Commodities Recap For The Week Of June 15, 2018

by: Andrew Hecht

A big rally in the dollar index on widening rate differentials between the U.S. currency and the euro weighs on commodities prices.

Gold falls to the lowest level of 2018 on Friday on dollar strength and posts a bearish key reversal trading pattern on the weekly chart.

Oil falls toward recent lows as the market waits for the June 22 OPEC meeting with fears of increased output.

Copper gives back recent gains.

Grains fall post WASDE on tariffs and a strong dollar.

The ECB's Amazing Ability to Make a Hawkish Move Dovish

This past week, the event that moved markets the most was not the apparently successful Singapore summit, nor was it the Fed meeting where the central bank hiked the Fed funds rate by 25 basis points and added another increase of the same magnitude for 2018. By the end of this year, the Fed funds rate should stand at 2.25%. The market moving event came from across the pond in Europe where Super Mario Draghi magically turned tightening credit into a dovish art form.

The ECB announced they will end QE at the end of 2018. The free government-sponsored put option will disappear from the sovereign and high-quality corporate bond market in Europe. While rates will remain at negative forty basis points into 2019, the move was a hawkish step by the European Central Bank. However, the statements and press conference that followed the move led the market to believe that tightening in Europe will occur at slower than a snail's pace and Mario Draghi stands ready to do "whatever is necessary" to stimulate the European economy. The euro currency tanked sending the dollar index to a new high. Currencies tend to move on short-term interest rate differentials, and by the end of 2018, the spread between the dollar and euro rates will be at the 2.65% level. The widening of the gap was too much for the dollar to handle and it exploded to the upside on Thursday in the wake of the ECB meeting.

The European central bank has an uncanny ability to show the market that their hawkish move is nothing more than a facade.

On Friday, the Trump administration took another shot at China when it comes to trade announcing that the first tariffs will take effect on July 6 with the rest following at the end of July. The President said that if China retaliates, he will respond with even more tariffs. China stated their intention to retaliate with commensurate duties on U.S. goods. Tariffs and the strong dollar sent the prices of stocks lower on Friday as bonds moved higher in a flight to quality. Trade wars distort prices, so we could be entering a period of extreme volatility in markets across all asset classes.

The stronger dollar and tariff issues weighed on the prices of most raw materials. Commodities markets waited until Friday to show their true colors. Precious metals moved sharply to the downside along with crude oil and oil products (sans natural gas). Silver had taken the stairs up, and Friday it took the express elevator to the downside. Grain prices had been moving south all week after the USDA released its WASDE report. Meanwhile, copper spent its week giving up the previous week's gains. It was a rough week for commodities, the inverse relationship with the dollar, tariff issues, and a truly hawkish U.S. Fed pushed prices down a few notches at the end of the week.

Highlights in Commodities:

  • Gold posts a 1.86% loss for the week and makes new lows for 2018
  • Silver moves 1.56% lower since the last report
  • Platinum posts a 1.98% loss for the week, and was trading at a $394 per ounce discount to gold
  • Palladium moves 2.38% lower on the week and settles below the $1000 per ounce level
  • Copper fails and drops 4.71% on the week as the dollar and tariffs weigh on the red metal
  • Iron ore rises 1.51% on the week as steel is ground zero for the tariffs issue
  • The BDI gains 2.72% since the last report
  • Rotterdam coal moves 1.04% higher on the week
  • Lumber posts a 5.33% loss as higher rates threaten new home construction
  • July NYMEX crude oil moves 1.03% lower and trades near the recent low at $64.22 in the aftermarket on Friday reaching $64.29 as the OPEC meeting is next Friday
  • August Brent crude oil moves 4.28% lower as the Brent premium declines
  • The premium for Brent over WTI in August closes the week at $9.61 down $1.23 on the week as the market expects an OPEC production increase
  • Gasoline moves 4.35% lower, and heating oil falls 3.57% since last week on July futures as products underperform crude oil
  • The gasoline crack spread moves 12.03% lower while the heating oil crack falls 9.04% on July since last week's report- Crack spreads could weigh on the price of oil next week
  • Natural gas moves 4.57% higher since the last report as the price rises above the January 2018 peak in the July futures contract and settles above the technical resistance level at $3.01 per MMBtu. The EIA reports an injection of 96 bcf into storage on Thursday
  • Ethanol down 1.87% on the week on weakness in gasoline and corn prices
  • Soybeans tank 6.58% for the week on tariffs, the dollar, and weather in post WASDE trading
  • Corn moves 4.37% lower on tariffs, lower gasoline, the dollar, and weather conditions
  • CBOT wheat down 3.96% on the week in sympathy with other grains. July KCBT wheat trading at a 20.25 cents premium over CBOT wheat up 2.00 cents on the week.
  • Sugar down 1.88% on the week on dollar strength and weakness in the Brazilian real
  • Coffee moves 1.63% lower since last week's report on dollar strength as July futures rolls to September
  • Cocoa recovers 4.31% on the week after filling the gap on the weekly chart as July futures roll to September
  • Cotton falls 2.90% on the week in post WASDE trading after making a new high as July futures roll to December
  • FCOJ rise just 0.44% on the week after trading to a low of $1.5315 and recovering
  • Live cattle down 0.95% since last week
  • Feeder cattle move 0.48% higher since the previous report
  • Hog futures rally 1.46% on the week
  • The dollar index explodes 1.44% on the week as the Fed hikes rates and the ECB offers the market a dovish message- Rate differentials support the dollar despite rising trade tensions which is likely preventing even more dramatic gains
  • June long-Bonds trading at around 143-24 up 0-21 as the Fed meeting approaches
  • The Dow Jones Industrial Average closes at 25,090 on Friday, June 15, down 227 points on the week on higher rates and trade issues. The VIX moves 0.19 lower to settle at 11.98 on Friday. The Chinese stock market closed weak on Friday which could lead to volatility next week
  • The Bitcoin tanks and the cryptocurrency was trading Friday at the $6,498.36 level down $1,148.20 or 15.02% since last week
  • Ethereum moves to $496.46 down 17.11% since the last report

Price Changes for the Week:

DBC closes the week at $17.27 per share, down 59 cents since last week's report on weakness in commodities.

Source: Barchart

DBC is the Invesco DB Commodity Tracking ETF, which represents a diversified basket of commodities futures contracts, has net assets of $3.28 billion and trades an average daily volume of 2.36 million shares.

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Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.