Commodity Corner: Morning Comments

Good morning,


DXU9  96.125  -0.457                       GCQ9  1384.6  +35.8                         ESM9  2958.50  +29.50                   CLQ9  55.77  +1.80


Well, where to begin?  I guess the Federal Reserve, and the no immediate changes to monetary policy, but big changes to the language in the statement.  Removal of the word “patient” from the text has the market not only expecting a cut to short term interest rates at the July meeting, but much more aggressive cuts being forecast for the rest of this year and into 2020.  Estimates for the rate cuts now range from a 50 basis point cut at the July meeting, to consecutive cuts to come at the July, September and December meetings.  Prior to the Fed’s announcement yesterday, there was a large structure traded in options on Eurodollar futures to the end of this year that pays out if short term rates decline by 150 basis points.  What seemed outlandish as the trade was being executed, possibly made a little more sense following Chairman Powell’s press conference. 


As commented yesterday, there was a chain reaction across numerous markets with the Fed statement being different than what the market was expecting to see.  The dollar was hit hard with the expected aggressive cut to rates.  Stocks popped, oil went bid and gold, in a somewhat delayed reaction, has been shot out of a cannon higher in the overnight trade.  Copper moved higher with the better economic hopes, and commodity prices traded up with the much lower dollar.  The markets that don’t seem to be following suit here would be the grain markets, as the soft dollar and continued rain both should be supportive for prices.  Grains are lower in the overnight trade.  Perhaps part of the story there is that part of the reasoning behind more aggressive rate cuts comes from stalled trade negotiations, where grain markets have found themselves to be right in the line of fire.  US 10 year yields rallied through 2% last night, and global fixed income markets continue the march to lower yields.     


Looking directly at some of the markets, oil would have been the lead story, until the huge move in gold that took place overnight.  As global central banks continue to ease monetary policy (the exception being Norway, which actually raised rates this morning 25 bps and the BOE left rates unchanged but lowered its economic growth forecast), gold benefits.  The dollar, being viewed as the safe have currency, as it depreciates, safety seekers flock to gold.  Gold is about $25 above the former highs for the trading range.  Technically, there is a gap on the intraday charts from yesterday’s high and today’s low.  Until this gap is filled, a bullish signal is in place.  At this point, a trade to $1400 for gold (GCQ9) certainly appears in the cards, as the overnight high is $1397.7.  Also providing the bid for gold are heightened tensions in the Middle East, as Iran shot down a US drone overnight.


With that segue to oil, Iran claims that the US drone was spying, being found in Iranian airspace.  Of course, the US denies this.  Tensions in Libya also remain a concern.  Prior to the Fed, oil already was trading higher, as yesterday’s production and inventory data, for a change, showed lower production and stocks.  Data on demand for gasoline was strong, and oil was on its way up.  In the overnight trade, WTI oil (CLQ9) fell just shy of $56, and should try to get above that level at some point.  Brent crude is also approaching $64.   Oil also has a gap higher on the intraday charts.  Oil is also higher with a few OPEC officials on the tape, claiming production quotas should remain in place for the remainder of the year.


The grain markets find themselves lower this morning, although bouncing off the lows at the moment.  Not only does the soft dollar help US grains in the export arena, but the continuous rains that have created the well-publicized havoc for farmers and the grains, also should help prices.  Evidence of a cheapening dollar being needed to help in the export arena can be found with yesterday’s wheat purchase tender out of Egypt.  Egypt purchased 290k mmt of wheat, from the Black Sea.  The prices was $1-2 higher than the prior tender, and $15-20 above where prices were last year.  Nonetheless, the weather induced rally to US grains, and the overall stronger dollar didn’t really give US wheat a chance.  Hopefully a softer dollar will help with the overall grain trade.  Another possibly aid to US wheat could come from hot and dry weather in Europe and the Black Sea leading to reductions in the expected harvest sizes.  Especially in the Black Sea, where another good sized crop is expected, diminishing available stocks could bode well for other countries, including the US.  As the rains continue in across the Farm Belt of the country, the concerns of not all the intended soybean crops getting planted continues to grow.  Funds still carried a small spec short position in beans, but that is being closed up as the weather threat lingers.  Soybean open interest declined by 33k in yesterday’s trade.  Soybeans remain hopeful that a resolution to the trade negotiations with China will lead to increased sales.  Many in the market are skeptical that when a deal is done, beans really observe a big increase.  The corn market while remaining within striking distance of the highs have seemed to lose explosiveness as prices move up.  This and the relatively soft price action, could be explained by the spec funds aggressively switching to long positioning in corn, from a massive short as of 1 month ago.  Some of the weaker positioned longs bailing could be weighing on prices.  The ethanol discussion, and the amount of potential additional demand for corn created also is influencing prices some.    


The continuation of the down move in the dollar overnight has kept a bid to other soft commodities this morning.  Coffee, cotton and cocoa are all higher this morning.  Cotton has been trading better over the past couple of sessions, as comments from Presidents Trump and Xi, and prospects for more trade progress being made at next week’s G-20 meeting, bodes well for cotton demand.  The depreciating dollar also allows for higher commodity prices, as producers from foreign countries aren’t going to be as aggressive selling products with its own currency increasing in value.  Lumber prices broke a string of 9 consecutive days higher yesterday, with a limit move down.  The overbought conditions of the lumber market certainly made room for a downward correction.  The Fed being aggressive with a dovish policy, due to economic concerns, probably keeps some pressure on lumber prices.


Copper prices continue to track the equity markets, and are trading higher today.  Global stimulus with most central banks lowering borrowing rates should help with economic uncertainty.  Any optimism for economic growth typically bodes well for copper prices.  Other metal markets are also higher this morning, boosted by the Fed statement.


July options expire tomorrow at the CBOT.  Large option positioning can often dominate the flow of trade on expiration day, as markets often gravitate towards strikes with large open interest.  This usually occurs when there isn’t much else taking place in the market.  Not sure if this phenomenon is relevant for this expiration, given the volatility in so many markets, but worth mentioning all the same.            


Technical Moving Averages:

Product               50 day                100 day               200 day

SN9                      864.25                   895.0                     907.0

CN9                      390.5                     387.5                     389.75

WN9                    473.0                     479.5                     509.25

KWN9                  432.5                     451.0                     495.25

MWN9                536.75                   550.25                   572.5

CLQ9                    59.96                     59.21                     59.79

GCQ9                   1303.7                   1312.5                   1284.9

LHQ9                   91.935                   88.580                   84.935

LCQ9                    109.725                 112.815                 113.040

KCU9                    96.85                     100.75                   109.00

CCU9                   2397                       2339                       2311

CTZ9                    70.71                     72.51                     74.42

SBV9                    12.59                     12.90                     12.98

JOU9                    105.90                   114.85                   128.10

HGN9                  277.00                   282.50                   278.90


Have a good day,