Daily Close | Forex, Metals, Oil, Agriculture July 31, 2020

Agriculture

General Comments: Cotton closed higher as bad growing conditions continued in West Texas. Export demand for US Cotton has been poor for the last few weeks but was improved yesterday.

Currencies

If his trend continues, it will mean a higher dividend in US dollar terms, which likely will flow through to a higher share price in due course. If the value of the dollar continues to decline, world investors are telling us that things are not going to get better. The Danone US dollar share price has been relatively flat over the five years through the end of 2019 despite solid EPS growth over the same period. EPS and dividends, in US dollars, have been depressed to some extent over the past five years by a strengthening of the US dollar against the euro.
While it may be sometime before that occurs, the decline in the U.S dollar may mark the bond market’s peak. The trend toward a lower dollar is very strong, so non-Fed demand for BND’s holdings may quickly decline from here. All along, I have been tracing the loss of confidence in the US with the decline in the value of the US dollar. The latter decline is due to Emerging Market countries being more affected by COVID-19 and to their currencies devaluing against the U.S. Dollar: Source: FB company filings.
With real-interest rates at an all-time low, the U.S dollar has been in steep decline which will likely bring an increase to the inflation rate. The strengthening of the US dollar has likely put downward pressure on the share price. A strong dollar means lower US dividend amount for dividends declared in euros. We see this decline especially in the relationship of the dollar to the Euro.
In US dollar terms, EPS has grown from $2.28 in 2014 to $3.31 in 2019, a slightly lower average yearly growth rate of 7.7%. Further gains in the dollar next month is likely to come from profit-taking of overstretched currencies rather than underlying demand for the greenback. As the dollar declines, it is likely countries like China, Japan, and Switzerland (major buyers of U.S bonds) will look to reduce exposure. This is already being seen in the rise of commodity prices and decline U.S dollar exchange rates.
The dollar has weakened against the euro since the end of 2019. Source: XE Figure 1.2 reflects the current weakening trend in the US dollar against the euro. For now the Federal Reserve is able to keep BND expensive, but the falling U.S dollar may soon force them to make hawkish moves against bonds. If re-hiring continued at a healthy clip, the dollar will bounce but if it misses expectations, investors will see it as a foreshadowing of what’s to come.

Metals

Naturally, the gold stocks follow gold higher, amplifying its gains due to their profits leverage to the gold price. Prevailing gold prices varied radically throughout these modern bull-market years, running between $257 when gold’s last secular bull was born to this week’s newest record high of $1969. Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Since it is gold’s own demand-driven seasonality that fuels gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming.
This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. 31, 2020 3:42 PM ET|| About: Sandstorm Gold Ltd. (SAND)by: SA TranscriptsThe following slide deck was published by Sandstorm Gold Ltd. in conjunction with their 2020 Q2 earnings call. Price action is very different between bull and bear years, and gold remains in a middle-aged bull market.
31, 2020 4:21 PM ET|| About: Troilus Gold Corp. (CHXMF)by: SA TranscriptsThe following slide deck was published by Troilus Gold Corp. in conjunction with this event.
Then all gold price action of the following year is calculated off that common indexed baseline, normalizing all years regardless of price levels. That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Gold’s last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! Then gold surged to a major decisive breakout confirming its bull remained alive and well!Its total gains grew to 87.3% over 4.6 years by late July 2020, still modest.
Essentially, rallies in gold make it difficult to see much validity or sustainability in the excessive gains that have been witnessed recently in the S&P 500. Instead, gold’s major seasonality is demand-driven, with global investment demand varying considerably depending on the time in the calendar year. This has carried gold stocks and the metal they mine back to their traditional strong season, which begins with robust autumn rallies usually accelerating in late summers.
That atypical strength has been driven by gold steadily marching to major new secular highs, fueled by strong investment demand. So during its bull-market years, gold has usually tended to enjoy major autumn rallies driven by these sequential episodes of outsized demand. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities see, as its mined supply remains relatively steady year-round.
We’re interested in bull-market seasonality because gold remains in its latest bull today and bear-market action is quite dissimilar. Over the past few months, gold and the bond market have rallied together, bringing both assets to all-time-highs.

