RJO FuturesCast

April 3, 2020 | Volume 14, Issue 14

The Markets

Metals - June Gold Needs to Break $1700

June gold has had just about every reason in the world to bust above $1700 and stay there for good. If we look at the fundamentals of why we might be seeing a rally, take your pick of the most recent horrendous economic data. We should have seen a flight to the supposed “safe haven.” Massive job losses, massive unemployment claims, all levels we have never seen before. It’s a broken market in my opinion. There are clearly other factors driving the gold sell-off. I’ve looked at the reasons to be bullish and the reasons to be bearish, and yet gold is for the most part sideways, but volatile. I think traders at this point need to stop asking the question I get asked the most, “why is gold going down when stocks are crashing?” My answer is simple, because markets can remain irrational longer than you and I can remain solvent. People just want out, clearing the books and going to cash it makes sense.

Traders need to take the fundamental playbook and throw it out the window in this volatile environment where headlines and rumors drive massive intraday swings for no good reason. The most important thing I see in gold is the lack of volume over the past week. Average volume traded in June gold futures is 436,000 contracts. We have traded less than half of that every day. This tells me that any move needs to be taken with a grain of salt. Don’t bet the farm on a big move up or down without big volume trending higher behind it. A classic head and shoulders pattern is clearly shown on a daily chart, and right now gold needs to take out the highs over $1700 for me to get bullish firmly. If you would like strategies made for gold trading with limited risk, contact me directly.

Gold Jun '20 Daily Chart
Metals - Silver Caught in Limbo

Silver rejected downside pressure and is trying to hold above $14.00 in the May contract. After the gold/silver ratio hit a staggering high in March, silver has started April well, relative to gold. Like most markets, silver is caught in the middle of demand/recession cycle. I don’t anticipate a huge run up in price but I do think that some technical levels could trigger an extended short term rally. For the futures, at least for the May contract, a high $14.98 needed to see low $17.00 Silver. On the other hand, a shift in global recession sentiment could trigger another wave of selling that could pressure silver below $12.00.  In my view, the sooner we can get a resolution or phase type of return to work for most sectors, the sooner you see price of Silver stabilizing. It has been very interesting how each country is dealing with coronavirus, I’m sensing that more and more countries are taking drastic efforts for better outcome. Stay healthy stay safe. 

Silver will be in sideways price action for the most part, if you like to learn to trade around it, reach out to me.

Silver May '20 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7290 or etesfaye@rjofutures.com.
Energy - Oil Reduction Not Enough to Offset Demand Loss

Oil prices have continued to surge as the market weighs a significant shift in supply fundamentals as producers discuss a global output reduction of 10 million barrels a day. A video conference is expected on Monday that will be open to all producers, notwithstanding OPEC and its allies. Despite this attempt in stabilization, the demand destruction from the fallout of the coronavirus casts a shadow on the oil sector. Russian producers have said to be on board, however, without concerted output reduction from the U.S. as well, efforts may not be enough as initial estimates are a reduction in daily demand of 35 million barrels. Global demand storage remains elevated with U.S. pipeline operators asking drillers to curtail production as stores get close to capacity. Ultimately, despite cuts as a near term catalyst oil may need eventual production shutdowns to establish a longer-term floor. Oil volatility (OVX) remains highly elevated at 160 with the market remaining bearish trend with today’s range seen between 18.68 – 27.34.

Crude Oil May '20 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-438-4805 or aturro@rjofutures.com.
Softs - Is Coffee Losing Steam?

May ’20 coffee futures start the day positive but still in consolidation this week with what appears to be decreasing volume. In the near-term coffee should remain fairly-well supported and even a bit bullish with tightening stocks as logistics and labor issues limit the flow of high quality coffee. There is further support in that end users are likely purchasing more than enough to make sure they can meet demand and keep the shelves stocked. But does this market have enough energy to continue-on to higher prices? I would need to see May coffee prices rally and hold above 124’50 before I call it bullish over all. In the long term it’s expected that major producers will create an abundance of supply for the 20/21 year assuming production and transportation remains reasonably functional with the viral outbreak impacting all facets of the global economy.

Coffee May '20 Daily Chart
Agricultural - Grain Futures Update w/Stephen Davis - 04/03/2020
Stephen Davis discusses the latest trends in the grain markets, including how Thursday's move in crude oil could potentially prop up the corn market.
Agricultural - More Volatility in the Live Cattle Market

Meat markets had a wild ride in the futures market, and we could see a steep break in prices which would hurt packer margins and further slow the pace of slaughter. Weights are rising sharply along with a concern in a slowdown in production is adding more selling pressure to the market. A few developing stories coming from the packing industry are; there is growing concern and possible talks of strike from the meat packing union about working in the current conditions do to the COVID-19 pandemic, and a report that came out just yesterday (feedstuffs.com) about how Chuck Grassley (R-Iowa) wrote a congressional letter to AG Barr and Agricultural Secretary Sonny Purdue about how there is cause for concern about market manipulation of beef prices. Since Feb. 4, 2020, live cattle prices are down 16%. This is happening even while American consumers bought 77% more meat during the week of March 15 compared to the same week of 2019, Grassley said in his letter. Further, the four largest meat packing companies control approximately 80% of beef processing in the U.S.

