A Week’s Vacation- A Refreshed View Of Commodities
- The dollar made a new high, but it is not running away on the upside
- The Fed is not cutting rates any time soon
- Precious metals- Gold and silver stuck in neutral, but copper and PGMs fall on the lack of trade progress
- Crude oil- A necessary pullback
- Go with the flow in the raw materials assets class
I am just back from a ten-day vacation that took me from my home in the Western part of the US with stops in New York City, Connecticut, and South Florida. I find that time away from the markets and news cycle is a refreshing exercise even now and then that allows me to reset expectations and approach markets without the bias that comes with watching each tick on the screen.
Most markets did not move much while I was away. When I turned on my screen on Sunday afternoon, there were not many surprises which was disappointing. I have always looked at unexpected moves as welcome events which make me revisit my bias, but since April 24 the volatility in most of the commodities I follow was well within a band that would provide little more than a yawn. Unfortunately, it feels like the current malaise is likely to continue to frustrate those looking for significant moves in the commodities sector or any other markets across most asset classes.
The dollar made a new high, but it is not running away on the upside
On April 24, the day before I flew east, the dollar index rose to a new high at 97.88 on the active month June futures contract. I thought that the move above the mid-December peak could trigger some action in markets. The leading reserve currency in the world finally took a step towards validating the fundamentals where interest rate differentials have been highly supportive of a stronger dollar. However, the rally to a new high ran out of steam on April 26 when the index hit 98.085.
As the daily chart of the June dollar index futures contract highlights, the dollar has been rising steadily making higher lows, and higher highs and the open interest metric has moved higher with the level of the index which tends to be a validation of a bullish trend in a futures market. However, the dollar failed to follow through on the upside after its latest new peak, and on Friday, May 3, the greenback put in a bearish reversal pattern on the daily chart which could cause it to continue to test lower levels over the coming trading sessions. Price momentum crossed lower and relative strength has moved back into neutral territory. It feels like there continues to be a big hand above the dollar which is preventing it from moving to the upside. The latest clue came last week after a more hawkish Fed meeting that should have supported more gains in the dollar. However, the US currency stalled and finished the week well of its high from April 26.
The Trump administration has made no secret of its desire for a weaker dollar as it makes US exports more competitive in global markets and is a weapon in trade negotiations with China. All of the evidence points to intervention in the foreign exchange market that has slowed upside progress in the dollar.
The Fed is not cutting rates any time soon
The Fed told markets that interest rates are not moving lower anytime soon at their most recent meeting. Last week’s employment data served as a validation of the position of the central bank as unemployment fell to its lowest level since way back in 1969.
While the Trump administration has repeatedly called for an interest rate cut in the short-term Fed Funds rate, the apolitical central bank has ignored the calls from the Oval Office and the President’s chief economic advisor Larry Kudlow. While I was basking in the wonderful Floridian sun, both Herman Caine and Stephan Moore withdrew their candidacies for positions at the Fed. Caine and Moore had advocated for a lower Fed Funds rate to repair what the administration saw as damage to the economy in 2018. However, both faced what was likely to be an insurmountable challenge in Congress when it came to confirmation of their respective nominations from both sides of the political aisle. Republicans in both houses of Congress have urged the President to nominate more mainstream candidates for the Fed which will likely result in a continuation of a data-driven approach to monetary policy that ignores attempts at political pressure from 1600 Pennsylvania Avenue. However, the comments on Twitter are likely to continue to express the President’s view that the central bank is standing in the way of economic growth and gains in the stock market. Meanwhile, we should expect the Fed to stick to its guns and rates will remain stable throughout 2019 unless inflation begins to rise, or GDP growth forces the Fed’s hand to increase the Fed Funds rate by 25 basis points before the end of 2019.
As we move into next year, the Fed will try not to rock the boat as the Presidential election will take center stage, and the central bank will not want to do anything that influences the voting one way or the other. Therefore, we should expect the status quo based on the latest comments from Chairman Jerome Powell. Alan Greenspan once said that the best position for the Fed is where the market does not know if the central bank’s next move will be to hike or cut the Fed Funds rate. It appears that under Powell, the Fed is now in precisely that position.
