166,000 jobs created. For those looking at the ADP totals to help gauge what the "official" government estimate will be, we should note that the ADP totals did not include the month-long strike by workers at Verizon which will be factored in the non-farm payrolls estimate to be released this morning.

Fundamentals

It's the first Friday of the month, so many traders and analysts may be awakening extra early for the release of the U.S. Bureau of Labor Statistics Non-farm Payrolls report for the month of May. Some traders are looking for around 155,000 jobs being created, vs.160,000 jobs reported in April. However, some analysts are looking for a lower figure, as a strike by over 35,000 workers at Verizon occurred during the period when data was gathered for the May report. While a lower "headline" figure may be discarded as a onetime event, there are still several other items in the report that will be scrutinized for clues to the strength in the labor market. Average workweek (34.5 hours expected) and average hourly earnings (+0.2%) are two such figures being watched for signs if wage inflation is accelerating or remaining stable. These two figures could play a key role as to when or if the Federal Reserve decides to raise interest rates. Currently, market participants using Fed Fund futures are pricing in only a 19% probability of a Fed rate hike at the next FOMC meeting scheduled to conclude on June 15. However, the probability rises to 59% for an increase at the July meeting. So while the Jobs report will certainly be a factor in the Fed's determination for interest rates, some traders believe that a bit more time as well as additional data may be needed before the Fed is willing to commit to a rate hike in the next several weeks.


Technical Notes

Looking at the weekly continuation chart for 10-year Note futures, we notice prices making a series of higher lows and lower highs as prices continue to consolidate. Prices are sandwiched between the 20- and 200-day moving averages, and the 14-day RSI has become neutral, with a current reading of 49.54. Support is found at the recent low of 129-09.5 made back on May 31, with resistance seen at the May 6 high of 131-06.5.

Mike Zarembski, Senior Commodity Analyst

June 6, 2016

A Tale of Two Numbers

Monday, June 6, 2016

Friday's release of non-farm payrolls for May showed two very different numbers. 38,000 jobs were created in May, which is far below the estimates of 160,000 - 170,000. However, the unemployment rate came in at a very healthy 4.7%. These figures also differed greatly from the ADP private sector jobs report, which showed an increase of 173,000 jobs for May.

Fundamentals

When interpreting the payroll jobs number, one thing traders should be cautious of is that these numbers are often revised substantially. In September of 2011, the Bureau of Labor Statistics stunned traders by releasing a report that showed job growth for August 2011 was zero. In the next two subsequent months, however, that figure was revised upward. The first revision was to 57,000 jobs created, and then that was revised to 104,000 jobs created. Quite a difference from zero jobs! The divergence between the low number of jobs created and the sharp drop in the unemployment rate also should be taken into consideration. The unemployment rate and number of jobs created are from two different surveys.

Technical Notes

US 30-year bond prices jumped Friday on the unemployment news, blasting right through the previous resistance level of 167-0. A previous resistance level often becomes a support level, so traders will likely keep an eye on this number. Bond prices have been quite choppy as of the past 3 months, as each economic data release has Fed watchers reacting quickly. However, the overall trend is very slightly bullish, as the 20-day Simple Moving Average (SMA) is just slightly above the 50-day SMA. 14-day Relative Strength Index (RSI) is also mildly bullish at 57.29.

Dale Jennings, Commodity Analyst

June 7, 2016

European Showers Bring a Wheat Rally

Tuesday, June 7, 2016

Wheat prices have been driven higher by weather conditions in western Europe, but how high can the grain go? Many believe the upside potential for the market could be severely limited by the oversupply in the US and other countries. The US is bursting at the seams with Wheat supply. The US Dollar Index has fallen over recent sessions, which has helped commodity prices.

Fundamentals

Heavy rains across western Europe have placed crops at severe risk in some places. France has seen flood conditions in the northern plains, which is home to some of the country's largest grain belts. Some traders are concerned that France's yields and crop quality may be diminished. The elevated moisture also exposes crops to possible dampness-related plant infections in some areas. In the US, farmers face a different challenge, as grain surpluses have created storage issues for many farmers. Last year's excess Wheat, Corn and Soybeans are eating up silo space, making it difficult for farmers to find a home for grain. In Kansas, for example, inventory levels were 29% larger than last year, even before the harvest. Leftover grain is using up 52% of the state's storage capacity, compared with 41% a year earlier. It is important to note Kansas is the largest grain producing state in the US.

