RJO FuturesCast

September 20, 2019 | Volume 13, Issue 38

The Markets

Metals - Will Gold Trade to $1,600?

In the early morning trade, December gold is trading slightly up at $1,510 an ounce. Gold continues to hold onto the $1,500 an ounce handle and with a light U.S. economic report slated for today, the shiny one should be able to end the week above it. December gold should enjoy continued support from weakness in the US dollar and the ongoing tensions in the Middle East with Iran. Furthermore, the bull camp gained more support with the overnight Saudi attacks on parts of Yemen, which claimed responsibility for the attacks over last weekend on Saudi Arabia’s oil production.

If we take a quick look at the daily December gold chart, you’ll clearly see that gold is still holding onto its strong up trend and still trading in its bullish up trending channel as well. If gold can trade and hold above last week high of $1,532, then gold is prone to test the top of the channel which is well above $1,600 an ounce at this time. I have highlighted these levels below on my RJO Pro daily December gold chart.

Metals - Silver Consolidates Sideways at Support

The silver market saw choppy sideways trade this week after last Friday’s slide lower to 17.505 in the December contract. Despite the Saudi oil attack over the weekend and FOMC meeting on Wednesday the silver market continues to consolidate at this support level. Mixed global equity markets overnight show no real push one way or the other but continued Chinese support of their economy and India’s corporate tax rate reductions could lend some support.

We will also see U.S. Fed speeches today, but a slowing of U.S. economic data reports could curtail any breakout mores. Thursday’s push higher in the stock market added pressure to silver and other metals as it weakens the safe-haven demand of metals. Any escalation of tensions in the middle east or signs of global economic slowdown would give bulls support to push the market off this support. In the December contract a close over 18.10 is needed to continue the trend higher and with momentum levels approaching oversold levels any bullish fundamental news could trigger a short covering rally that would accelerate a move higher.

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.
Energy - Questions Remain Following Wild Week in Crude

Following the weekend’s developments, namely, the bombing of Saudi oil facilities, with responsibility claimed by Houthi rebels and finger pointing at Iran; the now front month November contract gapped $9.10 from Friday the 13th’s close to the high Sunday night – Monday morning.  While the market has somewhat settled down, it remains without the gap closed and above the broken upper trendline from the October 2018 and 2019 highs (pictured below).

While the U.S. now trumps Saudi Arabia in production, there are reports of 70+ million barrels of Saudi storage, the global oil market is more diversified than in the past. There are reports of capacity coming back online, but there remains the concern for escalation should there be military conflict in the region.

While these fundamental developments are being monitored, several technical questions also remain.  For instance, the gap remains unclosed, former trendline resistance is acting as support and the Fibonacci levels from the Friday close to Monday morning-overnight high remain.

Movements such as this often have the potential to create opportunity in the market.  To discuss your trading in this market and others, please contact me at your convenience.

Softs - Cocoa Futures Continue to Climb

It appears the lows may have been put in the December cocoa futures contracts. Although the contract has hit overbought levels, the technicals and fundamentals are working together to get prices back to 2500. As the panic in the global markets has taken a short breather, cocoa futures have put together six positive sessions. Technically, prices continue to close above the 9-day moving average. A long-term bullish technical signal was also reached with a close above the 200-day moving average. Unfortunately, any disruption in the global equities creates pullbacks in the softs’ prices – but those pullbacks have created buying opportunities.

 Traders appear to be adding to positions as futures’ prices climb, taking a more conservative approach after the decline in prices during July/August. The euro and pound will add to the support and this move higher as these currencies have moved with market conditions and risk sentiment. Supply and demand have taken a backseat currently and many traders are looking outside the fundamentals. Resistance is around 2445 then at 2495. Positive economic news alongside more longs entering the market will be needed to test contract highs as we enter the final quarter of the year. COT data after the close Friday will gives us a feel for how traders are positioning.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-4124 or pmooses@rjofutures.com.
Softs - Coffee Short Covering Rally

Next week’s weather forecast for major growing areas in Brazil are showing quite favorable, which really helps to keep rallying December coffee prices in check. The recent strength in December coffee can be primarily attributed to dry conditions last year, and as our friends at The Hightower Group previously reported, “while next week’s rainfall should benefit Brazil’s upcoming 2020/21 production, it will not offset several months of dry conditions and July’s frost event”.

Recently, among ongoing tariff talks and new issues arising with Iran and the Saudi oil fields, we’re seeing more of a “risk-off” trade, with money camping out more on the sidelines of some safe-haven commodities and the U.S. dollar.

The December coffee price action yesterday showed some strong short-covering, but I believe that December coffee prices will need to see positive news in the way of resolved issues with Iran, and a weaker USD to offer the support needed to recover and revisit the 10750 level.

