Good morning,
DXM0 96.705 +0.048 GCQ0 1704.7 -22.7 ESM0 3134.00 +23.50 CLN0 38.59 +1.18
The equity market appears to have shaken off yesterday’s station break, trading lower, but rallying back up into the close, to post a small down on the day. The employment data thus far on the week is being viewed as a positive, in spite of the mind numbing amounts of unemployed being reported. The data is coming in substantially better than what was feared, providing the impetus for hope. This morning comes the biggie (although yesterday’s jobless claims data provides a more current picture), with Non-Farm Payrolls and the Unemployment Rate for May. NFP is expected to be -7.5m (this has been revised upwards a bit over the past 2 sessions, following better ADP and claims data) versus -20.5m in April. The Unemployment Rate is expected to print 19.1% (also revised lower) from 145.7%. Not only is this putting a bid into equities, but it is putting a great deal of pressure on the fixed income markets, in particular the longer maturity securities. Aside from the monstrous amount of corporate issuance and the increases to US Treasury issuance that has hit (and been absorbed by) the market, fixed income markets are now beginning to price in a recovery. As long rates begin to tick higher, I wouldn’t be surprise to see even more corporate issuance attempting to get loaded into the pipeline, in an effort to borrow money at close to the cheapest levels in history, before it goes away. This same ideology can be applied to anyone involved in the commodity markets, who may have some exposure to interest rates. The current environment may be a good time to lock in these low interest rates for an extended period of time.
Sticking with the interest rate theme, this increase in rates seen in the fixed income markets ahead of today’s data is having an impact on the dollar and gold market. The dollar is bouncing, following being hit the past few sessions with the move up in rates. Gold is getting hit hard as well, following a solid bounce off a double test of the $1700 area. At the moment, prices have held above this level on the overnight drop, but could make a run for a third test on this morning’s data.
Oil prices are bouncing again this morning, as OPEC+ appears to be making progress towards implementing the extension of the additional production cut quotas put in place for May-June to offset the supply/demand imbalance created by the pandemic. The extension is expected to be in effect through July, with some rumblings that it possibly could be stretched to further into the year. The biggest deterrent to this being put in place already has been the topic of compliance, specifically with Iraq and Nigeria not honoring the agreed upon levels for May and June. Thus, yesterday’s virtual meeting, moved up from June 8-10, did not take place. Progress is being made with Iraq, and it is believed a virtual meeting could take place this weekend.
The grain markets have ben showing signs of life recently, and there are a few contributing factors. The weather is a major factor, in the Us and globally. Hot and dry conditions have had a big impact on the crops in the Black Sea and Europe, and now appears to be creating stress for the US wheat. Corn is also quickly getting concerned about the weather as well, with a hot and dry period in the extended forecast, and longer term projections for July appear very hot as well. Keep in mind that the funds are carrying large spec short positions in wheat and corn (record short in corn), and with the fundamental backdrop over the past few months, really felt no pressure with the positioning. It had been thought that it would take a weather market to possibly spook these positions, well it may be approaching. Soybeans have been rallying sharply all week, as China has been a reported large buyer of beans this week. There was talk they were sniffing around yesterday for more, and beans keep moving up. Helping US beans has been the recovery in the Brazilian real, which makes Brazil’s beans more expensive and disincentivizes the local producers from selling. Lastly, there has been a lot of talk about a shifting of sentiment amongst the money managers towards positive for the “ags”. As the economy attempts to come out of being shut down, which helped drive prices down, the thinking is prices can recover. The recently falling dollar also makes US products more competitive in the export arena. Then there is the just mentioned potential weather factor. While this may not be a full fledged bull market, the stage is certainly set for a potentially strong short covering rally.
A couple of quick blurbs on some other commodity markets.
China continues to purchase pork. In flows that began about a year ago, no doubt due to ASF, China has been a strong buyer, with purchases approaching 400k mt a month. China imported 2mmt of pork in 2019, and is already at 1.35mmt this year, a pace that could get them close to 3mmt for 2020.
Base metals, while thought to be destined for a solid move up as economies get going, using China’s increased demand coming out of the pandemic as a gauge. However, there is a large inventory overhang, resulting from economies being locked down for 3 to 4 months, which will need to be worked off. So any rallies may hit some resistance.
Coffee prices came off yesterday, following consecutive days of a rally on dwindling supply concerns. Reports of lower inventories at the exchange warehouse, and a fire at a production plant, helped drive this. In addition, weather in some of the growing countries is proving to be a hindrance to the development of the crops. Weaker commercial demand, as a result of the lockdowns, also weighed on prices. Even with the Brazilian real in a corrective state over the past few sessions, the overall large depreciation of the currency still makes it worthwhile for the producers to attempt to sell.
Technical Moving Averages:
Product 50 day 100 day 200 day
SN0 851.50 878.50 913.50
CN0 326.50 354.50 376.75
WN0 529.00 536.75 529.25
KWN0 476.25 477.25 465.00
MWN0 522.00 534.25 544.00
SMN0 294.0 299.8 306.3
BON0 26.79 28.58 30.23
CLN0 28.54 37.61 46.23
GCQ0 1713.6 1655.2 1588.1
LHQ0 59.115 69.585 78.830
LCQ0 93.725 99.685 105.690
KCN0 110.85 111.30 113.35
CCN0 2430 2385 2396
CTN0 55.40 60.88 63.50
SBN0 11.74 11.44 11.73
JON0 117.05 109.65 109.20
HGN0 233.50 245.05 256.90
HON0 97.84 125.94 156.35
XBN0 87.15 116.82 145.81
NGN0 2.002 2.030 2.194
Thanks,
Mike
Michael Clifford
141 W Jackson Boulevard
Ste 1065
Chicago, IL 60604
Trean Group, LLC
312-604-6404