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Weekly Commodity Futures Report - July 5th to July 11th, 2004
The futures markets at a glance:
Stock index futures had an adverse reaction to the weaker-than-expected June payrolls data. All three major indexes finished with modest losses on both the day and the week.
The disappointing employment figure provided more fuel for the week long rally in Treasuries. The combination of weak economic data and reassuring FOMC language sent yields sharply lower earlier in the week. Interest-rate futures shot to their highest levels in three months as traders scaled back expectations on how aggressively the Federal Reserve will tighten monetary policy.
The weaker-than-anticipated 112k payroll gain sparked dollar losses against all the main European currencies. The unimpressive economic data weighed on the dollar, which finished marginally lower against the yen but fell a sizable 1.3% versus the euro.
Crude oil futures rose to a two-week high on concern a terrorist attack or other event that would limit supplies might occur during the three-day July 4 Independence Day holiday weekend.
Gold futures briefly stretched to four-day highs of $401.50 per ounce on a spurt of buying sparked by a sharp decline in the U.S. dollar, but they faded as the abbreviated session wore on thanks to a lack of follow-through interest.
Stock Markets & Financials:
Bonds rallied and stocks sank on the weaker than expected jobs number. The economy created a mere 112,000 net jobs in June, below expectations and down sharply from the close to 300,000 average pace of the prior three months. Factory orders slid for the second consecutive month in May, although the pace of decline was half the consensus. On a positive note, global semiconductor sales put in a solid performance during the month, reaching their highest level since the end of 2000.
Stocks opened weak out of the gate and selling accelerated through mid-morning. The market made its lows for the day early on and proceeded to vacillate in a narrow range for the remainder of the session, which was characterized by light volume ahead of the long holiday weekend. All three major indexes finished with modest losses on both the day and the week.
The disappointing employment figure provided more fuel for the week long rally in Treasuries. The combination of weak economic data and reassuring FOMC language sent yields sharply lower earlier in the week. The new development forces had investors retooling their expectations for the trajectory of interest rate increases. Fed Funds futures have removed a 25 basis point move by year end, which leaves the December contract looking for a 2% funds rate. The yield on the benchmark 10-year note hit a two-month low, falling eleven basis points to 4.45%.
S&P 500 - Stock index futures had a muted reaction to the weaker-than-expected June payrolls data, although Sept S&P futures did briefly test key support levels. There was an early round of selling from institutional participants. Previous low of 1122.50, however, held as support for the contract throughout the session, and the contracts drifted a bit higher before the close amid thin volume. The September S&P respected the two-week low of 1121.80 and settled above the100-day moving average of 1124.90. Investors realized that the weak jobs number will force the Fed to remain less aggressive in the next few months as they decide how and when to raise interest rates.
After resistance for Sept DJIA appeared at 10,475, the contract has fallen to 10,250 so far. The sell-off may extend to ay least 10,200. A new bull market follows. Sept Nasdaq 100 broke through resistance at 1500, and did rise further to 1530. It may then pullback to 1450 - 1440again. Sept S&P 500 did find a barrier at 1145, and may pull back to 1115 –1110, before resuming a new bull market cycle. Further decline to 1105 may trigger a bigger loss to 1090.
U.S. T-Bond - Interest-rate futures shot to their highest levels in three months as traders scaled back expectations on how aggressively the Federal Reserve will tighten monetary policy. The impetus was a rise in non-farm payrolls that was less than half of what most traders were expecting. The weaker-than-forecast employment report comes on the heels of a meeting of the Federal Open Market Committee this week in which policy-setters suggested they are still inclined to tighten at a "measured" pace, unless future data should show inflation picking up more rapidly than expected. Sep 10-year notes settled up 26.5 ticks at 110-16, Sep Treasury bonds rose a full point plus 7 ticks to 108-01, and Dec Eurodollars surged 11.5 basis points to 97.66. Sep 10-years soared all the way to 111-03, a level not seen since April 12. Sep bonds got up to 108-30, the most muscular level since April 8. Dec Eurodollars peaked at 97.70, a level not visited since May 7.
