Weekly Futures Market Summary Dec 13th

BONDS:

In retrospect, we are incredulous with the action in treasury prices today following the hottest US inflation reading in 40 years. While some traders suggested the market was aware of the hot inflation potential, last Friday’s bond and note action still seemed nonsensical. In fact, a stronger-than-expected consumer sentiment reading also failed to send bond and note prices down. However, even the equity markets discounted or ignored the 0.7% gain in the November CPI. Over the last several years treasury prices have been propelled higher and held higher by a combination of US Federal Reserve support, speculative long interest, and simple fear of the Fed.

Later this week the Federal Reserve will have an extremely difficult task as they begin to unwind historic supportive policy measures without puncturing economic and Treasury market sentiment. Typically, we would expect treasury prices to have declined sharply following last week’s CPI report and therefore we doubt prices will fall in the wake of US producer price index reading for November which is expected to climb by a very hot +0.6%. However, some economists will suggest that the excluding food and energy component with a month over month gain of only 0.4% shows supply chain price pressures are beginning to stabilize. Even definitive risk on sentiment flowing from equities has had little negative influence on treasury prices and that is clearly justified by the uncertainty flowing from the omicron situation.

CURRENCIES:

Surprisingly, the dollar index saw a hotter than expected US CPI report, rallied and then failed as if hotter inflation and the potential for higher yields in the US were not of interest to the trade. Perhaps the trade sees the US Fed sticking with their gradual taper exit instead of expecting accelerated tapering. On the other hand, the Japanese Yen and the British pound were significantly oversold late last week, in part of their gains might have been the result of technical short covering. While the dollar has not forged new contract highs in nearly a month, the technical and fundamental bias still favors the bull camp.

While Japanese machinery orders for October were better than expected the Tankan surveys of manufacturing and “all industry” were disappointing. However, we see the Yen as a sideline currency wrapped in a range bound by 88.45 and 87.85. Like the Japanese Yen, the Swiss franc also looks to be caught in a trading range (albeit a wider range), but the Swiss also sits just above a “failure point” on its charts in the early going this week.

With the UK Prime Minister warning of a severe omicron infection spike we suspect UK central bank meeting minutes will express caution toward the economy and the need for ongoing accommodative policies. From a chart perspective, the path of least resistance is down, The path of least resistance in the Canadian dollar is also down to start out the week, but it is unclear if the Bank of Canada meeting minutes will steer the Canadian away from a quick slide down to 78.00. However, the BOC has recently been at the forefront of central banks leaning in favor of hawkish policy changes.

STOCKS:

The stock market rallied straight through last Friday’s CPI report that could have hammered prices off fears of tightening Fed policy. However, seeing a hot CPI resulted in a rally in treasury prices which gave the bull camp an unusual windfall. The NASDAQ obviously outperformed the rest of the complex partly because of news that Microsoft might see authorization from the EU to undertake a buyout for an artificial intelligence and speech technology firm. Global equity markets were higher at the start of this week with the lone exception the Russian RTS. Increased geopolitical tensions between Russia and the rest of the world are seen following threats from the G7 of aggressive sanctions of Russia if they violate the sovereignty of the Ukraine. Another negative largely discounted by the trade this morning came from the UK Prime Minister announcement that a wave of omicron infections was unfolding.

While the initial gains are not significant from that absolute perspective, the S&P has all-time highs in its sights in the early going this week. Apparently, the markets are unconcerned about the potential for a Russian incursion of the Ukraine, warnings of surging UK omicron infections and the presence of a US Federal Reserve statement later this week. On the other hand, adjusted for the gains since the last COT report was measured, the net spec and fund long is likely at the highest level since early 2020! The December 7th Commitments of Traders report showed E-Mini S&P Non-Commercial & Non-Reportable traders net sold 25,779 contracts and are now net long 173,825 contracts.

With the Dow futures forging an 18-day high and the markets clearly capable of discounting inflation threats, the path of least resistance is up, but volatility is likely to expand dramatically. Fortunately for the bull camp, the net spec and fund long in the Dow is nearly flat which in turn suggest the index retains speculative buying capacity. The December 7th Commitments of Traders report showed Dow Jones $5 Non-Commercial & Non-Reportable traders are net short 3,445 contracts after net selling 969 contracts.

Relatively speaking the NASDAQ is lagging the rest of the markets but the index appears to be capable of grinding out gains until the US Fed statement is in the market’s windshield. We see critical support in the NASDAQ at 16,251.50 and a key resistance point at a series of (ix highs around 16,456. The December 7th Commitments of Traders report showed Nasdaq Mini Non-Commercial & Non-Reportable traders added 84 contracts to their already long position and are now net long 24,340.

