April 20, 2018

Volume 12, Issue 16

Feature Article

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Fundamentals of Energy Futures

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  • Energy Commodities 101
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Metals - Gold

Will Gold Ever Breakout?

Joshua Graves

June gold has been unable to make up its mind in either direction. If you look at the fundamentals of why gold might be trading lower right now, it appears that pressure from a rising US Dollar has been the most clear and obvious reason why gold might be trading lower. The DXE has been pushing the key psychological and technically important 90.00 level three times over the past few months. All these times we have failed to garner enough strength to push above this level. Right now, the DXE is pushing to the 90 level as it last did the first week of April. The difference fundamentally is that now the Fed might be looking at four rate hikes instead of the “most likely” three rate hikes as it appeared earlier in the year. This is a bullish fundamental for the US Dollar and bearish for gold. This alone is a big reason why gold might never have enough strength to push above 1400. A technically important level to watch in the DXE is 90.5. If we get a close above 90.5, we could see gold finally breakdown beneath the longer-term low of 1310 around March 1. If we see a surging dollar, and a more hawkish Fed (despite less than stellar recent economic data) we could see gold breakdown beneath this level.

There has been plenty of bullish news in the headlines recently, however. The conflict in Syria is far from over and I could see an escalation of the conflict by something as simple as a miscommunication between Russian and American forces who operate so closely in the region. Demand for the physical has been great as well with gold and silver ETF’s pressing new highs, and China/India continuing to be strong buyers of the precious metal. Unless we see a surging US dollar, I believe the upside in gold is still there. Until then, we remain rangebound.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-435-4805 or jgraves@rjofutures.com.

Gold Jun '18 Daily Chart

Gold Jun '18 Daily Chart

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Metals - Silver

Silver Continues in Consolidation

Eli Tesfaye

May silver is trading at 17.235, down about 9 cents on the day. So far silver is up about .50 cents compared to last week. The dollar index is strong this morning as it is making a weekly high above 90.00 and that is putting pressure on silver and other metals in general. The technical outlook for the US dollar index is improving with more US rate hikes on the horizon. Even with the strength of the US dollar index, the silver chart looks more bullish with a weekly structure leaving 16.05 near-term bottom. The only negative for silver is the size of longs in this market; therefore, any profit taking type of sustain pullback should be an opportunity to buy rather than sell. My last report, I mentioned that “technically, a close above 17.00 is needed to confirm the downtrend has come to an end.” A weekly close above 17.00 and breakout above 17.50 needed to turn momentum higher. A weekly close below 16.00 will probably end this uptrend.

A weekly close above 17.50 will probably get more participants coming as a buyer rather than sellers. As I have stated before, silver has been in consolidation for a very long time, a move outside of the range below could be material. Proper money management is key to trading successfully, along with sound strategy. I would be happy to talk to you about trading ideas in the silver market. The Employment Situation number this morning shows that the fundamentals of the US economy are still solid. The wild card here is the impact of a trade war with China that hasn’t been factored in the market yet. For now, silver seems to be benefiting from it.

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.

Silver Weekly Continuation Chart

Silver Weekly Continuation Chart

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Energies - Crude Oil

Can a Rise in US Shale Production Sink This Rally in Crude Futures?

Dan Hussey

This week the EIA Petroleum Status Report continued to confirm a more bullish fundamental outlook, with crude oil stocks having drawn down -1.1 million barrels for the week of 4/13.  The decrease in WTI inventories is likely a result of the strong refinery operation, with US refineries operating at 92.4% of full capacity (even though this is .9% lower than last week).  As I have mentioned in the past, the $60 to $65 price per barrel threshold is significant for many (both within US, and abroad) producers.  Now that WTI crude prices have broken above multi-year highs, and the psychological price barrier of $66 is likely to be tested as support.  It’s worth noting that the current run up in crude prices could be the result of pipeline constraints, where US shale oil fields are having trouble moving the product to market.  This is generally because pipelines are at capacity, and with pipeline expansion projects in the works, WTI producers are having to rely on the more expensive means of trucking crude from fields to refineries.

With a constraint in the ability to get oil out of production areas, the rally which broke through multi-year highs seems like confirmation of a longer term trend beginning.  While it’s still early, and some conditions are starting to suggest short-term over bought conditions, traders looking to position long should begin to look for supportive levels for entry.  While a Fibonacci support zone has already provided a bounce from the $58.50 to $58.00 inflection zone (blue boxes on chart are Fibonacci inflection zones), WTI crude futures have begun their climb towards these inflection zone targets clustered between $70 and $76 a barrel.  If WTI crude prices break back into the multi-year range (below $65), traders can expect support into the $63.80 and $58.00 inflection zones.  Either of these supportive areas would be logical downside targets if the price of WTI crude breaks lower, however, the bulls have been holding their key levels and defending their supportive levels.  Before this situation can even be considered, WTI crude price would need to settle below $65.00 a barrel.