Sept T-Bond’s new rally went through the 107-00 resistance, and should extend the rally to at least 110-24. The contract may go as high as the contract’s 115-00 top. Sept 10-yr Note rallied above the 110-00 focus and should go to at least 112-00, perhaps even revisit the old top at 115-10. Dec Eurodollars pulls back slightly but should resume the uptrend later, probably to 97.68 at least.
There are four reasons why the rise in U.S. interest rates is unlikely to provide a notable boost the dollar:
First, the dollar has already appreciated markedly since the beginning of the year, fueled, in part, by the prospect of interest rate hikes. Currency markets, much like other financial markets, have already priced in higher interest rates. Second, U.S. interest rates are at historic lows. Thus, it will be sometime before absolute interest rate differentials turn favorable for U.S. assets. Third, as the Fed has noted once more, the intention is to tighten policy at a measured pace. Thus, differentials will improve only at a gradual pace. Fourth, the trade weighted dollar has declined, on average, by 1.4% during the six months following the beginning of prior tightening cycles. The historical evidence would, thus, argue for depreciation, not appreciation, in the dollar.
With the initial tightening now fully priced in, the focus will undoubtedly turn to longer-term considerations, such as ever rising funding requirements. The spotlight will return to the burgeoning current account deficit, with consequent negative implications for the dollar.
Australian Dollar - The RBA meets next week and though many economic indicators still point to a robust economy, it is unlikely to raise rates until later in the year. Total dwelling units approved advanced 3.4% over last year. Strong retail sales data for May also suggest lingering resilience in the Australian economy. Total credit provided to the private sector remains robust, indicating that demand for credit among Australians remains strong. But all these factors may not be enough to compel the RBA to hike rates for two reasons. They will no doubt wait to see Q2 GDP figures after the disappointing 0.2% growth in Q1. Moreover, the RBA is likely to hold off on raising rates until after the Australian Federal Election.
The Sept contract approaches the crucial .7110 resistance. Odds are that the contract will eventually go through it and may focus at .7500 very much further out.
GBP/USD - The BoE's recent rate hikes may be taking root. The U.K. housing market shows signs of cooling -- the Halifax data shows the slowest rate of growth in house prices since November. These data are in line with anecdotal evidence cited by the BoE in its June Minutes that house price appreciation may be slowing. Moreover, signs of a cooling economy came from the unexpected slip in the Gfk Martin Hamblin’s consumer sentiment index. The survey shows fewer intentions to make major purchases. All these suggest less need for the BoE to deliver another hike at next week’s meeting. Given that sterling is quite sensitive to rate hike expectations, this may cause some softness in GBP/USD.
The Sept contract broke through 1.8200, and should take out the 1.8300 resistance soon. The next focus thereafter is the 1.8670 resistance, and further out. 1.9000.
Euro - the ECB kept rates on hold at 2% this week in an effort to support the struggling euro zone recovery. The data remains mixed, with some signs of price pressures while other indicators suggest the recovery is vulnerable to slippage. The dip in June's PMI, the unexpected contraction in Germany 's Ifo index, released last week, and the slump in German retail sales underscores the lingering weakness in consumption. ECB Chief Economist Issing nonetheless suggested that a rate hike could be in the offing. The delicate balance between a sluggish recovery and price pressures, may eventually tip the scales in favor of a rate hike, rather than a rate cut; though there's not much chance of a rate hike before the end of the year.
Sept contract was sharply higher and should break through 1.2350 crucial resistance soon. Further out, the upside objective is 1.25001.2600, but 1.2800 is the real focus on the medium-term.
