Ag Markets February 3, 2020

Agriculture markets are facing non-fundamental headwinds as we enter February. The macroeconomic environment is negative, price seasonals turn more bearish, and hedge funds are overextended long in a few key markets against these more negative price drivers.

The macro environment is firmly negative and last week was a second week where most of the macro drivers that matter most for agriculture commodities turned lower. Broad risk sentiment is negative, energy and metals momentum is downward, inflation expectations are lower. China's equity and fx markets are re-opening lower today, with A-shares down ~10%.

Price seasonals turn more negative this month, especially for the wheat and sugar markets...both of which look overbought with Friday's COT showing record long positions in both Chicago wheat and white sugar.  

Market structure still looks like a bearish input, even with prices falling and funds likely selling ~100k contracts through the end of last week. There are still plenty of agriculture markets where funds are extended long vs data from the past 24 months: sugar #11, white sugar, Chicago wheat, arabica coffee, bean oil, cocoa, and matif rapeseed. Risks are skewed to the downside for these markets if macro volatility drives traders to trim big long positions.

What Matters This Week:

Risks are again skewed to the downside for our agriculture markets with non-fundamental factor alignment across the macroeconomic environment, seasonal price trends, and market structure. Hedge funds added big new longs over the past four months and those positions look vulnerable today, especially with the negative macro mood.  

Coronavirus and China market volatility will be an investor focus this week. In the U.S. we have Iowa caucuses and ISM manufacturing data today, Trump's state of the union Tuesday night, and U.S. Nonfarm payrolls Friday (+160k jobs exp). Argentina meets with the IMF to discuss credit lines Wednesday.

The U.S. job numbers Friday (14:30 GVA, 7:30am Chicago) will likely be the biggest macro risk and U.S. dollar data point this week. A strong jobs report would drive USD back towards multi-month highs...another macro headwind for our markets. 

Like last week, be cautious with long futures positions in this environment, esp in overbought markets like sugar, Chicago wheat, cocoa, and bean oil. These markets still look like great short candidates for hedge funds looking to express a bearish macro theme.

Chart of the week: Despite the firmly negative macroeconomic tone over the past two weeks and broad commodity selling, there are still plenty of agriculture markets that look overbought (fund positioning skewed long) and expensive (prices above the 24-month average) today.

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

Ag Markets January 6, 2020

As we enter the first full trading week of the calendar year and ahead of Friday's big USDA numbers, the non-fundamental message for agriculture markets this week: bullish January price seasonals and a positive macroeconomic environment (crude up, inflation expectations up) vs increasingly bearish market structure (hedge funds are extended long, especially momentum CTA traders).

Watch the macro environment closely this week, especially crude oil, S&P 500, and the US dollar. Ag markets are being buoyed by stronger energy markets (and positive Jan seasonals) but if the macro mood sours and hedge funds bail on macro/inflation hedges, that would make overbought markets like bean oil and coffee look vulnerable to profit taking. Watch Iran headlines (crude oil driver) and US job numbers Friday at 14:30 GVA, 7:30am Chicago (next USD driver).

Chart of the week: Markets like bean oil, sugar and coffee are especially sensitive to volatility in energy markets and perform well when crude jumps.

For our full weekly report or for a trial of our research, reach out to us: insight@peaktradingresearch.com