Precious metals- Gold and silver stuck in neutral, but copper and PGMs fall on the lack of trade progress
The price action in the gold and silver markets since April 24 has been nothing short of watching paint dry.
As the daily chart of COMEX June gold futures illustrates, the yellow metal has been under the $1300 per ounce level since April 11 and has traded in a range from $1267.30 to $1290.90 since April 17. Both price momentum and relative strength are in neutral territory, and open interest in the futures market is flatlining at under 450,000 contracts which is the lower end of normal.
Meanwhile, silver got down to a low at $14.57 on the now active month July futures contract on May 2 but returned to just under the $15 per ounce pivot point as of last Friday. Technical metrics in the silver market are also in neutral territory, and open interest has dropped to the 200,000-contract level.
Both gold and silver remain stuck in neutral after they moved lower since their February highs and are watching the dollar and interest rates for direction. When it comes to platinum group metals and other industrial commodities, the lack of a trade deal between the US and China has caused some selling sending platinum and palladium lower over the recent sessions. Perhaps the best barometer for trade has been the price of copper which moved lower while I was away as it is highly sensitive to the Chinese economy.
On Sunday evening, May 5, the price of copper traded to a low at $2.7615 per pound which is the lowest level since late January this year. After hitting a high at just over $3 per pound on April 17, copper’s price reflects the frustration with trade negotiations. While I was away, copper fell through the $2.80 per pound level on May 1. While short-term technical metrics have moved into oversold territory on the daily chart, copper inventories on the London Metals Exchange have been rising steadily since mid-March and have doubled from just over 110,000 tons to the 230,000-ton level as of May 3.
While gold and silver are watching the dollar and interest rates, PGM and copper prices have displayed frustration over the lack of progress on trade.
Crude oil- A necessary pullback
When I departed for vacation on April 25, the price of crude oil was sitting near the highs at over $66 per barrel on the nearby NYMEX futures contract. While I was away, the price of the energy commodity eroded and was testing the $60 per barrel level on Sunday evening, May 5 as trading opened in the Asian time zone. Crude oil had quite a recovery moving from lows at $42.36 per barrel in late December to a high at $66.60.
As the weekly chart shows, the price of WTI crude oil had a horrible fourth quarter in 2018 falling from $76.90 to just over $42 per barrel and then recovered to $66.60 in late April. The rally appears to have run out of steam. Oil received its last boost to the upside on news that the Trump Administration would not be granting extensions to those nations purchasing oil from Iran. However, with the OPEC meeting on the horizon in June, oil prices appreciably higher than the levels at the last biannual meeting in late 2018, and a recent phone conversation between President Trump and Russian leader Vladimir Putin, it seems that Russia and Saudi Arabia could be making up the difference when it comes to Iranian exports. The fall in the price of crude oil is likely to cause a decline in any inflationary pressures. The next level of support in the oil futures market below $60 is at the $55 per barrel level.
The fall in the price of oil was not a surprise as I returned from vacation as the price seemed to be running out of steam in late April. After rising by over 57% from the late 2018 low, a pullback in the price of the energy commodity was overdue.
Go with the flow in the raw materials assets class
I will be watching the dollar, the bond market, and the progress on trade negotiations between the US and China for clues about the path of least resistance of commodities prices over the coming days and weeks. I do not expect much price action in the asset class unless we see a dramatic change from the current status quo. Therefore, buying dips and selling rallies is likely to be the optimal approach for traders, and looking for bargains during bouts of selling will present the best opportunities for investors looking to build medium to longer-term positions on the long side of the markets in metals and energy. I would leave room to add on dips in markets like copper and copper-related equities as it is always a challenge to pick a bottom in markets where the current path of least resistance is lower.
After sitting in the sun for the past week in Florida, I will take a go with the flow approach to markets. I look forward to the webinar on Thursday!