RJO FuturesCast

April 17, 2020 | Volume 14, Issue 16

The Markets

Metals - Gold Bulls Need A Stand Here

June gold futures have seen unbelievable volatility over the past few weeks. We are now seeing an average move of $49 for the average true range on any given day. We made a high of $1789 and are now just days later at $1710 at the time of this article. Investors should be cautious in this market and potentially look at the options contracts and smaller futures contracts such as the 10,33, and 50 oz contracts if new to trading futures. I can provide strategies depending on the client’s risk tolerance and bias in gold for anyone interested.

Technically speaking, gold has not seen a close below $1700 since April 8th. We need to maintain closes above $1700 at a minimum in order to justify a push above $1800 in my opinion. The volume has been very low and less than half of the average trading volume since the end of March. This should be taken into consideration as big moves up or down can be taken with a grain of salt. It’s important to look at key price levels, and right now we need a new high sooner than later with some closes above $1750 now needed. We could also be setting up for another push above the recent high of $1788 with a bull flag pattern appearing to form with the 4-day selloff. Is now the time to buy? If you are bullish gold and don’t believe the stock market bounce, yes, this is a level that should be considered for long exposure. The fed is printing money on an endless basis, and the stock market could easily be derailed by additional negative economic data which has been horrendous so far. There are clear reasons to own the precious metal, and it won’t take much to push us back to the highs in my opinion.

Gold Jun '20 Daily Chart
Energy - Bearish Bias Remains in Crude Oil

Only a few times in OPEC+ history has production cuts happened so quickly, and while significant we believe traders are coming to the realization that this will not suffice in stabilizing oil prices. API Crude inventory numbers the other day added to downward pressure in crude futures. It should be noted that Germany announced they will be opening up their economy next week, and of course China has been slowly opening, but this will not be reflected in any data for some time. The fact of the matter is the historical demand destruction that has taken place is causing a complete fundamental collapse in the crude market.

May crude contract has technical support $20.00 flat and if this breaks in near sessions we should see a test of $19.50, where buyers have stepped in before. The first upside resistance will be $20.30 and a break of that should see a $20.50 test of resistance if traders

Don’t fade any sort of rally.

Crude Oil May '20 Daily Chart
Softs - Coffee Offers a Bullish Indicator

July ’20 coffee futures start the day with a positive reversal on threat of tightening near term supplies and concerns of harvest issues. Reports continuously indicate shrinking coffee stocks and the threat of coronavirus impacting labor during harvest. This creates an interesting situation for the coffee market. There could be strong volatility with headlines shifting between near term bullish and long term bearish fundamentals. However, with bullish near term tight supplies and potential for abundance down the road, there could be a major discrepancy created between front month and differed futures contracts which could be an exciting opportunity for spread traders.

Coffee Jul '20 Daily Chart

Agricultural - Grain Futures Update w/Stephen Davis - 04/17/2020
Stephen Davis discusses this week's movements in the grain markets. The weather in the midwest has been unpredictable lately and that could have an impact on future grain prices.
Agricultural - Possible Turnaround in Cattle?

We could start seeing a turnaround in the cattle markets in the short term due to some positive fundamental news with the talks of reopening the economy. Albeit “phased and deliberate”, it’s an opening nonetheless. With the strong week in the cattle market and favorable export numbers showing more active buying from Hong Kong and China, packers now have an incentive to keep feedlots current with marketing’s. There is still a large discount of the futures to the cash market right now with light volume traded this week, with a total of 792 head trading in Iowa/Minnesota at 95-100 over the past three sessions, down from 105 last week and 261 head trading in Nebraska on Wednesday at 94, down from 105 last week.

                Yesterday, June cattle hit limit up but closed midrange. This buying interest seems to be because of the big discount of futures to cash but also people could be buying into the thought of restaurants opening up in the coming weeks. One key factor for the producers to keep an eye on is the cash level basis, and although they are still near record highs, the move to a more normal basis could be cause for concern over the next couple weeks that may give the market underlying swings.  

The USDA estimated cattle slaughter came in at 92,000 head yesterday. This brings the total for the week so far to 376,000 head, down from 417,000 last week and down from 488,000 a year ago. Average dressed steer weights for the week ending April 4 came in at 889 pounds, down from 891 the previous week but up from 865 a year ago. The 5-year average weekly weight for that week is 868.4.

Live Cattle Jun '20 Daily Chart
Currency - Yen Showing Signs of Long-Term Rebound

After the yen’s massive decline in value coming off of annual highs on March 9th, people are asking, “Will it regain its strength?”. With the United States Federal Reserve continuing to increase the money supply at an alarming rate, it seems like common sense that the yen will continue to strengthen against the dollar. What’s important to note in addition to this, however, is the relationship between Japan’s money supply versus other major economies. There is nearly no doubt at this point that Japan’s economy will shrink overall for the year 2020, much like the rest of the world’s, but the real question seems to be not only how it will shrink compared to other countries, but how it will shrink in relation to that company’s respective economic history. Economists of 24 private institutions project an average quarterly GDP shrink of 2.93% in Japan, coming to an annualized 11.72% contraction in GDP overall.

On the surface this certainly sounds dismal, but not when you look at this in context to other major economies. The Office for Budget Responsibility notes that GDP could plunge by 13% in the UK for the year 2020 and Goldman Sachs reports that the United States, the world’s largest economy, has the expectation that GDP will experience a 10% decline solely due to COVID-19. As the world now has its mind set on rampant quantitative easing measures, it is no longer shocking that the United States Federal Reserve has been so aggressive about economic stimulus. Currently, the world’s idea for remedying this solution seems to be pumping more currency into their respective countries’ economies, hoping they can pay their way out of a recession.

However, Japan has experienced occasions somewhat like this before, when in 2009 GDP shrank by 5.4%. For the US, however, GDP shrinkage of this magnitude, at least in the last 50 years, is generally uncharted territory. In 2009 US GDP shrank by 2.5%. The relationship between 2009 and 2020 projections are four times the effect on American GDP vs roughly only twice as much for Japan (5.4% vs 11.72% & 2.5% vs 10%). For this reason, I feel an overreaction is more likely to occur in US monetary policy.

There are still many unknowns in this unprecedented scenario regarding this pandemic, but one thing seems sure, our new mindset seems that the more a country is projected to shrink, the more aggressive the quantitative easing will be, and that aggressive QE will increase the money supply, which will in turn devalue their respective currencies. For these reasons, I project the yen will increase in value versus the dollar over the next several months.

Yen Weekly Chart
Equity - Gilead Rallies Stock Market

The stock market jumped after a major drug maker presented a promising treatment for patients diagnosed with COVID-19 while policymakers escalated talks of reopening businesses. According to Stat News, a health-care media site, there have been promising results from a drug used to treat COVID-19. This disease has taken the lives of almost 150,000 people world-wide and closed most of the global economy to contain it. Researchers at the University of Chicago Medical Center have reported that they have seen “rapid recoveries” in patients taking Gilead Sciences experimental drug remdesivir in clinical trials.

Even though health officials and lawmakers have been saying that this country’s testing capacities fall dangerously short, President Trump released guidelines for a return to normalcy where coronavirus cases are low. Kristina Hooper, a global strategist at Invesco had said, “There is also positive sentiment being generated by the White House’s plan to begin slowly rolling back lockdown measures.  It seems clear that, as of late, stocks have chosen to look through what is expected to be a dramatic drop in earnings, and forward to a resurgence in economic activity in the not-too-distant future.”

Support today is 278000 and 2730 with resistance showing 284000 and again at 285000.

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.

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