Technical Notes

Turning to the chart, we see the July Wheat contract trading back through the 500 level. Prices are coming up to near-term resistance at the 512.25 level, which could be a near-term sticking point for Wheat. If prices are able to advance beyond this level, prices could test more stout resistance around the 526.25 level. Failure to do so, however, could result in more range-bound trading.

Rob Kurzatkowski, Senior Commodity Analyst


June 8, 2016

Is Hard Red Winter Wheat Rally for Real?

Wednesday, June 8, 2016

Wheat futures account for the largest net-short position in the grain complex among large speculators according to the most recent Commitment of Traders (COT) report. During the reporting period ending May 31, non-commercial traders were holding a combined net-short position in Chicago, Kansas City and Minneapolis Wheat totaling 112,517 contracts. This position was prior to the 40-plus cent rally we have seen since June 1, and if the recent rally was nothing more than short-covering, we should see a sharp decline in the net-short position on the next COT report. Commercials have been on the other side of the large speculative trade in Wheat, while the small speculator generally has been absent from the market, currently holding a small net-long position in Chicago Wheat while being net-short in both Kansas City and Minneapolis varieties.

Fundamentals

Grain futures have posted strong gains so far in June, including Wheat, which has been lagging the performance seen in both Corn and Soybeans. So far, much of the price rally for Wheat appears to be tied to short-covering buying by large speculative accounts which have been overall net-short of both Chicago and Kansas City Wheat for months. In fact, looking at the fundamentals for Wheat, it is hard to find much in the way of bullish news for the commodity. Private forecasters are starting to raise their estimates for U.S. Winter Wheat production, as weather forecasts are calling for near ideal conditions for the major Wheat growing area of the Midwest which, if accurate, will help to boost crop conditions which are already running well ahead of the 10-year average for this time of year. On the demand side, a global Wheat glut is hampering U.S. Wheat export sales, especially for old-crop Wheat, which may fall short of USDA sales forecast for the marketing year. In addition, the USDA is forecasting new-crop Wheat ending stocks at over 1 billion bushels, which would be the highest carryover in nearly 30 years. With the main Winter Wheat harvest set to begin shortly, U.S. wheat producers may look to sell Wheat futures into the recent rally, especially as liquidity remains ample while commodity funds rush to cover short positions. However, this hedge pressure could be the straw that finally breaks the back of the recent up-move, barring any major production issues in the U.S., Europe or Black Sea region in the coming weeks.

Technical Notes

Looking at the daily chart for Kansas City Wheat futures, we notice that the market has lagged the upward momentum seen in the Chicago futures that were covered in Tuesday's Xpresso. Prices remain well below the recent high and now major chart resistance at 509.25. While the July contract is trading above the 20-day moving average (MA), it remains below the longer-term 200-day MA. However, the 14-day RSI is strong, with a current reading of 63.17 and we are seeing trading volume increase during the recent price rally. Chart support is seen at the major low of 441.25.

Mike Zarembski, Senior Commodity Analyst

June 9, 2016

Oil Gets Some Help from China

Thursday, June 9, 2016

Crude Oil futures are softer overnight after coasting to 2016 highs in yesterday's session. Tensions in the Niger Delta continues to interrupt the flow of production in the country, which has been a price support in recent sessions. The militant group Niger Delta Avengers has vowed to completely shut down the country's Oil production. Better Chinese demand has been also added to optimism for Oil traders. However, is the Crude Oil market starting to get a bit top heavy for investors' tastes?

Fundamentals

While Nigerian militants have failed to completely shutter the country's Oil industry, attacks have severely impacted production. Nigerian output has fallen to around 1.8 million barrels per day, according to the Nigerian National Petroleum Corporation's monthly report. This is the lowest output in around 12 months. Many fear that the report is vastly overstating production and believe the true figure to be closer to 1 million barrels per day. China imported 32.24 million metric tons of crude oil in May, equivalent to 7.6 million barrels a day, preliminary data from the General Administration of Customs showed Wednesday. This was actually down slightly from April, but up 39% year over year. China has been making an effort to bolster its strategic reserves, which is adding to demand from private refineries. While fundamentals favor the bulls in the near-term, the wildcard is the Federal Reserve and its impact on the US Dollar. If the Fed goes with a July rate hike, it could certainly put a damper on the Oil market. The Oil market has seen a sustained rally without a significant pullback, so the market could be ripe for some profit taking.

