Good morning,
DXM9 97.46 +0.138 GCM9 1299.6 +3.3 ESM9 2826.25 -13.00 CLM9 61.11 -0.67
As the dust settled surrounding the announced tariffs from both the US and China, the market was able to move back into a “risk on” mode yesterday. This was aided, mid-day, by a Twitter blast from President Trump, assuring a deal with China would get done. For equities, that meant a bounce, for gold, a correction lower. Oil continues to observe strong swings in both directions, yet never venturing very far from the $61 to $62 range (CLM9). The commodities saw short covering bounces yesterday, coming off fresh lows made in the trade on Monday. The funds have been carrying large short positions, and booking some profits off the fresh lows appeared to be in order.
The grain markets observed substantial bounces yesterday, believed to be short covering, as these markets printed multiple years up to over a decade low for prices in the trade on Monday. Interestingly, while funds were seen as big buyers, with estimates for corn purchases approximately 25k, soybeans over 10k, wheat, soymeal and bean oil all around 5k, futures open interest only declined just over 5k in corn and soybeans, and less elsewhere. With the funds carrying very large short positions across the “ags” complex, this would suggest there is potential for a lot more short covering to take place. This, in part, is what has prices resuming the upward trajectory in the overnight trade. In the overnight trade, corn (CN9) has taken out the technical resistance area of 3.71 ¼ (50 day moving average; which held for resistance in yesterday’s trade) and has its sight set on the 100 day (3.81 ½ ). Wheat (WN9), which has been in its own corrective bounce over the past few sessions, is testing its 50 day moving average (4.54 ¾ ), which has held (so far, 6 AM CDT). These levels are significant as a violation through the levels can trigger some additional short covering buy, or go long signals from the algo community. Soybeans, which saw prices trade at over 10 year lows on Monday, led the charge higher yesterday (biggest price increase since last July), and are continuing to do so today. Soybeans are thought to receive the largest burden from the trade war with China. This bounce of over 50 cents from the lows would suggest the market, coupled with equities attempting to bounce and the dollar index staying firm, thinks a trade deal will eventually be put in place. The story (excuse) for the big short covering trade is Monday afternoon’s crop progress reports, showing the substantial lag in planting for corn and soybeans. It’s not as if the market wasn’t expecting to see a big lag in the planting figures, it is more a function of the extended forecast carrying more rain events with cooler temperatures, so the reality of not all the corn getting planted becomes more pressing. The window for corn is the remainder of the month, into the first couple days of June. While an aggressive pace is being reported right now in this planting window, it is unclear how it will all work out, with rain towards the end of the month. Soybeans, have a later planting window, so there is still some time there. Beans carry the risk of receiving some additional acres that were earmarked for corn. Wheat also has some exposure to the heavy rains and cooler temperatures in the extended forecast. It is thought this could continue to slow planting of spring wheat. In addition, the heavy rains can lead to quality issues for SRW and HRW in the southern Plains. Wheat prices yesterday, while following the soybeans and corn, were aided by a good export inspections report. On the export front for soybeans, support came in yesterday’s trade from an announced sale of 180k tons of beans to Unknown, which the market usually assumes is China.
Other commodities also had good bounces yesterday, in short covering trades. Coffee rose for a 13 year low, taking out some key resistance levels on the rally. Cotton also bounced off a 3 year low, on trade hopes. Orange juice, which has been decimated for the past several weeks, saw a $5 rally in prices yesterday, also a short covering trade. Cocoa bounced, as it was reported that growers were working with buyers to discuss a floor price for cocoa beans, in an attempt to coordinate production and marketing, to stabilize the wild gyrations to prices. Sugar prices were up for the 3rd consecutive session, as the market is concerned about the availability of future supplies, as Brazil shifts its focus towards the production of cane ethanol. The lean hogs market also bounced, after being locked limit down on Monday, on hopes that a trade deal does get put in place, restoring China’s strong demand for US pigs.
Oil was up in the trade yesterday, as the reported drone attacks on the Saudi pipeline took prices higher, along with OPEC reporting a downtick in production for April. Prices softened up later in the day, as the API announced an inventory build in crude of 8.63m bbl. In addition, overnight, the IEA cut its demand forecast for 2019 by 200k barrels/day, although it did acknowledge that sanctions against Iran may impact this estimate. The funds continue to carry long positions in crude, and with the market leaking lower, another test of the key technical level 200 day moving average (CLM9) of 60.68 may be tested (overnight low is 60.85). A violation lower in prices could lead to exacerbated selling pressure, as sell stop trades may be elected.
The gold market continues to dance around the $1300 level here, getting pushed and pulled in the opposite direction of the equity markets. The current stability with the stronger dollar is tending to weigh on gold, but the tensions in the Middle East, along with a very fickle equity trade keeps underlying support for gold in place. Copper also is at the mercy of trade prospects. Deal or No Deal will be viewed as a positive or negative for global economic growth.
The US weather, while providing an opportune planting window at the moment, has more rain and some cooler temperatures in the extended forecast. Not only has this caused and may continue to cause planting delays, but it also brings a risk to the quality of the crops. For winter wheat, which is in the process of heading, the heavy rains pose a risk. For corn that is getting planting, lower soil temperatures can have an impact on yields.
Technical Moving Averages:
Product 50 day 100 day 200 day
SN9 889.25 912.25 914.0
CN9 371.25 381.5 387.25
WN9 454.75 486.125 519.5
KWN9 429.5 469.125 514.0
MWN9 538.75 556.375 583.5
CLM9 61.61 57.47 60.68
GCM9 1295.4 1303.1 1268.6
LHM9 90.360 84.255 82.180
LCM9 118.600 118.080 116.165
KCN9 95.13 101.21 108.75
CCN9 2300 2317 2278
CTN9 76.23 75.68 78.94
SBN9 12.54 12.73 12.64
JON9 113.03 118.15 133.60
HGN9 288.73 282.46 280.18
Have a good day,
Mike
Michael Clifford
141 W Jackson Boulevard
Ste 1201A
Chicago, IL 60604
Trean Group, LLC
312-604-6404
312-896-2012 (fax)