21.06.21 - The Commodity Report

Wow what a week and so many things I have to talk about. This weeks report is about the FOMC meeting, sharply falling commodity prices and water futures.

Top/Worst Performer Of The Week

Market participants have waited a long time and now it is finally here, the correction in the commodity sector! Now, in my opinion, it is important to keep calm and use excessive dumping of commodities as buying opportunities.

As good as all commodities were massively sold last week. Usually if this happens you can find great buying opportunities. I see those opportunities in the Precious Metals as well as the Softs and Energy sector.

Palladium and Copper were enormously overbought and are now getting crushed. Copper remains interesting for me long term. Don't worry, I'll get to Gold later. Many Grains such as Soybean products and Corn are also continuing their correction. The story here is driven by increased biofuel demand and continued Chinese buying as well as the weather madness in the US. Lumber has been pulled down again but now appears to be attempting to form a bottom. The price was supported by an important Fibonacci level and former support level. Natural Gas stopped its rally directly in front of a bullish breakout level, but remains interesting in terms of a bullish break out trade.

I think that a lot of speculative funds are now being flushed out of the market, which should offer us good entry opportunities.

Financial Conditions

If we take a closer look at the change of financial conditions, we saw the USD was performing very well after the changed interest rate hiking outlook by the FED was presented.

Because we finally saw signs of the FED thinking about tapering and to reduce the massive stimulus, which is still active, inflation expectations were falling.

On the other hand we have a new development in the bond market, which is important to understand. If tapering is announced, the long end of the yield curve is usually rising and the short end is falling. (30Y yields going down, while 5Y yields going up) We also saw this development in last weeks trading. Nevertheless I still expect to see 10Y yields as high as 2% at the end of the year, but for now prefer a short on the 5Y Treasuries.

Lets talk about the FOMC meeting. I think a lot has already been said about the meeting, so here are the really decisive points for me:

After Jerome Powell explained the steps and trains of thought in the usual press conference, US bonds fell tremendously and the USD got hit with momentum upwards. Five year government bonds posted the fourth largest daily loss since data was recorded. (so yields were skyrocketing)

The dollar has now managed to perform a bullish breakout, after forming a double bottom and could continue its rally a little further. I am sticking to my fundamentally bearish dollar stance, but currently I have no position against the dollar and am sitting on the fence and wait for further developments, as I write this weekly report.

What I found most important was the comment from the FED chair that this was the meeting where you talk about whether you should talk about tapering. This shows me that we shouldn't be far from the announcement of tapering itself. In any case, it will be announced this year, in my opinion. The FED is now finally actively debating about tapering!

What I Have On My Watchlist / Waiting for entry signal

Attractive on the Long Side: Gold, Lumber, Copper, Cocoa, Platinum
Attractive on the Short Side: Lean Hogs

My Thoughts & Current Setups

While we’re still talking about the aftermath of the FOMC meeting, the western part of the US feels what it means to live under enormous heat. An extreme scenario, which is unlikely to be an exception in the future. Welcome to the future of rising temperatures with all its consequences.

I have found a controversial but, in my opinion, effective trading opportunity for this scenario, which is trading H2O water futures. A bet on the scarcity of water reserves. Ethically it is controversial to be allowed to offer these products at all, since water is the most important resource of our planet and with the listing on an exchange the water price falls to a certain extent in the hands of speculators.

The contract, which is based on the Nasdaq Veles California Water Index, is listed on the CME since December of last year. YTD the future already reached a return of over 84% . In my opinion, this contract represents a strategic hedge against extreme weather, longer droughts and the further aggravation of climate change. If you wanna know more about H2O futures, here you go.

China's influencing power over commodity prices appears to have ended. While China announced that they’re ready to flood its own market with raw material reserves last week, raw material prices in China fell. However raw material prices for Lithium, Coal and Iron Ore on the American futures exchanges continued to rise. So it currently looks like there will be a divergence between the home market and foreign markets, which is a new development. As long as the international demand for raw materials remains at the current high level (in the midst of the global reopening) it will be difficult for china to keep turning the price screw. Here you can read more about this topic.

Last but not least Precious Metals were getting crushed but nobody is finding a convincing argument why this move happened with this magnitude.

While I was mentioning last week that I’m waiting for a new breakout in Gold, I changed my view after this bearish surprise. For me Gold is a clear buy right now.

After the FED meeting all metals were getting crushed. I believe this was an emotional exaggeration by market participants. Gold was not nearly as overbought as copper, palladium or even platinum. Fundamentally, one could explain the sell-off with the strong dollar from last week, but in my opinion the extent is not justified. The Realyield is getting even more negative because of the taper story, so why are we still falling?

Now it is necessary to wait for the bottom to form. Aggressive investors like me have already bought into falling prices. In my opinion, investors should definitely buy an upward break above 1800 USD.

Elsewhere In The Macro World

All eyes were on the FOMC meeting last week and, as we have seen, rightly so. Otherwise it was very quiet on the news front.

Look out next week for further comments from FED chair Powell on Tuesday about any further signs of the tapering strategy, as well as PMI data from Europe and the US on Wednesday. The most important thing will of course be to watch how the markets recover from the strong price movements of the past week.

I'm betting that tech and momentum will now perform best again for the time being.

Tweets Of The Week

Till next Monday, Lukas

If in the mean time you have any questions, please feel free to contact me via Twitter or Mail.

(The Commodity Report is not investment advice)