Technical Notes

Turning to the chart, we see the July Crude Oil contract continuing to progress without much of a pause. The Crude Oil contract's ascent on the chart has steepened in recent weeks could be seen as a potential red flag that the market could be vulnerable to a reversal. It is interesting to note that the RSI is moving a bit lower, even as prices have moved higher. This could be seen as possible hint at a reversal.

Rob Kurzatkowski, Senior Commodity Analyst


June 10, 2016

Coffee Market Heating Up!

Friday, June 10, 2016

Small speculators have the upper hand in the Coffee market of late, as Large Specs were in long liquidation mode just prior to the recent price rally. According to the most recent Commitment of Traders report, non-commercial traders were net-long only 86 contracts during the reporting period ending May 31. This was a reduction of over 10,000 contracts and occurred just prior to the nearly 25-cent price rally. Non-reportable traders, meanwhile, were adding to their existing long positions, adding an additional 1,700 new net long positions to bring their total net long position to just over 7,300 contracts. Commercial traders were buying back short positions, covering over 8.500 net short contracts, which reduced the overall net-short position to just over 7,400 contracts.

Fundamentals

While here in Chicago we are looking at temperatures in the 90's heading into the weekend as the beginning of summer approaches, in the Southern Hemisphere Coffee traders are starting to build in a risk premium in Coffee futures prices, as weather forecasters have issued a frost warning for parts of the Brazilian Coffee growing region. There already have been reports from Parana state of some minor frost damage, although the overall effects should be minimized, as only about 5% of the Brazilian Coffee production comes from Parana. However, should below-freezing temperatures head further north into Minas Gerais, then the potential for more meaningful damage could occur. In addition to the recent weather concerns for the Brazilian Arabica crop, a major bank has cut its forecast for global Coffee production for the 2016-17 season by about 1.4 million bags to 152.6 million bags. If accurate, the Coffee market could be in a deficit by over 2 million bags this season. In just the past 5 business days, the front-month July futures have rallied nearly 25 cents per pound with weather concerns, a stronger Brazilian Real and short-covering buying all noted as catalysts for the price run-up. However, it appears that on Thursday some hedge selling pressure finally emerged, as prices reached the 145.00 price level, which has capped the rally for the time being. We may need to see additional reports of frost damage or further dryness concerns for the Robusta crops in Southeast Asia to generate enough bullish fundamental news to spark further upside momentum for Coffee prices.

Technical Notes

Looking at the daily chart for July Coffee futures, we notice the steep price rally the past several sessions, with prices moving past the previous major resistance level at 144.15 before commercial selling pressure capped the rally on Thursday as prices settled well off of the day's highs. Prices are now well above both the 20- and 200-day moving averages, and the 14-day RSI is strong but has moved back below overbought levels with a current reading of 63.05. We have to look back at the August 2015 high of 149.60 to find the next resistance level for the July futures, with support seen at the May 27 low at 120.80.

Michael Zarembski, Senior Commodity Analyst


June 13, 2016

If Leaving Me is Easy

Monday, June 13, 2016

The countdown is on to the UK referendum on remaining in the European Union. The referendum is just ten days away on June 23. All the leaders of the major UK political parties support remaining in the European Union, but polling has shown a tight election.

Fundamentals

One recent outlier poll, however, shows a stunning 10-point lead for the Leave campaign. The uncertainty surrounding the campaign has caused the Pound Sterling to drop in recent trading. Many major economic organizations such as the IMF, the British Treasury, and the International Monetary Fund have warned about the consequences of leaving the EU. These forecasts include the possibility of recession, rising prices, a rise in unemployment, and a weaker Pound Sterling. The Leave campaign dismisses these claims as fear mongering. Markets don't like uncertainty, and the implied volatility of the Pound Sterling/US Dollar has increased to 28.15%, almost approaching the 2008 financial crises level of near 29%.

Technical Notes

Turning to the 3-month continuation chart, we see several bearish signs. The Pound Sterling is now trading below both the 20- and 50-day Simple Moving Averages (SMA). While the 20-day SMA is still above the 50-day SMA, the slope of the 20-day SMA is turning downward. 14-day Relative Strength Index is a mildly bearish 40.9253.

Dale Jennings, Commodity Analyst


June 14, 2016

Euro Holding Ahead of Brexit

Tuesday, June 14, 2016

With so much focus on the UK's Brexit vote, many questions surround how the Euro would act if the UK were to leave the European Union. Obliviously, Britain is not part of the currency union, so there would not be a rebalancing of currency. Nevertheless, the country is a major economic power and leaving would be a bad precedent for EU. It would serve as a sort of case study for other nations that would consider exiting in the future. The upcoming vote has had a somewhat negative impact on prices, as traders attempt to limit their Euro exposure, but there has not been a large sell-off to this point.