GOLD, SILVER & PLATINUM:

Just as gold and silver failed to rally off one of the hottest US CPI readings in nearly 40 years, the markets have not rallied off similarly much hotter than expected German wholesale prices. Yet another failed bullish catalyst for gold and silver came from the Chinese government with Bloomberg headlines touting the Chinese government “pivoting toward growth policies”. Fortunately for the bull camp, both gold and silver ETF holdings increased last week in a fashion that signals some investment interest. Unfortunately for the bull camp the US dollar has forged a 4-day high in the early going today and the risk on vibe flowing from global equities has put gold and silver off balance in the early trade.

The silver market on the other hand damaged its charts last week with a trade below $22.00 and with the high to low decline from the latest positioning report of $0.70, the silver net spec and fund long probably sits in the lower portion of the 2021 positioning range. The Commitments of Traders report for the week ending December 7th showed Silver Managed Money traders were net long 17,860 contracts after decreasing their long position by 9,718 contracts. Non-Commercial & Non-Reportable traders net sold 9,075 contracts and are now net long 44,089 contracts. In gold, we expect further sideways coiling and in silver we expect more erosive price action.

Like the gold and silver markets, the palladium market missed out on last week’s potential inflation window of opportunity. Like the rest of the precious metals complex, the PGM trade remains confident in the Fed’s ability to put the brakes on inflation before it becomes entrenched. As for the demand side of the equation, the recent reserve ratio reduction by China was met with a yawn in the PGM markets which suggests the trade remains skeptical of Chinese demand. A caveat to the bearish view toward PGM markets is the potential for a Russian incursion of the Ukraine which in turn could lead to a wide embargo of Russian exports like PGMs. With a decline to the late November consolidation low of $1,690, we suspect the palladium net spec and fund position will post a “record” short! The Commitments of Traders report for the week ending December 7th showed Palladium Managed Money traders net bought 294 contracts and are now net short 2,444 contracts. Non-Commercial & Non-Reportable traders net bought 238 contracts and are now net short 3,122 contracts.

The platinum market also remains in a downward bias with demand hopes injured by the latest virus headlines and the markets undermined because of higher refined PGM production guidance from Anglo-American platinum LTD for 2021. In a major retroactive negative, platinum ETF holdings last Friday reduced their holdings by 27,062 ounces or posted a daily decline of 0.7% of total holdings. Relatively speaking, the net spec and fund long positioning in platinum leaves room for additional stop loss selling on a failure of consolidation support. Platinum positioning in the Commitments of Traders for the week ending December 7th showed Managed Money traders went from a net long to a net short position of 3,776 contracts after net selling 3,811 contracts. Non-Commercial & Non-Reportable traders net sold 2,197 contracts and are now net long 12,409 contracts.

COPPER:

With disappointing builds in global exchange warehouse stocks at the end of last week, another daily LME copper stock build on Monday, a failed reaction to a Chinese reserve rate requirement reduction last week, ongoing uncertainty toward the Chinese economy and continue trade below the 200-day moving average of $4.3220, the bear camp has control. Certainly, global exchange warehouse stocks remain tight and still within striking distance of 13-year lows, but to bring copper out of the sideways/lower pattern will likely require true and sustained risk on sentiment in the West and/or more stimulus from China.

ENERGY COMPLEX:

Fortunately for the bull camp, global equities are throwing off positive sentiment to start the trading week as a US strategic supply sale of 18 million barrels looms later this week and global crude oil in floating storage increased by 2.5% on the week. In fact, the biggest gain in floating storage was seen in the Asian-Pacific area with a gain of 21%! Fortunately for the bull camp, a European firm is predicting OPEC+ will put increase production moves on hold and could even roll back some of previous production increases because of the omicron infection wave. Furthermore, after some initial strategic sales, sales by non-US-countries have dried up. In a longer-term negative, the oil rig operating count last week increased by four and has reached the highest level since April 2020.

It should also be noted that US gasoline stocks continue to run at an 18-million-barrel year-over-year deficit despite stocks increasing in each of the last 2 weeks. From a technical perspective, the net spec and fund long in gasoline remains relatively balanced leaving the control of prices in the hands of the fundamental camp. The December 7th Commitments of Traders report showed Gas (RBOB) Managed Money traders reduced their net long position by 1,531 contracts to a net long 57,431 contracts. Non-Commercial & Non-Reportable traders net bought 3,954 contracts and are now net long 53,894 contracts. We see the RBOB market vulnerable to back and fill action.

About the most supportive thing that can be said about the global weather outlook for natural gas is that the markets are aware of an ongoing mild pattern and perhaps that was priced in with last week’s spike low! On the other hand, there is a serious Eastern European supply threat looming with the Ukrainian secretary of state suggesting it would be difficult to see gas flow through the Nord Stream 2 pipeline if Russia shows aggression against the Ukraine. In a very supportive demand side development, Northeast Asian cash LNG prices have recovered with buyers in that region apparently competing with European buyers. Furthermore, a Bloomberg story suggests US LNG exports are now economically feasible to both Asia and European buyers.