RJO FuturesCast

August 16, 2019 | Volume 13, Issue 33

The Markets

Metals - Gold Futures Have Established a Solid Floor

It seems hard to find a reason to be short on gold these days, so why not look at where the near-term bottom is and play the upside? Let’s look at the core reasons to be long. The first, and a little shocking, is the 2/10-year yield curve finally inverted which has a perfect 50-year track record of predicting a recession. Once this inversion happens a recession follows on average 18 months later with a 100% accuracy according to history. German and European economic growth has come to almost a halt with the UK and German GDP numbers posting negative growth numbers recently. World famous hedge fund manager Ray Dalio recently stated that a recession before the end of 2020 he sees at 40%. There is little to no reason to be short gold right now other than a pure chart play betting that we should see a correction just below 1500 before we take off once more. I would be positioning for a longer term move higher in gold well beyond 1600 given the warning signs we are already starting to see abroad.

The one factor that makes me think otherwise is that the economic data here in the U.S. continues to be strong with retail sales and jobless claims recently coming in much better than expectations, along with a revision up in the next quarter GDP. Things seem to be plugging along just fine despite a trade war raging on. Investors should look at building a long position in outright futures, or calculated risk call spreads with various ways of structuring the trade to keep costs down and leave upside open. If you would like more information on how to play gold please contact me directly.

Metals - Silver Sellers Beware

September silver is approaching expiration here in 11 days. Technical setup continues to favor the bull camp. In my view correction is to be bought, not sold into. In other words, if you are not set up already in the market on the long side, wait for a correction. What I find impressive for the metals, and especially silver, is that it is relatively strong despite the strength in the U.S. dollar. The U.S. dollar had a big technical uplift yesterday at it takes out multi-day highs and silver is also going for the ride. This is largely due to the new negative yield lows in the German bund, weakening the interest differentials for the Euro and leading to strength in the dollar.  While a strong dollar can be bearish for metals, such as silver, metals are seeing strength as bond yields fall.

 With headlines full of twists and turns, as we are dealing with China to work out a trade deal, upside potential for silver could exceed $20.00 or more. To keep it simple, there is just a lot of news that keeps silver bulls confident that they could see more upside…

Silver Weekly 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 - Another Crude Washout Is In The Making

Crude oil prices continue to consolidate, and trend lower weighed in by the escalation in U.S.- China trade tensions and fears that the global economy will continue to slowdown. Looking at rising oil production in the U.S. and with new pipelines coming on in the next few months this should also pressure prices. Watch the weekly inventory data as the 5-year average is 426 M/b in inventory against current levels of 433 M/b leaving a supply glut. I would expect prices to push back down to the contract lows of $50.50 if crude can break critical support at $53.75.

Softs - Sugar Consolidating Below Moving Averages

This week’s comment finds sugar consolidating below the moving averages and the most recent swing high. Outside market weakness has surely weighed on sentiment. The constant barrage of bullish prognostications from large commodity concerns and producer unions has recently been unable to lift sugar over the 18-day moving average, at least not for very long. The size of the fund short position, which we will find out about with Friday’s release of the COT, should be just shy of 100k. There is room for the funds try to push this market lower. The question might be, however, is there a fundamental catalyst for new lows?

As volatility increases across commodity and stock index futures markets the October sugar futures contracts may be settling in for late summer doldrums. In their comment from morning lead, The Hightower Group had October sugar futures turning a blind eye to the excitement in crude oil and currencies. Crude contracts were down over 2-full points and sugar was off only 11-ticks from open to close? This could be a prelude to aggressively sideways price action until the market is presented with new information. 12.19 and 12.63 beckon overhead as risk levels trend followers will use to exit current short positions. Interesting to note that those levels are not profitable exits yet for the trend following models we track. Summertime is not usually kind to trend followers and these short positions should be viewed with suspicion. A short covering rally could erupt at any moment.  But, at the end of the day, should production challenges and deficit projections begin to fade it will be difficult for sugar to avoid new lows.