Fundamentals

Being that Britain is not part of the currency union, the downside potential for the Euro can be seen as somewhat limited. Some experts are expecting support near the 1.0800 area to be tested if "leave" wins the vote. The same experts are hypothesizing that the Euro could test the 1.1700-1.1800 level with a "stay" vote. Even in the event of a "leave" vote, the Euro could fare better than many had previously predicted. The British Pound could find itself under pressure, which may trigger some defensive buying in the Euro. The ECB recently raised their GDP outlook for the Eurozone, which could be seen as positive. Inflation, or rather lack thereof, could force the ECB's hand and keep policy fast and loose.

Technical Notes

Turning to the chart, we see the June Euro currency trading around the middle of its trading range. Prices have been centered around the 1.1250 level, with 1.0800 and 1.1500 serving as near-term support and resistance, respectively. Traders may want to keep an eye out for movement outside of this trading range, which could be considered a breakout. Presently, the oscillators are giving neutral readings.

Rob Kurzatkowski, Senior Commodity Analyst

June 15, 2016

Are Producers Caught in Sugar Bull Run?

Wednesday, June 15, 2016

While Sugar futures appear to be in the midst of a price rally based on market technicals, there are still some fundamental factors that are also favoring the bull camp. One major international bank has raised its estimate for the global Sugar deficit to 8.5 million metric tons for the 2015-16 season. In addition, average analyst forecasts are calling for a 5.8 million metric ton deficit for the 2016-17 season as well. Much of the deficit was blamed on lower than expected Sugar production out of Asia at the same time that Sugar demand has risen. It now appears that Brazil will need to see a sharp rise in production this coming season to help prevent the market deficit from rising as we move into 2017.

Fundamentals

Sugar futures have been in a bullish phase for most of 2016, with the lead month July futures posting gains of nearly 5 cents per pound since the start of the year. Among the noted reasons for the price gains have been tighter global supplies, a weak Brazilian Real and a general move by speculators back into commodity markets following what appears to be a major low now in place for Crude Oil. While all of these factors can be attributed to the bullish interest in Sugar, it is starting to appear that market technicals may be the biggest reason behind the trajectory of the price move. First, we can look at the overall positions of the two biggest participants in the Sugar market, that being large speculative commodity funds and Sugar producers. A look at the most recent Commitment of Traders report shows that non-commercial traders, who are normally large speculative accounts as well as commodity funds, have increased their overall net long position by over 12,000 contracts during the reporting period ending June 7. This increases the overall net-position to over 309,000 contracts, which while a very large position, is still shy of extreme levels which would likely occur should we move to over 400,000 contracts. On the other side of the large specs are the commercial participants who added over 17,000 new net short positions during the same timeframe. The commercial net-short position is now over 365,000 contracts, and while producers are selling to try to "lock-in" favorable prices during the rally, we must remember that there is a cost to hedging and some producers may look to lift their hedges, especially if they believe prices could head higher, which would add further fuel to the bullish trend. While several analysts are starting to believe that Sugar prices have moved too far too fast and a potentially significant price correction could occur, we may need to see further producer short-covering to occur first. Traders should prepare, however, for the potential of increasing price volatility in not only the Sugar market, but in other markets that have made some big moves the past several months like Coffee, Soybeans and Milk futures.

Technical Notes

Taking a look at the daily chart for July Sugar, we notice prices are currently in a moderate sell-off following an unsuccessful test of the 20-cent price level. The recent correction is not surprising given how overbought the market had become, with RSI readings recently peaking at over 88 during the last few trading sessions. Remember that readings in the RSI over 70 are generally viewed by technical analysts that a market is becoming overbought. However, we note that trading volume has started to wane a bit the past few sessions as prices have been correcting, so it appears that for now bullish traders generally are holding their ground so far. The recent high at 19.82 made on June 9 looks to be the next resistance level for the July contract, although we may not see further buying by trend-following traders until we see a close above 20 cents. Support is seen at the June 3 low of 18.11. Today is the last trading day for the July Sugar options, so we should start to see traders begin to roll positions forward to the October contract during the next several trading sessions.