In my opinion, the rally that has taken WTI crude prices above the $66.66 continuous contract highs (into the end of 2017 and start of 2018) is still at the forefront of traders’ minds.  While there are still the prior highs ($69.55) to break through, there may be an opportunity to position for the resolving push to test above $70.00 and hit those technical $76 upside targets.  With WTI crude prices above prior multi-year highs, the trend is up until it’s not (and I like to think, trend is my friend).  When a market speaks, you must listen, and WTI crude may be telling us this is the beginning of a much larger trend being born.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7290 or dhussey@rjofutures.com.

Crude Oil Daily Continuation Chart

Crude Oil Daily Chart

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Softs - Sugar

How much longer will sugar futures continue in downtrend?

Joe Nikruto

This week’s comment finds the July sugar futures contract slicing into low priced territory we haven’t seen for years. Seven straight weeks of lower prices has the July contract trading an 11 handle with no real technical bottom in sight. I had to consult a weekly continuous chart to find a swing low, 10.50, for reference. With the Fund trader category almost as short as they have been for some time we can be excused as market watchers for thinking the sugar market is due for a bounce.  But this technical over-sold condition has not been enough counter the tremendous fundamental pressure from the abundance of sugar available. Trend-followers could be forced to cover short positions, but the market will have to close above 13.12 for that to happen in the July contract.  11.91, where the July contract is today, vs 13.12 feels far away but really only represents a little more than one full point.  It is possible that a short covering spark could light a fire in sugar, but the market will still have to contend with supply surplus.  It would make for a more interesting comment if we could find a fundamental crosscurrent to hang our hats on.  But, even with my imagination, I am at a loss to locate a significant fundamental change that could turn the sugar market toward bullish footing. This is usually the exact moment where the market will turn.  So, I am eagerly waiting to see what change is in the offing but at this moment the trend is down, really down. Those who have been early in attempting to locate a bottom have been punished. I continue to think options of shorter duration, if you must play from the long side, are the way to position for a bounce. Traders can get long exposure for less risk (though the risk of losing your premium purchased remains), than futures and if you are willing to pay up you can buy some time as well.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-453-4494 or jnikruto@rjofutures.com.

Sugar Jul '18 Daily Chart

Sugar Jul '18 Daily Chart

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Softs - Coffee

Disappointing Prospects for Coffee

The coffee market has been very weak as much of the trade continues to hold firm on the idea that production in South America is still on track for a bumper year.  However, how much longer can the market hold these lower values before producers decide that they would rather hold out than sell at such low prices. I would argue that we are currently building up for another drop in the market that may take coffee to a level not seen in over ten years.   2017 and 2018 both look to have done what producers set out for after a terrible production year in 2016, giving us shortages in both the Robusta and Arabica blends.  Sadly, this has had an adverse effect on values that are now making it difficult for producers who would like to sell at better prices. I feel that the trade should take a solid look at a possible bounce before the market takes in the next round of bearish news.  We may see coffee make it as low as 11250 before ultimately making its way back to values we are most accustomed to seeing. 

If you have any questions or would like to discuss the markets further, please feel free to contact me at 877-963-6484 or hgalvan@rjofutures.com.

Coffee May '18 Daily Chart

Coffee May '18 Daily Chart

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Agriculture - Grains

Daily Market Update - Grain Futures - 04/20/2018

Stephen Davis

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

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Currencies

Euro and British Pound Round-up

John Caruso

For the fourth straight time the Euro has failed at its >3-yr bear trend regression line running along 1.2450 at the start of the week.  Eurozone inflation data continues to come in soft and well below Draghi and the ECBs target.  German PPI came in at a paltry 0.1% and missed analyst expectations of 0.2%.  We’ve warned our client base that a near-term bottom in the Dollar could be taking hold. While we have yet to confirm a USD/EUR breakout, we’re watching US inflation expectations (which we believe will begin to re-accelerate in coming months), and naturally US interest rates specifically the US 10-yr yield (the dollar has a tendency to follow the direction of interest rates and hawkish or dovish Fed Policy).  For the time being, we recommend managing the range of the June Dollar Index futures 89.00-90.30. 