Sugar Oct '19 Daily Chart
Softs - Extreme Cotton Technicals

December ’19 cotton futures prices are stair stepping their way down on the charts as most fundamentals in the supply/demand dynamic are still strongly bearish. Ending stocks for 2019/20 were adjusted, now at a 12-year high, and currently weak demand are weighing heavily down on prices. While from a fundamental standpoint, cotton futures still have plenty of reason to be bearish and prices can always go lower, the fact that managed money and traders are so heavily net short that it wouldn’t take much in the way of tangible shift in the supply/demand dynamic to see large short covering action and a price rally. Currently crop conditions are in decline with hot dry weather in Texas and US/China trade tensions might be easing slightly. As stated in my previous article on cotton: Keep a close eye on this market. If production issues become more threatening or headlines on trade talks take a strong positive tone, this could be a great opportunity for patient, well-times bulls.

Cotton Dec '19 Daily Chart
Agricultural - Grain Futures Update w/Stephen Davis - 08/16/2019
RJO Futures Senior Market Strategist Stephen Davis discusses the grain futures markets.  If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7181 or sdavis@rjofutures.com.
Agricultural - Live Cattle Down This Week

The big news over this past week is that Tyson packing plant in Kansas went up in flames last Friday. This led to the market opening limit down on Monday, for both feeders and live cattle contracts. The market showed some follow through yesterday with feeder cattle futures and live cattle futures almost going limit down again when the market had expanded limits. It appears that the market is assuming that the other plants will not have the capacity to take on the increase in market ready cattle. The redistribution of roughly 30,000 head of cattle is going to put a burden on an already taxed packing capacity, which is going to lead to a backup in market ready cattle. If there is any bullish news to be taken out of this, it is that the packers are going to increase demand for the beef which could offset any cash loss. The USDA estimated cattle slaughter came in at 116,000 head yesterday. This brings the total for the week so far to 231,000 head, down from 237,000 last week, which means that slaughter this week is down 2.5% from last week. USDA boxed beef cutout values were up $5.45 at mid-session yesterday and closed $7.74 higher at $226.36. This was up from $215.78 the prior week and is the highest beef market since May 6th. With October cattle below the 100.00 level there is really no bottom in sight right now and we could see some further pressure to the downside until the logistics of the packing plant get fixed. The gap lower does signal for a decline to the 97.000 which would be the next level of support.

Live Cattle Oct '19 Daily Chart
Currency - Dollar Continues to Outperform as Economic Anxiety Runs Hot

The USD has gained in light of recent economic uncertainties following a more than 700pt decline in the Dow Jones futures. Probably the newsiest event of the week was the inversion of the 2-yr and 10-yr yield spread. Often times the inversion of the yield curve is a harbinger for an oncoming recession and casts doubt over the safety of foreign currencies vs the U.S. Dollar. On top of the bond yield inversion, we’ve also heard news of the ECB preparing to launch a “major” stimulus program at its next meeting in September. The news of such events is very bearish for the euro, which is being reflected in its recent 150 point decline over this past week.  We do expect the U.S. dollar to eventually struggle as it continues to grind towards its Aug 1st highs of 98.93 in the cash market. The strength of the USD has threatened US Manufacturing (presently at recession levels), but has kept the U.S. consumer in a good place despite trade war with China. Until then, the dollar continues to be the currency world’s favorite safe haven choice. 

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.
Equity - Stocks Recover Slightly from Wednesday’s Break Lower

Equity markets traded back and forth this week with a big move lower across the board on Wednesday. Friday’s trade started the day positive and continuing the move higher from Thursday’s recovery. U.S./China trade sentiment has switched slightly more positive from the beginning of the week. There is some hopefulness that stocks will end the week strongly with mentions of another round of stimulus from central banks and Trump pressuring the Fed but the Hong Kong protests could add to today’s volatility. Although the outlook is for positive trade today, gains should be limited with resistance in the S&P at 2895.00. A close below 2834.50 would continue the trend lower. The Dow and Nasdaq are also seeing slight gains to end the week but haven’t reversed the current trend yet. Extended gains are needing to see positive headline on U.S./China trade talks while protests in Hong Kong could provide additional negative pressure.

E-mini S&P 500 Sep '19 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-2270 or therrmann@rjofutures.com.

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