Mike Zarembski, Senior Commodity Analyst

June 16, 2016

Fed Rate Indecision Drives Gold

Thursday, June 16, 2016

The Federal Reserve kept rates unchanged at its June meeting, paving the way for higher Gold prices in the near-term. The yellow metal has closed higher for six consecutive sessions and is up strongly this morning. The median of FOMC members still expects two more rate hikes by year's end. However, the number of FOMC participants expecting only one more rate increase in 2016 has gone from one in March to six in June. In addition to the FOMC rate decision and policy statement, Gold prices have recently gotten support from the looming Brexit vote. Traders have been nervous about the vote, and there has been defensive buying of precious metals as a defensive play.

Fundamentals

Traders have become doubtful that the Fed will raise rates more than once more before the end of 2016, citing weaker economic data. Data has not been abysmal, but has also done little to instill confidence. US industrial production fell 0.4% in May after a decent April. This marks the seventh decline in the indicator over the past nine months. Consumers have become more skeptical over the condition of the economy, as the Michigan Consumer Sentiment Index fell to 94.3, down from 94.7. The current conditions gauge rose to 111.7 from 109.9, but the expectations component fell to 83.2 from 84.9, which is 5.2% lower than the same period last year. This could hold the Fed back from raising interest rates as aggressively as many members would like, which may negatively impact the US Dollar. This also bolsters Gold's appeal as a defensive instrument. The upcoming Brexit vote could have a large impact on near-term Gold prices, especially if UK voters favor leaving the EU. Some analysts have speculated that the price of Gold could test the $1,400 level with a "leave" vote. Regardless of the outcome, the mere presence of the vote will increase volatility in the near-term.

Technical Notes

Turing to the chart, we see the August Gold contract testing the $1,300 level yesterday. Prices have jumped through this level in early trading and could be signaling a breakout, should prices hold. The next area of resistance comes in around the 1340.00 level. The RSI is around 90 as of this writing, suggesting the market is overbought. It is also of interest to note that the momentum indicator has been relatively flat over recent sessions, despite the market rallying.

Rob Kurzatkowski, Senior Commodity Analyst


June 17, 2016

Milk Prices "Moove" Higher

Friday, June 16, 2016

In addition to the rally seen in Milk prices of late, other major members of the daily futures complex, Butter and Cheese futures, also have seen rather dramatic price moves. July Cheese futures (CSC1) are displaying a very similar chart pattern to the July Milk futures (DA). For Cheese, we saw prices accelerate to the upside once resistance at 1.474 failed to hold. The July Butter chart actually looks stronger than both the Milk and Cheese charts, as the 2016 lows were made back in March, as opposed to May for Milk and Cheese futures. July Butter prices also have held near the 2016 highs, and it appears that 245.00 is now the next major upside resistance level.

Fundamentals

For those traders that believe that commodity markets trade in predicable cycles, the Class lll Milk futures market should be on their radar screens. Following a nearly 5-year bullish trend that began in early 2009 and ended in late 2014, Milk prices moved up nearly threefold to peak at an astounding $24.60 per cwt. in December 2014. Since that time, Milk prices have fallen nearly in half to $12.71 earlier this year. However, the bearish trend appears to have ended in early June, as prices have rallied sharply since the start of June, with the lead month July futures rallying nearly $3 cwt. the past two weeks. So what is behind the recent up move? Analysts who follow the daily markets cite higher feed prices, especially Corn prices, as a potential catalyst on top of the recent USDA World Agriculture Stock Estimate (WASDE) report in which the USDA raised its forecast for Milk prices by an average of 30 cents per cwt. However, not all of the fundamentals for Milk are bullish, as we still have relatively large dairy product inventories globally, and the outlook for U.S. dairy exports remains lackluster. In addition, the USDA still expects U.S. Milk production to increase going into 2017, despite what could be difficult profit margins for producers if feed prices continue to outpace recent gains in Milk prices.

Technical Notes

Looking at the daily chart for July Class lll Milk futures, we notice that prices moved sharply higher once the market moved above chart resistance seen at the recent high of 13.51. We then saw another strong up move once the April 20 high of 14.63 was successfully challenged. This market action is leading me to believe that trend-following traders are now actively involved in the Milk futures market, as we have seen increased trading volume as previous resistance levels have been removed. Prices are now starting to hold above the 200-day moving average, which could be an indication that the bear market trend from the December 2014 high has ended. Momentum-wise, the 14-day RSI very briefly moved above overbought levels but has since moderated to a still strong reading of 65.75. The "spike" high at 16.00 made back on June 14 is now seen as the next major resistance level for the July futures, with chart support seen at the previous major resistance level of 14.63.