However, if one or both of these two scenarios play out, I don’t see this ending well for cattle producers. If the union ends up going on strike, we could see an even bigger build up in supply not only for the near term but also for months to come going out until the 4th quarter. The concern for COVID-19 has even spread to South America as some Brazilian mayors have shut down aspects of their agricultural production.

According to msnmoney.com:

“In Brazil, a union nearly succeeded in shutting down two JBS SA chicken facilities by convincing a judge that the health risks were too great. In the U.S., chicken giant Perdue Farms is trying to appease workers after two dozen employees at a 600-person plant in Kathleen, Georgia, staged a walkout. The first meat processing employee to test positive for coronavirus in the U.S. also materialized Monday, at a Sanderson Farms Inc. plant.”

I don’t expect the volatility to slow down anytime soon, as it is the same with the hog market. The big discount from the futures to the cash market is typically a supportive force but with these sharp moves recently and the fears of a massive April supply is giving us this short-term selling pressure. I would stay short if you are able to, but buying some upside protection with calls is probably the most risk-adverse trade right now for these markets.

The USDA boxed beef cutout was down $7.30 at mid-session yesterday and closed $7.98 lower at $235.17. The cutout has fallen $15 in five sessions after climbing $43 in the nine previous sessions. Like other markets, the beef cutout is experiencing extreme volatility. Yesterday, cash live cattle traded $8-$9 lower from the end of last week in moderate volume. In Kansas, 2,155 head traded at $112-$113 with an average price of $112.15, down from $119.53 a week ago.

In Nebraska, 91 head traded at $111.25 versus an average price of $119.49 a week ago. In Texas/Oklahoma, 975 head traded at $112-$113 and an average price of $112.43, versus $119.27 a week ago. June cattle opened sharply lower on the session and closed down the 450-point limit yesterday. The USDA estimated cattle slaughter came in at 116,000 head yesterday. This brings the total for the week so far to 352,000 head, down from 361,000 last week at this time and down from 362,000 a year ago.

Live Cattle Jun '20 Daily Chart
Equity - Oil and Jobs Don't Mix

Stock futures are down this morning with a huge decline in jobs for the month of March, but that number was muted by the historical rally in the crude market. According to the U.S. government, March unemployment was 4.4% with payrolls falling over 700,000 making it the worst report since 2009.    These numbers are not telling you the whole story of the devastation from the coronavirus as jobless claims increased by 6.6 million last week, which is a record according to the Labor Department.

Keeping the stock market from further collapsing was crude oil’s rally on Thursday. West Texas intermediate increased by 24% making it the best day in history. Despite the record gain, crude remains over 50% lower on the year. The rise in crude was attributed to President Trump’s claim that oil production would be facing major cuts and Saudi Arabia called for an emergency meeting of OPEC and other producers.

Support today is 246000 and again below at 239000 while support is showing 256000 and 259000.

E-mini S&P 500 Jun '20 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 888-861-1656 or jyasak@rjofutures.com.
Economy - Volatility Running Economy

Pres Trump is calling for a 10M-15M Barrel cut – why not make it 25M!! LOL.  You knew this was coming, he said it was coming last week actually in his daily press briefings. This will also be the case in stocks as well – President Trump will take to twitter and go ALL CAPS and get a nice pump out of the market. Regardless, we’ll keep managing the range of the market and stick to our process.  Speaking of which, this is a nice bounce in crude to the top of our range, I’ll likely take a short position today. Super wide range of 18.70-27.40 (probably higher now as I write this) and a nasty 162 on the oil volatility (OVX). A 35% rally makes this a big fat juicy sell.

Stocks and Volatility – falling vol in the equity space, I highly doubt that this is the “transition” back into stocks. Implied vol in the SP500 is back to a big fat lazy number of -44% vs 30 realized vol.  Downside in the SP500 approximately 11% lower to 2230 this morning.  

Unemployment- we don’t really need the data to know what’s happening in the world.  -701K Unemployment with a 4.4% rate (this will likely be north of 10% soon – ugh!) – just not good, sad actually.

We’ve got work to do, so I’ll keep it tight this morning.  All the Best. 

E-mini S&P 500 Jun '20 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-669-5354 or jcaruso@rjofutures.com.

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