28.06.21 - The Commodity Report

My current thoughts on Natural Gas, Corn, Cotton and Bitcoin as well as the weekly recap.

Jun 28

Top/Worst Performer Of The Week

Most of the commodities were able to make up some ground again after the strong selling pressure in the last week. In my opinion, we now have to decide between commodities which only had a short correction and probably will resume its selling pressure, and those commodities which should again offer attractive buying opportunities. In the last week of trading, only the Grains and Meats sectors were on the losing side.

Gold and Silver posted only slight price gains and are still massively oversold. In the Grains sector, Rice increased, while Soybeans, Soybean Meal and Wheat continued to come under pressure. In the Meat sector, Pork continued the sale I had anticipated. The bottoming out at Lumber was not sustainable and the sale seems to continue here. The Energy sector remains in high demand with Oil and Gas having a strong week.

Financial Conditions

If we take a closer look at the change of financial conditions, we saw the USD was slightly lower in the last trading week after its bullish breakout the week before. Inflation expectations were surging and show me that the question about long term sustained inflation is still unclear. Yields across all maturities were rising. Nevertheless the 10Y Realyield was slightly lower last week.

As long as the dollar isn’t able to break the 93.3 mark and therefore isn’t able to make a higher high, I’m sticking to my transitory USD strength thesis.

What I Have On My Watchlist / Waiting for my entry signal

Attractive on the Long Side: Gold, Lumber, Copper, Cocoa, Platinum, Silver, Palladium, Cotton, Soybean Oil

Attractive on the Short Side: Lean Hogs, Sugar

My Thoughts & Current Setups

Natural Gas managed to break through the resistance last week and in my opinion could now continue the rally upwards. I definitely like the setup. The price breakout is supported by a lot of fundamental data such as the lower than expected weekly Nat Gas reserves. In addition, Nat Gas is also a commodity that should gain in importance in the long term from the transition from Oil to renewable energy. Moreover China stepped recently up and is now the worlds largest importer of Nat Gas. Supply is already very tight and some analysts also fear another very cold winter which would increase supply concerns even further. Here you can read more about the Nat Gas rally.

I think at this point it should also be noted that while investments in fossil fuels are being massively reduced, Coal futures in the EU and China are at new all-time highs. In my opinion, you can see the weak points of the global emissions reduction strategy at the expense of the general public, due to a shortage of supply and higher prices in the middle of the reopening process.

Another interesting commodity is currently Cotton. Here the price is currently in the process of getting to a historically important resistance. Cotton is currently supported by a strong positioning of the commercials and seasonality. Moreover farmers are concerned about the weather disruptions and heavy rain which could damage the crop. Here you can read more about that topic.

Corn is a commodity about which I don't have a strong opinion at the moment. However, I made a discovery here that shows how unusual the behavior of the Corn futures is at the moment. If you look at the historical spread between the first and second futures contract, you can see that it has never been as high as it is now. Even more unusual is that while all other spreads on Grains have fallen again, Corn has been able to widen the spread further. One can deduce from this on the one hand how high the demand for the commodity is, on the other hand how overbought the forward contract still is.

Since I personally see Bitcoin as digital Gold and not necessarily as currency, I would like to write a few words about this today. Bitcoin has been sold off massively in the last few weeks and has already lost 50% from its high. However, this is relatively normal for the crypto asset, as the average sell-off since 2016 has been 48%. If Bitcoin is quoted below 30.000 by the end of the day, the sale will continue in my opinion. Potential targets you can identify in this chart by Nautilus Research, which would be somewhere between 19.500 and 13.800.

For me, on the long side, a daily closing above 36.000 would be interesting.

Elsewhere In The Macro World

The PCE Price Index, which is important for the FED, was within expectations. Unemployment claims were slightly weaker than expected and further comments from FED chair Powell received little attention. PMI numbers from Europe were strong and encouraging. Overall it was once again a quite week on the news front.

Next week will be more exiting! On Wednesday we will receive important PMI figures from China, which will provide further information about the flattening growth there. In addition, there are Pending Home Sales numbers from the US, important for the housing market. The PMI figures for Europe, Great Britain and the USA will follow on Thursday. The next OPEC meeting is scheduled for the same day and will be closely watched by oil market participants. Friday will be rounded off with the US labor market report, where many market participants already have high expectations, because of less unemployment benefits distributed in the last month.

If you’re currently looking for a great podcast for starting your week, I highly recommend this macro talk between Julian Bridgen and Jesse Felder.