Michael Zarembski, Senior Commodity Analyst

June 20, 2016

Uncertain Week Makes the Equity Markets Weak

Monday, June 20, 2016

Last week was a volatile week in the equity markets, as traders digested news from the Fed meeting of June 14-15 as well as polls showing support is increasing for the United Kingdom to leave the European Union. Also, the primary election season in the United States wrapped up last week, and now both major political parties have moved into general election mode.

Fundamentals

The United Kingdom was shocked when MP Jo Cox was assassinated on June 16. As a result of this tragedy, both sides of the EU referendum campaign have suspended their campaigning. This will add even more uncertainty to the election, which is fast approaching on June 23. In addition, the Federal Reserve indicated that they took the potential Brexit vote into account when they left US interest rates unchanged on June 15. The Fed also mentioned the disappointing jobs report for May and reduced their expectations for GDP down from 2.2% to 2%. As of now, however, two rate hikes are still forecast for 2016.

Technical Notes

Turning to the 3-month continuation chart, we see some very choppy trading which is providing mixed signals. 14-day Relative Strength Index (RSI) is quite bearish at 33.64, very near the oversold level of 30. However, the 20-day Simple Moving Average (SMA) is still above the 50-day SMA, and the curve of the 20-day SMA hasn't yet turned downward. Although trading has recently been below the 20-day SMA, the September E-mini contract is still trading well above the support level of 2039. Resistance is found at 2118, not far from the all-time high.

Dale Jennings, Commodity Analyst

June 22, 2016

Bulls Still "Hog Wild" on Pork Prices

Wednesday, June 22, 2016

Large speculative accounts have gone on a buying spree in the Lean Hog futures market of late, with the most recent Commitment of Traders report showing non-commercial traders adding nearly 12,000 new net-long positions during the reporting period ending June 14. This brings the total net-long position to over 84,000 contracts. Commercial and small speculative traders are taking on the large specs and have added 9,351 and 2,640 new net-short positions respectively during this timeframe.

Fundamentals

This summer's barbecue may be a bit more costly, as U.S. pork prices continue to move higher. Strong Chinese pork imports are fueling the current bull market in Lean Hog futures, as meat packers have been steadily purchasing market-ready Hogs to meet demand. This week U.S. pork production was up nearly 2% from last year and analysts expect near record pork production in the third quarter. The potential for strong U.S. pork exports appears to be the main factor driving the August Lean Hog futures to a much larger premium over the 2-day CME Lean Hog Index when compared to the past several years. While it appears that the August futures have become a bit overbought and a technical "correction" appears likely, it may be difficult for prices to fall sharply as long as the U.S. Dollar does not "spike" higher and Chinese pork demand does not dissipate.

Technical Notes

Looking at the daily chart for August Lean Hog futures, we notice what appears to be a "bull flag" technical formation, as prices have started to pull back from recent highs. However, the recent price correction is occurring on lower trading volume, which added credence to the bull flag formation. Prices remain well above both the 20- and 200-day moving averages, and the 14-day RSI recently has moved back below overbought readings. The June 7 low at 85.750 looks to be the next major support level for the August futures, with resistance seen at the recent high of 90.425 made back on June 15.

Michael Zarembski, Senior Commodity Analyst


June 23, 2016

Dollar Sinks Ahead of Brexit Decision

Thursday, June 23, 2016

The US Dollar Index has grinded lower over recent sessions, as British voters decide whether or not to stay in the EU. Currency traders have been bracing for the possibility of a British exit for months, and the vote is almost upon us. The currency markets have priced-in most scenarios, so the vote may have a limited impact on trading. The only scenario which could trigger extreme volatility would be a decisive victory for those wanting to stay.

Fundamentals

The US Dollar has had a bearish bias in recent weeks, fueled by speculation that the Fed will only raise rates once before the end of the year. There are fewer Fed officials expecting two rate hikes by year's end, which is what the Central Bank is suggesting will happen. Economic growth in the US has been extremely lackluster, which has failed to instill confidence in the economy. German manufacturing saw an uptick in June. The German manufacturing Purchasing Managers' Index (PMI) rose to 54.4 in June from 52.1 last month. The services PMI saw a decline to 53.2 from 55.2 in May. Germany, however, is the long bright spot in the EU. France's manufacturing PMI declined to 47.9 in June, versus 48.4 in May, while the country's services PMI regressed to 49.9 from 51.6 in May. The composite EU PMI, which includes both manufacturing and services, fell to 52.8 in June, versus 53.1 in May. A vote to stay in the EU could result in some selling pressure in the US Dollar, as this would keep the status quo and not rock the boat. Late polls, conducted yesterday, suggest the Remain camp will prevail. The YouGov poll for The Times (London) showed that 51% of voters supported the campaign to remain in the EU, with 49% supporting Brexit. The ComRes poll for the Daily Mail newspaper and ITV television showed the Remain campaign had a 48% to 42% lead over the Leave camp.

