Ag Markets June 29, 2020

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The macroeconomic environment is a negative headwind for agriculture markets heading into this holiday-shortened trading week and ahead of tomorrow's quarterly USDA stocks report.

Markets traded with a risk-off tone late last week as Covid-19 cases accelerated across U.S. sun belt states and the U.S. surpassed 40,000 new daily cases for the first time. From Wednesday to Friday the S&P 500 dropped -3.9%, crude oil fell -3.8%, and the U.S. dollar rose +0.8%...all headwinds for agriculture futures. 

This week has some important macro catalysts: 

  • Today: EU - UK Brexit trade deal talks 

  • Tuesday: Fed Chair Powell testifies before the House Financial Services Committee

  • Wednesday: ADP jobs, ISM manufacturing, FOMC meeting minutes (June 10th meeting)

  • Thursday: U.S. jobless claims, continuing claims, and the big June NFP payrolls report (a day early due to the Friday market holiday); NFP jobs exp +3.0mm, unemployment 12.4%

  • Friday: U.S. Independence Day market holiday

Beyond the negative macro environment, price seasonals are broadly positive this week before turning strongly negative in July.

This weekend's COT positioning report (June 23rd data) showed small hedge fund net outflows. Funds have now sold agriculture futures in 10 of the past 12 COT reports and hedge funds are the shortest they've been in nine months. CTA momentum traders are the shortest they've been since the first Covid-19 macro washout in mid-March (chart of the week below).

What Matters This Week:

The negative macro mood is overwhelming late-June's bullish seasonals and keeping hedge funds comfortably short in markets like corn, chicago wheat, kansas wheat, spring wheat, soybean meal, cattle, hogs, and robusta coffee.

Extended-short fund positioning is often a bullish contrarian indicator ("with funds so short, who's left to sell?"), but today the combination of negative macro, great U.S. weather, and negative upcoming July seasonals is keeping funds comfortably short. There just isn't a spark to push prices higher and force short stops today. 

Watch this week:

  • Sentiment around Covid-19: This virus has been the #1 macro driver in 2020. Record Covid cases = more economic damage = macro risk-off trading = lower agriculture prices.

  • Data: U.S. employment data matters, esp this Thursday's "gold standard" NFP jobs report.

  • Price action: How will risk assets and the U.S. dollar respond to Powell’s testimony and the various job reports later in the week?

  • Seasonals: Can ags bounce before entering seasonally negative July? Or will the negative macro mood keep ag prices pinned to the mat like last week?

Chart of the Week: Momentum traders have quickly gotten short agriculture futures, partially driven by last week’s negative macroeconomic sentiment. Today these momentum CTAs are the shortest they’ve been in three months, playing for a continued downtrend in agriculture prices.

For a trial of our industry-leading agriculture research, reach out to us: insight@peaktradingresearch.com.

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