Japanese Yen - The Q1 Tankan's business conditions index rose to 22 the highest since 1991. Similarly, the small manufacturers index rose to 2 the first positive reading since 1991. Signs of strength were fairly broadly based. Large manufacturer’s capital expenditures plans were also upwardly revised. The average of predicted exchange rates by large manufacturers anticipated a firmer yen, from 108.43 in the March Tankan to 106.21 at present. The survey shows that exporters are expecting a stronger yen and are factoring that into their business plans, but remain overall optimistic.
Sept contract was higher after seeing support at .9150. Breaking .9300 would cause the rally to continue; expect further gains to at least .9600 further out.
Swiss Franc - Economic data this week pointed to continued recovery in the Swiss economy. The June KOF leading indicator jumped to a fresh 3½-year high to 1.07. The figure is seen to anticipate the Swiss economy's direction in six to nine months’ time. The increase in new orders prolonged a year-long gain, while total order books, which two months ago were in decline, expanded modestly. The June Purchasing Managers’ Index also signaled a sustained expansion with a rise to 57.0 from 56.2 in May. The gains were broad-based, reflecting gains in output, orders, and employment. And with inflation remaining tame, the Swiss economy appears on the mend. Further appreciation in the Swiss Franc cannot be ruled out, especially in light of heightened geo-political event risk this weekend.
Sept contract rose through .8100 resistance and should rise further and challenge the .8250 top later in the week. The uptrend should go on towards .8500 further out.
USD/CAD – Key event risk for USD/CAD is now passed. The federal election returned the Liberals to power, though only with a minority government. The loonie took comfort in the familiarity of the Liberals, and thus far, has ignored the historical facts that minority governments tend to be short-lived. Monthly GDP figures for April slipped to only 0.1% following a 0.8% gain in March. But these data should not garner a great deal of concern as key sectors, including energy and construction, remain strong. Next week’s June labor force survey will be a potential market mover, especially after two months of solid gains. Overall, CAD positive fundamentals are in place. Commodity prices are still strong, the export market has been invigorated by the U.S. rebound and a key element of uncertainty regarding the election has now been eliminated. Also potentially CAD positive is a possible bid by Brazil ’s CVRD for Noranda, though this is still under discussion.
The Sept contract eked out further gains and is set to rise further to the .7635 resistance. The contract should clear the resistance, which suggests further upmove towards the .7820 top further out.
Metals & Energy:
Copper - High-grade copper futures finished with only a tiny loss after rebounding from overnight weakness when the U.S. dollar tumbled in the wake of a soft employment report. Technically, the Sep futures did not do anything substantive, as they posted an inside trading session in which the day's highs and lows were within Thursday's highs and lows. The Sep copper contract recovered from an overnight low of $1.2080 to settle with a loss of just 20 points to settle at $1.2200 per pound.
July 04 contract rose through 120.00and is set to rise further. It may accelerate higher once 125.00 is taken out and should make a move through to at least 130.00.
Gold - Gold futures briefly stretched to four-day highs of $401.50 per ounce on a spurt of buying sparked by a sharp decline in the U.S. dollar, but they faded as the abbreviated session wore on thanks to a lack of follow-through interest. The most-active Aug contract settled up $2.30 at $398.70 per ounce. The dollar was trampled by investor and fund selling in the wake of disappointing data on U.S. factory orders and jobs growth. However, the thin conditions prevailing in the market ahead of the long weekend limited sustained interest in gold futures by late morning. As a result, Aug futures returned below the psychologically significant $400 level and remained below there for the remainder of the session before closing the week just below $399.
The Aug contract found resistance at 405.00 area and pulled back support came above 390.00. The current uptick should push through to 410.00 and beyond. The ongoing upleg comes as a consequence of U.S. dollar weakness.
Silver - Sep silver pushed to four-day highs early but managed better to sustain follow-through interest through the morning. Sep futures managed to close above $6 for the first time in five days, and analysts agreed that further probes higher should be allowed for next week. But, like gold, silver continues to struggle to attract sustained buying interest at the higher levels and may continue to be plagued by a lack of follow though should gold remain tucked below the $400 mark on a closing basis in the days ahead.
