RJO FuturesCast

June 5, 2020 | Volume 14, Issue 23

The Markets

Metals - Has Gold Lost Its Safe-Haven

In the early morning trade after better than expected May non-farm payroll number this morning with a reading of 13.3%, gold has sold-off more than $40 an ounce and currently trading at $1681.0. The payroll number was supposed to come in over 19%, so this was seen as a big positive in the big V-shape recovery we are having despite all the recent chaos in this country over the past few months. After this week’s trading and today’s job report, gold has lost some of its safe-haven buying as it broke new weekly lows this morning. Poor global weekly reports and with the EU announcing a 1.3 trillion-euro stimulus package, gold has not been able to get a bounce to hold onto yesterday’s gains hinting the COVID-19 rally could be losing its steam. Look for support in gold roughly between $1670-$1650 or a breakout above yesterday’s high of $1729 an ounce.

Gold Jun '20 Daily Chart
Metals - Silver Chart Showing Weakness

The North American session has begun with the weekly initial jobless claims which showed the U.S. added 2.5 million jobs in May against expectations of losing over 8 million. While the silver market may not be shedding its gains as much as gold, the charts are showing some weakness after a rally last week. Although traders were not presumably expecting to see data reflecting jobs returning faster than expected, its difficult to fully grasp the extent of pain that’s still present within the labor market. We would like to see metals such as gold and silver sustain yesterday’s recovery move, when the central banks like the ECB step forward with a 1.3 trillion stimulus package.

July silver may see a failure of $17.50, with the possibility of the session testing $17.20 if this occurs. Seeing as there has been a glimmer of hope from recent economic data, this is to be expected. July silver needed a pullback in order to potentially test resistance of $18.00.

Silver Jul '20 Daily Chart
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Energy - Oil Extends Gains on Jobs

Oil rose to a three-month high ahead of the upcoming OPEC meeting amid data showing the economy defied expectations and added jobs in May. The OPEC plus meeting was expected to be canceled next week due to non-compliance by Iraq, however, it would appear that the meeting will take place this weekend with Russia indicating that it would not attend unless an agreement would be set. An extension of cuts with full compliance would include a removal of over 7 million to upwards of 9.7 million barrels per day. However, following July OPEC plus supply cut will be reduced by 2 million barrels a day and therefore you will need to see an increase in demand to offset return of supply as WTI approaches $40 a barrel. Notwithstanding, oil vol (OVX) remains highly elevated and the market bearish trend with today’s range seen between 30.66 – 38.67.

Crude Oil Jul '20 Daily Chart
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Softs - Lack of Demand During Pandemic Continues to Lead Cocoa Trade

Economically, the world is in an overall slowdown. People aren’t spending money on non-essential items for the most part, weighing on chocolate sales. The demand of cocoa is down, if consumers aren’t spending money on chocolate due to covid-19 restrictions, this will only pull cocoa prices lower than before the pandemic when demand was already a concern. Supply concerns continue to provide support though, mainly due to output concerns and bearish weather patterns.

The equity markets have rallied, but commodities haven’t followed, especially in the softs. With so many uncertainties remaining and lack of economic growth which is needed for people to feel comfortable to start spending money on luxuries and not just on necessities, cocoa futures could stay in the 2350-2500 range for the summer months. If another wave of coronavirus occurs globally, look for commodities like cocoa to take another hit lower – prices we saw in March will be tested.

Cocoa Jul '20 Daily Chart
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Softs - Coffee Prices Continued Weakness

The coffee market has been able to gauge the level of return demand from the fast-paced re-opening of the world economy, and it has been a rough start back to say the least. July coffee prices took a dive to violate the 100 level, which should have been a good support area. Although many factors should have been able to support higher coffee prices, we have only seen weakness. Some demand has returned to coffee with the re-opening of the economy, but it has not been nearly enough to offset the upcoming large Brazilian crop that will ultimately need to find a home. Major factors such as continued strength to record highs in the US stock market, a weaker US Dollar and strong Brazilian currency have still not been able to lend support to coffee prices. We should expect to see the same until all restaurant businesses on this planet return to full steam to fill the massive void left unsatisfied by “home demand”.

On the technical side, the violation of the 100 level in July coffee prices should signal a continued move lower, and 100 now becomes our new resistance area. Rather than trying to call a bottom on this market, traders should be advised to follow the trend at this point.

Coffee Jul '20 Daily Chart
Agricultural - Grain Futures Update w/Stephen Davis - 06/04/2020
Stephen Davis discusses this week's movements in the grain markets. With Brazil's supply of soybeans nearly depleted we may see a spike in the sale of U.S. new crop soybeans.
Currency - King US Dollar Grows Old

June US dollar futures are trading slightly higher on Friday morning for the first time in seven sessions. The safe-haven qualities of the USD have gone to the wayside as successful economic openings become headline news, and the “do-whatever-it-takes” policy of the Fed begins to weaken the world’s reserve currency. A rise in rates is helping to support the greenback near 96.80 this morning. The longer-term theme hasn’t changed, and foreign currencies are beginning to tell that story. The euro blasted higher this week, trading along 1.1335 Friday morning after a breakout from 1.10. The currency of the EU is likely to show the most relative strength if the dollar continues to weaken. Commodity currencies, like the Aussie and Canadian dollar, have done well as the price of oil rebounds to the $40 level. There is a paradigm shift happening in the currency space right now, and the days of “King Dollar” may be in the rearview mirror.

U.S. Dollar Jun '20 Daily Chart
Interest Rates - Rates in Focus Ahead of FOMC

Looking at the September 10-year note we see some consolidation after interest rates hit their low in March. We have since been trading in a range, and although the stock market continues to rally, treasuries are very much still focused on current economic decimation. Traders will need to watch if this consolidation continues ahead of the next FOMC meeting on June 10th. The fed has been diligent through this crisis and the scheduled meeting may introduce new monetary policy tools. It is of our opinion that the name of the game is still about liquidity and money supply. Those are the keys to economic decisions by Fed chair Powell.

10-year on technicals in the September contract has important support at 138’110, and this level will need to hold if we want to see continue consolidation or rangebound movement. A break of this level we could see the contract trade pretty quickly to 138’000 and lower. The market remains poised to test the higher range at 139’040 and a break of this with supporting fundaments we can see a test of 139’110 or higher.

10yr Note Sep '20 Daily Chart
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Equity - Jobs Number Blowout Moves Stocks Even Higher

This morning’s non-farm payrolls data were expecting to see a figure in the neighborhood of -7.7M and an unemployment rate of about 19.8%. Instead we added 2.5M jobs (about 3.1M of that was private payrolls w/ the losses largely coming from local government jobs) and saw an unemployment rate of 13.3%. It is safe to say that while stocks have discounted most, if not all, the bad news that you see or read about, but it did not expect this kind of number. The Dow is up 700 (2.65%), the Nasdaq is up 130 (1.37), the S&P is up 63 (2%), and the Russell is up 55 (3.77%). It is hard to say where this number takes us with the other indices, but the Nasdaq has now eclipsed the pre-shutdown highs.

The market has come back to an incredible degree in a very short period. I can understand the stance that we are due for a pullback given all the headlines out there. However, you could also argue that we’ve seen the pullback that everyone was calling for prior to the shutdowns. If we continue to see data anywhere near what we did today, a selloff of significance becomes increasingly unlikely.

E-mini S&P 500 Jun '20 Daily Chart
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