Oil

Oil prices are an important indicator for inflation protected bond funds as a rise in oil prices creates inflationary pressures in the economy, with the inverse also being true. We also write daily and weekly reports, covering key variables in the U.S. natural gas market (supply, demand, storage, prices, and more). Refining margins are getting crushed as global refining capacity exceeds global oil supply (largely due to curtailments) by over 12 million barrels.
This streak comes on the heels of its second-worst quarterly net outflows ever (-$10.2 billion) driven by a COVID-19 induced slump in oil prices. Please note that the methodology for calculating natural gas consumption in the industrial sector has been changed to reflect the impact of COVID-19. As the coronavirus shut down the global economy in Q1, the demand for oil cratered as did its price. Source: Q2-2020 presentation XOM was able to manage this as oil prices moved up quicker than we expected in Q2-2020.
Low oil prices continue to depress petroleum exploration and development. The price for Brent crude (the global benchmark for oil) retreated 66.5% during the first quarter.
The oil price will respond to the growth in the industrialised nations, as one example. Source: Bloomberg Oil’s up for the 3rd month in a row, but has largely trod water all month… The basic math here is that without the refining side backbone, XOM does not come close to covering its capex and dividend even at $75/barrel. The price of Brent crude has recovered since the end of Q1, appreciating 88.8% as of the end of July. In fact, even if we reach $60/barrel in Q4-2020, we would still expect debt to continue to be added.

United States

“Looks like Trump administration kept this corroborating intel even from the Republican lawmakers briefed yesterday,” New York University law Professor Ryan Goodman commented, linking to The New YorkTimes report. While there has been an increase in inflation expectations, demand for saving cash has also increased as government spending programs have dramatically increased U.S consumer savings rates. The Fed does not manage exchange rates, but lower exchange rates promotes inflation and could jeopardize the U.S’s position as global currency hegemon.
If the Fed waits too long to do so, inflation expectations will likely rise too high and result in an even more extreme decline in bond prices. Instead, Donald Trump announced a plan that would see the federal government act as a facilitator while state governments led operations for supplying and conducting testing efforts. President Trump has called reports that Russia was paying bounties to Taliban fighters to kill US troops “fake news” and “just another hoax”.
The highest risk remains that the Fed could lower interest rates, maybe even into negative territory. The Federal Reserve’s bond purchasing program has directly supported the value of the Vanugard Total Bond Market ETF BND since it owns many assets the Fed is purchasing. Following the briefing, Republican legislators claimed the information was never brought to Mr Trump because US intelligence agencies couldn’t agree on the credibility of the reports.
The Fed’s federal fund rate remains within a range of 0% to 0.25%, and was trimmed in mid-March as the coronavirus pandemic made serious damage to the economy. The deflationary gap is evident in the credit markets, as the Fed fund futures are pricing in negative interest rates a year from now. I was never briefed because any info that they may have had did not rise to that level,” Mr Trump said in another tweet. Since the Fed has been reducing rates due to the economic stimulus package, the sector is expected to perform well marginally.
Shares of Google-parent Alphabet were under pressure on Friday following the tech giant’s latest earnings report, but Wall Street analysts were largely positive on the results, which beat expectations. With political risk surging and a recovery reversing, high-flying technology stocks, the most overcrowded trade ever, haven’t been enough to breakout Nasdaq futures to new highs. “The president does read and he also consumes intelligence verbally,” Ms McEnany said, when asked why Mr Trump wasn’t reading his daily briefings.
The last few years saw companies like Uber (NASDAQ:UBER) with little more than a fancy idea go public and raise billions on a hope and a prayer.
Intelligence sources told the New York Times that President Trump had been warned of the Russian bounties months ago. March was the period that the coronavirus pandemic really began to impact the US economy. Contention in Washington has emerged throughout the week around allegations that Mr Trump and his aides were briefed on the intelligence and did not take action.

Europe

He said that the high EU tariffs that would instantly hit car manufacturing and chemicals exports would “wipe out” many UK businesses. But Lord Mandelson said ministers would be unlikely to allow talks on an EU trade agreement to break down. The Brexit-supporting former international trade secretary Liam Fox is also interested in the position.

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