July Silver’s support still looks firm at 5.60 area and should reach at least 6.4000 before meeting resistance, then to 6.650 later. It may extend gains to 7.200 further out.
Crude Oil - Crude oil futures rose to a two-week high yesterday on concern a terrorist attack or other event that would limit supplies might occur during the three-day July 4 Independence Day holiday weekend, when U.S. markets are closed. The rally accelerated after OAO Yukos Oil Co., Russia's biggest oil exporter, said it may be forced to halt production at some fields after the freezing of its bank accounts. Yukos, which produced about 2 percent of world supply in the first quarter, said it may slow oil output after court bailiffs froze the accounts in connection with a 99.4 billion-ruble ($3.4 billion) tax claim. Weekend attacks in Saudi Arabia and Iraq have caused prices to soar three times since late April. The al-Qaeda terrorist network has staged attacks on foreign workers who help run the Saudi oil industry. Iraqi insurgents have repeatedly attacked pipelines and other facilities, disrupting output. The two countries hold about a third of the world's proved oil reserves.
Aug futures found support at 35.50, and the uptrend has resumed strongly since then, with 40.15 as the minimum target of a recovery. This rally may in fact be the initial kick-off for another go at 42.30 top.
Natural Gas - Natural gas futures fell ahead of a long weekend as two previous days of higher prices that traders said were spurred by gains in crude did not carry over to a third. Crude oil futures had gained 8.7% in the previous two sessions but succumbed to profit-taking, losing just under 1%. August natural gas futures dropped 6.9 cents to $6.148 per million Btu. September futures fell 6.9 cents to $6.181/MMBtu and October fell 6.4 cents to $6.218/MMBtu.
Aug contract found support at 6.000 again, but the downmove may not be over. The sell-off could extend to 5.8200 area. The rally resumes thereafter. The next upside target is at least 6.500; the next rally may in fact be the initial kick-off for a move to 6.800 further out.
Grains & Food:
Soybeans - Soybean futures settled mixed with the nearby making another advance higher on firm basis while the back months slid further into negative territory due to bearish weather forecasts. Jly soybeans settled 6 cents higher at $9.39 1/2 a bushel, and Nov beans were 15 1/4 cents lower at $6.52 1/4 a bushel. Pulling the old-crop/new-crop spread apart, the bearish weather scenario continued to be played out as market participants looked ahead toward a three -day weekend. Meteorologists are calling for rains migrating out of the southern and western areas of the U.S. corn and soybean belt and stretching across most of the belt for the weekend. However, no threatening weather patterns are seen developing at until at least mid-July.
The July contract continues to rise and has gone above 9.48 resistance. The contract should continue towards the 10.50 area from here. However, this may be a countertrend rally and we may see the contract falling again thereafter.
Wheat CBT - U.S. wheat futures finished moderately higher, in a slight recovery from the recent sharp downtrend. Short covering ahead of the extended holiday weekend emerged after an initial drop to fresh lows failed to uncover any follow-through interest. Friday's activity was subdued with traders eagerly awaiting the weekend and amid an absence of fresh market moving news. Sep wheat ended 3 cents higher at $3.41 1/2 per bushel. Early session, CBOT Sep scored a new eight-month low of $3.36 1/2.
The July contract continues to drift lower a short-term relief is due but thre is no end in sight for the downtrend until we see 3.20 levels.
Coffee C - Arabica coffee futures fell to a 1 1/2-month low amid a lack of freeze damage in Brazil and a technical weakness. Jly closed 270 points lower at 70.05 cents a pound and Sep fell 265 points to 72.25c. The market was extremely slow in morning trade ahead of the three-day weekend. However, the market fell sharply as the Sep was unable to push above 74.75c. Part of the selling was from news Brazil is not likely to see a freeze over the weekend and into the first half of July. Warm, dry weather will continue across Brazil's coffee groves this weekend, allowing farmers to press ahead with harvest efforts.