Technical Notes

Turning to the chart, we see the cash Dollar Index (DXY) falling in recent sessions after failing to test late May relative highs. The Dollar Index has been drifting toward the near-term low of 92.50. Failure to hold the 92.50 level could be seen as a significant setback for the index. In order to regain some near-term momentum, the Dollar Index may need to push through 96.50 on the upside.

Rob Kurzatkowski, Senior Commodity Analyst

June 24, 2016

Natural Gas Prices Rally Despite Ample Supplies

Friday, June 24, 2016

Small speculators appear to have the upper hand in the Natural Gas futures market of late, adding to existing long positions as the market rallies on the back of short-covering by large speculators. According to the most recent Commitment of traders report, non-reportable traders added a whopping 11,262 new net-long positions during the reporting period ending on June 14. This brings the small speculative position to a net-long 39,233. The non-commercials were still covering part of the overall net-short position, cutting the size by 2,400 contracts last week. Commercial market participants used the recent rally to reduce the overall net-long position by 13,661 contracts to stand at a net-long 112,947 contracts.

Fundamentals

Natural Gas prices are in the midst of an early summer rally, as weather forecasts calling for above average temperatures this summer in a large swath of the U.S. has triggered short-covering buying by large speculators. While one does not normally associate a weather related price rally for Natural Gas with mid-to late June, we should note that power generation is among the largest uses for the fuel, and any increase in cooling demand can cut into the amount of Gas placed in storage during the summer months. The August futures have rallied over 80 cents since the March lows, although the upward price acceleration really did not begin until the end of May. Ironically, although weekly Gas storage builds have been generally running below average recently, the total amount of Gas in storage remains ample, with just over 3.10 trillion cubic feet of Gas currently in storage, which is 28% above the 5-year average for this time of year. In addition, a weekly report by Baker Hughes has the Natural Gas rig count increasing by 3 to 85 as of June 10, with Oil rigs increasing by the same amount. This could spell increasing supplies of both Gas and Oil in the coming weeks, which could help to offset any increases in demand. The Energy Information Administration (EIA) weekly Gas storage report showed 62 billion cubic feet (bcf) of Gas was placed in storage last week, which was just above analysts' estimates for a 58 bcf build. For comparison, 77 bcf of Gas was placed in storage this time last year.

Technical Notes

Looking at the daily chart for August Natural Gas, we notice prices trading above both the 20- and 200-day moving averages (MA), and we recently have seen the 20-day MA cross above the 200-day MA, which is generally viewed as a bullish signal. The 14-day RSI has started to retreat from overbought levels above 70 but is still relatively strong, with a current reading of 62.65. The June 16 low at 2.605 is now seen as the next support level for the August contract, with resistance found at the recent high of 2.812.

Mike Zarembski, Senior Commodity Analyst

June 28, 2016

Oil Sells Off on Brexit Fears

Tuesday, June 28, 2016

The risk sell-off after last week's Brexit vote has put the brakes on the Crude Oil rally. Traders are still in risk-off mode, as market observers try to make sense of the long-term implications of the Brexit. The UK's growth rate forecast for 2017 has been slashed to about a 1.4% estimate by most analysts. Goldman Sachs was more aggressive in cutting their outlook, and now only expects 0.2% growth. S&P stripped the UK of its AAA rating, downgrading two notches to AA, while Fitch downgraded from AA+ to AA. Many market observers have been focused on the UK; the real risk may lie with the EU.