Agricultural - Corn Needs Bullish Development to Spark Short-Covering Rally

USDA’s foreign agricultural service indicated China corn production in the 12-months that start October 1st may fall to 250M tons from 257.22M this year. The short term technical action remains positive and there seems to be more upside potential in the near term as opposed to downside. The traders seem to see lower harvested acres and still potentially lower yields unless we see ideal conditions over the next 3-4 weeks. Ear weights were already considered low for the September report and those numbers can drop if harvest is cut short. The warm temps are a double-edged sword. Less chance of frost, but less time for filling on late planted crops. If harvested acres drop to 77.9 million, as opposed to 82, then ending stocks slide to 1.383 billion bushels compared to estimates of 2.190 billion. The next area of resistance comes in at 374 and 376 with support coming in at 370 and 368.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-2270 or tcholly@rjofutures.com.
Agricultural - Grain Futures Update w/Stephen Davis - 09/20/2019

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.

Currency - Tug of War for U.S. Dollar Direction

U.S. dollar futures have chopped sideways this week as the market tests support and resistance levels around Wednesday’s Fed announcement. The U.S. Federal Reserve cut interest rates another 25 bps, which was largely priced into markets, then gave a somewhat hawkish testimony. Future rate cuts are not ruled out, but certainly have not been promised either. Chairman Powell stated that the economy is improving, sighting that labor statistics and consumer confidence remains strong. The dollar jumped on this less-than-dovish rhetoric as foreign currencies dipped. However, reversals were observed in afternoon trade and again Thursday morning. Bears and bulls alike have a solid platform to stand on. Those in the USD bear camp argue that falling corporate profits are linked to a strong dollar (as a strong dollar deters foreign buyers). When this corporate weakness hits the consumer, the economy will be shaken down. In short, the Fed should work to weaken the dollar in order to compete with suppressed currencies elsewhere.

From a technical perspective, the dollar is headed into a period of weakness in its quarterly, monthly, and weekly cycles. The last time this happened, the dollar index fell six handles. Dollar bulls argue that America’s relative strength compared to other slowing economies will attract investors to the dollar market as people look for a safer place to keep their cash. Furthermore, given the volatile spikes in the repo rate, it is clear there are liquidity and supply issues in the U.S. banking system, keeping the dollar elevated. Both camps have a credible argument. Should liquidity issues continue to squeeze the dollar higher, the hand of the Fed will be forced to unroll QE and inject more dollars into the system. Should this happen, inflation will return and elevate commodity prices, depressing the consumer and fueling the natural course of the business cycle. I believe the catalyst will be falling corporate profits.

Interest Rates - Bond Market Volatile Ahead of Fed Announcement

Today shapes up to be a volatile one with the Federal Reserve widely expected to lower rates .25% with the announcement coming at 1:00 PM central. The market is expecting it and is currently priced in. The real market mover should be what Powell says in his press conference.  Do they state that they see more rate cuts ahead? Or will todays expected cut be more of an insurance cut meaning the economy is still doing well, but we are cutting to keep pace with the rest of the world?

Many presume Iran was behind the attack on oil fields in Saudi Arabia this weekend, and investors bought up crude and bonds as safety and stocks sold off. Yesterday, the move in crude reversed as oil pipelines are scheduled to get back on line quicker than anticipated, and bonds lost the initial bid that was seen Monday morning. Economic data in the past few weeks has weakened a bit, but not enough for the Fed to continue a path of constant reduction of rates, even though the world economy is at a critical level where many of the world’s economy are near or at recession levels. Traders should be on their toes this afternoon as the announcement on rates comes out. However, more important than the announcement of rate cuts is what Powell says afterwards.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-2270 or gperlin@rjofutures.com.
Equity - Equity Futures Eye All-Time Highs Despite Developing Economic Issues

U.S. stock futures traded modestly higher Friday morning, with even gains across all four major indices. Stocks seem to be eyeing fresh all-time highs as uncertainty is removed from global markets in the short term, and Chinese negotiators are in Washington for talks once more. If all-time highs are seen again, how much more upside is there?

Economic warning signs continue to flash around the world. Foreign equity markets are selling off as developing economies and seasoned economies struggle to keep up with the U.S. The German GDP is contracting, and Chinese data continues to weaken to multi-year lows. The repo rate is warning of a domestic liquidity issue, which is keeping the dollar elevated, thus deterring foreign purchases of U.S. products. Yes, the American consumer remains strong, keeping U.S. growth steady. However, the saving to investment ratio is high, indicating the consumer does not have long-term economic confidence. Furthermore, we observed a dramatic transfer in the stock market last week as investors swapped growth stocks for value stocks… another sign of caution.

The most recent stock market rally has been funded by REITs and utilities, both defensive groups. Not to mention the fact that domestic manufacturing is now contractionary. The yield curve is flat, and investors still show interest in safety assets. The Fed is cutting rates with stocks near all-time highs and has confirmed that they will roll out quantitative easing when they see fit. So yes, stocks will likely move higher in the short term, but I believe we are in the late stages of economic expansion. Quarterly profits are shrinking and that is one of the best indications of rough waters ahead. A close above 3032.35 in the e-mini S&P hints at a run above 3050, while a close below 2984.25 could trigger a retracement to 2943. Investors beware; any slip-up in trade talks or trouble out of the Middle East could have a dramatic effect on equities.

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