Commodity Corner: Morning Comments

Good morning,

DXM9 96.575 -0.348 GCK9 1297.2 +1.8 ESM9 2881.00 +14.00 CLK9 62.69 +0.11

Global equity markets continue to march higher, as service sector economic indices in Europe come in better than expected. Oil has grabbed the market’s attention, with Brent Crude testing the $70 level. Increased hopes for a trade deal with China to be finalized very soon also has proved to be supportive for the markets. The dollar has come under some pressure today, as increased risk appetite moves positions out of the safety of the dollar and towards other currencies.

The rally in WTI crude has carried all oil markets higher. The bid in the market again came from cuts in production from OPEC and disruptions caused by the power outages in Venezuela. The CLK9 market traded through its 200 day Moving Average yesterday, and settled well above it (62.58, highest settle since November). This trade through the key moving average level most likely generated some additional buying from technicians and program traders. Brent Crude was pushed higher as well from this, and in the overnight trade an attempt to test the $70 level occurred (high is 69.96). The spread between WTI and Brent has been narrowing, and settled yesterday at $6.76, the tightest since last August. Yesterday afternoon, the API announced crude stocks increased by 3 mm barrels last week (expected a 900k draw).

The grain markets had a relatively calm day, finding some support from comments from the USDA’s Perdue saying progress is being made with the trade talks between the US and China. The wheat markets were under some pressure early, following Monday afternoon’s good report on winter wheat crop conditions (56% Good/Excellent). There were some announced wheat purchases, with Jordan buying 60k tons of wheat and Rwanda buying 48k tons of US wheat (1st time Rwanda has purchased US wheat since 2006). Wheat markets did find some support mid-session, and firmed into the close. Chicago wheat futures lead the complex higher this morning, trading 5 cents higher, while Kansas City and Minneapolis wheat are up 1 to 2 cents. The spread between Chicago and Kansas City wheat prices, which historically sees Kansas trade at a premium to Chicago, is currently trading with Kansas at a 34 cent discount. Corn and soybean markets are trading at the upper end of their ranges for this week, as trade resolution optimism provides a support. A headline from yesterday afternoon could prove to be supportive for the oilseed complex. The president of Richardson International (canola exporter) thinks Canadian farmers may reduce canola plantings by 10% or more this year. This would be in response to Chinese moving away from canola purchases from Canada.

On the US weather front, rain storms in the south over the next couple of weeks could be an issue as the soil is already saturated. This could cause some delays to planting in this region, where soybeans, cotton and corn get planted. There will also be more rain across the Midwest and Great Plains, but it isn’t expected to create any additional flooding. There is a warm-up to temperatures coming this weekend, which is expected to increase the rate of snow melt in the Plains.

The meat markets had some excitement yesterday, with lean hog futures trading to up Limit, and settling there. With this, today’s limit for lean hogs expands from 3 cents to 4.5 cents. The aggressive buying is being attributed to increased prospects for China to be a large buyer of hogs. The cattle market traded higher as well. It would appear long positions were being added, with Open Interest increasing by approximately 2.5k. Keep in mind funds are already carrying a very large long position in cattle, and open interest is near a record level.

The cocoa market closed higher for the 8th straight day, as supply concerns remain from the dry conditions in West Africa and the recent improving Chinese economic data could bode well for the demand side. It is believed that these inputs may be causing a round of short covering in cocoa. The cotton market closed slightly lower, but remains confined in a fairly tight range, waiting for a trade resolution. The coffee market continues to work lower, with Robusta coffee trading at a 3 year low yesterday, while Arabica coffee is at a 13 year low. Favorable weather in Vietnam and ample supplies are applying pressure to prices.

In the metals markets, gold is now higher this morning, having been lower earlier in the night. The weakness in the dollar may be providing support for gold. Industrial metals closed lower yesterday, but are trading higher today, buoyed by improving global economic growth prospects and the already mentioned improved trade resolution prospects.

On the economic front for the US, the ADP Employment Index will be released shortly. The market tends to use this as a gauge for what the Non-Farm Payrolls number may show at the end of the week. It may carry a bit more weight this month, as last months NFP came in at +20k only (just printed +129k, market was looking for +160 to +170k). With the Fed holding a more neutral stance on monetary policy, data that is out of line from what is expected can create some additional volatility for the markets. The other key data point today will be the Services PMI report. This number came in above expectations in Europe earlier today, and helped with the bid to equities.

Have a good day,

Mike Clifford
312 604 6404