‘Could’ is a Weak Verb
Trump’s language matters to traders when it refers to the elusive China trade pact. He is much more cautious while discussing the deal, as in “could happen soon,” rather than earlier robust and optimistic verbiage. China is irate over what it sees as American interference in Hong Kong, as the US legislature has come down forthrightly on the side of the protestors. Of the three most sensitive markets to gain, or lose, from a China deal, soy seems to be enjoying good export demand while cotton and pork languish.
Are commodities as a whole too cheap? Looking at the chart below gives one that impression. The CRB has done a little better recently, rising from 388 in Aug to 420 recently, but remains 20% below its peak a year ago, and much below the all-time high of 888 in summer 2008. We have been seeing a lot of newsletters and pundits expressing “macro” bullish sentiment on the complex. A weaker $ would certainly help this idea, but the Buck has been sideways for 3 months, and continues to trade within 5% of a 16 year high.
If the $ would tip over, we would get on the bandwagon for higher overall commodity prices, but best to check balance sheets and see where the better stories are, and chances for price gains. Even though the world supply of cotton dropped 2.8 Mb this month, an 80 Mb carryout and a 67% ratio are historically negative. Recall that the carryout in May was 5 Mb less at 75.7 Mb, and price was trading around 67c, roughly where back months of futures are now. Before the era of massive Chinese hording, a carryout of 60 Mb and a ratio of 55% were considered very negative price.
A few observations on the CRB chart. A rising price channel of about 100 vertical points existed from Nov 2015 to Nov 2018. After breaking down, in typical fashion, the CRB re-tested the channel, failing at 458 in Apr 2019. Since then it has chopped lower, putting in a low in Aug at 388, and rising to 415 this week. Regards the Deutsche Bank Ag Index, this index lost 2/3 of its value from the 2008 high of 43.50 to the low in Sep at 14.62. It has eased a little higher, trading 16.22 current, but remains well below its historical mean around 29.00.
As always, please use protective buy and sell stops when trading futures and options.
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