July contract fell some more according to the scenario the contract has been to .7000. Expect to see a downmove to as low as 68.00 - .6700. But allow for a sharp recovery thereafter.
Orange Juice - Frozen concentrated orange juice futures traded higher on speculative buying. Jly settled at 65.30 cents per pound, 80 points higher, and Sep at 65.65c, a 45-point gain. Sep rose to a 3 1/2-month high of 67.25c late in the morning. However, it then turned around and fell. But it was still able to end at a 3 1/2-month high close. Early in trade, fund buying pushed prices higher. Speculative buying also supported the market early, but was countered by light trade.
July contract continues to rise; the recovery has gone through to 66.50 and may rise further to the 72.00 area further out. This suggests that the long bear trend might be already over.
Cocoa - Cocoa futures took a pounding from speculative selling, closing lower after filling a gap left open from the start of the session. On the third consecutive day of fund selling, traders said it appeared to be new short selling. Follow-through selling from the funds took Sep to fresh contract lows at $1,298 a metric ton ahead of the three-day weekend. However, the initial blow to cocoa came after the release of disappointing data on U.S. job growth that sent the U.S. dollar on a sharp decline. Sep settled $16 lower at $1,317 a metric ton. One fundamental function of the day, was talk in the market that Ghana was still selling current crop.
July contract fell to 1300 but may bounce back towards 1400 area again thereafter.
Fiber & Meats:
Cotton - Cotton futures settled lower after breaking new contract lows on fierce speculative selling and options play. Dec settled off its contract low of 49.21 cents a pound at 49.56 cents, down 68 points on the day. The Dec contract continues to register new lows as selling in options and speculator selling pressured the market. Private analysts pegged U.S. cotton production for 2004 at 18.2 million bales, and world output at 105 million bales. This compares to the current 2004 U.S.D.A estimate of 17.6 million bales for U.S. production and a world crop estimate of 102.88 million bales.
July contract may bottomed at 47.00. Expect a small recovery to go not much higher than 53.25, then the sell-off resumes. The downtrend is not over yet new resistance at 55.00 will likely hold and we may see further declines towards 50.00 - 48.00.
Sugar 11 - World raw sugar futures ended at new contract highs amid fund buying in very active trade. Oct settled 19 points higher at 7.96 cents per pound and Mar rose 17 points to 8.32c. The market started the day at unchanged levels, before falling into negative territory shortly after the open. Oct fell to a session low of 7.71c, but didn't stay there long. Prices turned around and pushed higher throughout the balance of the day. The Oct continued to make new highs before eventually jumping to 7.99c the last few minutes of trade. Strong fund buying supported the market throughout the session.
The July contract rose further, reaching new contracts high at 8.00. The contract may rise further to8.508.75, but expect a pullback thereafter.
Live Cattle - Live and feeder cattle futures settled mixed in extremely dull pre-holiday trade. The markets were just marking time until resolution of the latest USDA test result on a second animal with an inconclusive reading for bovine spongiform encephalopathy, or mad-cow disease. Results are expected any day now. Many comments reflected the frustration with the BSE tests. "We're going to have to go through this two or three times every month," complained one cattle pit broker. "Why don't they just test all of them? It's going to cost them just as much to keep on doing it this way." An isolated trade of slaughter-ready cattle at $87.00 per hundredweight on a live basis was reported in central Kansas, but no action had been reported elsewhere.
The August contract fell towards 84.00 but did recover somewhat. But resistance at 90.00 may limit the upside. The contact may fall further towards the 80.00 area in the next few days. Further out, could see 78.00.
Lean Hogs: - Lean hogs settled mostly higher Friday in extremely slow pre-holiday trade. Despite the doldrums, Dec hogs hit a new contract high on the close. Jly ended $0.37 higher at $79.12, while Aug ended up $0.55 at $76.92. Jly bellies fell $1.02 to $112.45.
Aug lean hogs has been higher, pushing to new contract high to 79.30. The contract should rally further towards the area of 81.0082.00 in the short-term
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