Fundamentals

The strength over the US Dollar following the Brexit vote has been one of the negative driving forces pushing Crude Oil prices lower. The lower British growth forecasts could result in a lower demand outlook for Oil and other commodities. The Brexit also likely has a negative impact for China by strengthening the Japanese Yen and triggering a sell-off in the Yuan. The future of EU Oil imports is also brought into question, given the risk of other countries following England's lead in exiting the Union. Despite the risks, inventory levels are expected to inch lower over the summer months, which may underpin Oil prices. US production is expected to decrease over the coming months, which may offset decreased UK/EU demand. In Asia, traders may want to keep a close eye on independent Chinese refineries, or honeypot refineries. The large increase in capacity from these refineries has resulted in a huge increase in China's overall refining capacity. This has resulted in a large increase in diesel exports due to domestic storage and trucking capacity not being able to keep up. China's two largest state run refineries, Sinopec and PetroChina, have cut output as a result. China becoming a net exporter of diesel fuel has added to the global oversupply, which may hurt refinery demand of Crude Oil.

Technical Notes

Technical Notes

Turning to the chart, we see the August Crude Oil contract forming what could become a double top formation. If confirmed, the measure of the double top could result in a test of the $40 level. The recent closes below the 20-day moving average ("MA") suggest that a near-term high may be in place. Prices closed below the 50-day MA, but have rebounded in early trading.

Rob Kurzatkowski, Senior Commodity Analyst


June 29, 2016

How Much Did U.S. Grain Producers Really Plant This Year?

Wednesday, June 29, 2016

The following are the average estimates for the USDA Planted Acreage report

Corn: 92.76 million acres vs. 93.601 million acres from the March USDA report
Soybeans: 83.97 million acres vs. 82.236 million acres from the March USDA report
Wheat (all): 49.73 million acres vs. 49.559 million acres from the March USDA report


Fundamentals

Before grain traders pack-up early to start the long Independence Day Holiday weekend, there is still one major point of business to attend to and that is the release of the USDA Planted Acreage and Grain Stock Report on Thursday morning. Traders are looking for a modest decrease in Corn acreage from the March estimate, but an increase of over 1.5 million acres for Soybeans. Much of this acreage switch may be due to the relative price performance of Soybeans compared to Corn, which encouraged those producers on the fence to move towards Soybeans this season. As of the end of June, crop condition ratings are excellent for both Corn and Soybeans as we head into July. However, the National Weather Service (NWS) 8 to14-day forecast has the entire Midwest at above normal temperatures. While the NWS also has above normal precipitation forecasted from the upper Midwest through the Ohio Valley, many traders will definitely be keeping an eye on the weatherman as we move into the heart of summer.

Technical Notes

Technical Notes
Looking at the daily chart for November Soybeans, we note that despite the recent $1-plus price correction, the overall daily chart still appears bullish. Prices are once again testing the 20-day moving average, and a strong move higher, especially if it occurs on higher than average trading volume, could signal that the recent price correction was merely a bull flag formation. The 14-day RSI has corrected from well overbought readings over 80 to a more neutral 53.34 as of this writing. The recent low from 6/24/2016 at 1072.50 should likely now act as chart support for the November futures, with resistance remaining at the contract high of 1186.25 made back on June 13.

Michael Zarembski, Senior Commodity Analyst


June 30, 2016

Gold in Holding Pattern After Hitting Multi-Year Highs

Thursday, June 30, 2016

Gold futures rallied to their highest level in two years this past Friday after the Brexit announcement, but prices have been stagnant over the past several sessions. Gold's value as a defensive instrument has been a driving force behind the price increase this year. The combination of this being the week leading up to a major holiday along with the uncertainty and choppiness of the currency markets likely has resulted in Gold's consolidation this week.

Fundamentals

While fear and economic uncertainty have and may continue to provide support for the Gold market, slow growth may put a ceiling in place for precious metal prices. This could curb investment demand for the metal, as slow growth likely will lead to slow inflation. Aggressive central bank action and possible inaction from the Federal Reserve could be seen as supportive for metal prices. The real question is whether or not physical demand for the metal was able to keep up with the first quarter of this year, which saw a sizable jump in overall demand. However, this was due to investment demand for Gold increasing more than threefold, while technology, jewelry and Central Bank demand decreased by a fairly large amount. The rise in prices and demand was essentially a self-fulfilling prophecy for Gold bulls. It will be interesting to see if the trend continues the next time the World Gold Council releases quarterly data.

Technical Notes

Technical Notes

Turing to the chart, we see the August Gold contract breaking out above resistance around the 1296.50 level. After making an initial surge, prices have traded sideways, resulting in what may be viewed as a flag pattern over the past several sessions. If the pattern is confirmed, prices could test the 1,400 resistance level. On the downside, prices could reverse back lower if the August contract is unable to hold the 1296.50 mark.

Rob Kurzatkowski, Senior Commodity Analyst