The June British pound has suffered a breakdown of its recent run higher since the start of the year.  The UK's third data point miss (Retails Sales -1.2% vs 0.8% m/m) in a row this week, finally was enough to encourage the bulls to lock in profit.  Furthermore, the UK reported weak wage growth in Tuesday's labor report and followed up with a miss in the Consumer Price Index.  While the recent data could discourage the BOE from raising rates altogether at its next policy meeting, it could be more likely that they perform a “dovish hike”.  Regardless, the softer data was unexpected and enough to discourage the market.  Near-term downside target could be down at 1.39.50 before signaling immediate term oversold.

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.

US Dollar Index Trapped in a sideways range (88.90-90.30 range)

US Dollar Jun '18 Daily Chart

US Dollar Jun '18 Daily Chart

 

British Pound Key Reversal w/ downside potential to the low end of the range to 1.3950

British Pound Weekly Chart

British Pound Weekly Chart

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Interest Rates

Keep an Eye on the Yield Spreads

Tarik Husseini

30-yr Treasuries are just about where we left them two weeks ago, trapped in a upward channel.  This makes for good technical trading while it lasts, however it’s my contention that the path of least resistance in the weeks and months to come will be down. 

For now, the long end of the treasury spectrum is staying stubbornly strong since a tepid employment report was released on April 6.  Keep an eye on the yield curve, which has flattened considerably as of late, with the yield spread between the 2 and 10-yr, and the 5 and 30-yr narrowing to levels not seen since 2007.  A flattening curve can be a portent of sluggish growth in a rising rate environment.  We know the Fed has shifted to a tightening monetary policy, with two more interest rate hikes slated for this year, and further hikes in the next two years.   This policy is being implemented in the midst of a massive tax cut that has given the economy a shot in the arm but will come with a big bill in the form of a ballooning federal deficit.  It is this deficit that is worrying economists and putting into question how long the shampoo effect of the tax cuts will last.  The international monetary fund recently said that the impact of the tax cuts would be short lived. 

Looking forward, it will be informative to watch how the Fed approaches the flattening of the yield curve.  It may cause a dilemma if long-term yields don’t start to rise.  On the one hand they want to get ahead of any potential inflationary pressure, and with the unemployment rate the lowest since 2000, wage growth is starting to percolate.  On the other hand, a flattening or inverted yield curve has historically been a precursor to recession.   As noted in the beginning of the article, it is my conjecture that the yields on the long end of the curve will resume their trend which is up, and the 30-yr bond future will break out of the channel to the downside.  Remember that yields move inversely to price.  This offers opportunity in the months to come, either trading the spreads, or outright futures.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-672-0664 or thusseini@rjofutures.com.

30-Year T-Bond Jun '18 Daily Chart

T-Bond Jun '18 Daily Chart

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Equities

S&P 500 Gives Pause to Uptrend

Jeff Yasak

Overnight equity markets were mostly lower with the DAX, ESTX 50 and the FTSE being the exceptions.  It looks as if the equity markets were challenged as a result of fresh Chinese suggestions that they were prepared to handle any negative impacts from the growing trade flap with the United States.  Despite general strength in international equity markets overnight, the US markets appear to be poised to start off on a back foot.  The US markets have also failed to directly benefit from Amazon’s claim that they have 100,000,000 prime members worldwide. Although the markets this week do not appear to be concerned about rising commodity prices that issue could become front and center today if that situation is noted by any fed members.  The June E-mini S&P has traded in a very tight trading range over the past 36 hours and would appear to have lost some upside momentum in the process.  Some will suggest that negative corporate headlines from Exxon, Facebook, Southwest and GM, have served to lighten investor interests.  Support comes in at 2700 and resistance comes at 2725.

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.

E-mini S&P 500 Jun '18 Daily Chart

E-mini Jun '18 Daily Chart

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Exchange Info

TACO on E-Mini S&P 500 Futures

Effective Sunday, May 13 (trade date Monday, May 14) and pending all relevant CFTC regulatory review periods, CME will permit Basis Trade at Cash Open (TACO) transactions on E-Mini S&P 500 futures for trading on CME Globex and for submission for clearing via CME ClearPort.  A TACO transaction on the E-Mini S&P 500 futures is an outright future trading the differential between the equity future and underlying cash index's marking at the publication of the Special Opening Quotation (SOQ).  The TACO instrument is similar to the BTIC (Trade at Cash Close) instrument but uses the cash market open and will trade Sunday – Friday following a unique trading schedule.

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