Open: London Session | Forex, Metals, Oil, Agriculture October 16, 2020

Agriculture

China is the biggest buyer of Australian cotton and the trade worth was worth about A$900 million ($637.4 million) during the 2018/19 crop year. Commodity traders have for years used coffee certified by third parties to meet consumer demand for ethical and sustainable sourcing, but the system has to date had limited success. Coffee may revisit its September high while cocoa its July low. The country’s farmers harvest wheat in December and January.

Currencies

Bond issuance remains highs but the peaks are behind us The rupee (INR) settled lower at 73.38 on Thursday versus preceding day’s close of 73.29 against the dollar (USD). For much of the euro zone’s first decade in existence, investors demanded less than a 50-basis-point premium over German bunds to hold Italian or Greek government bonds. The Bloomberg Dollar Spot Index was little changed.Spot silver, palladium and platinum were also little changed. SOFR is intended to replace dollar Libor, which still underpins hundreds of trillions of dollars of assets such as mortgages in the U.S. and syndicated loans in Asia.
The dollar climbed.The S&P 500 came off session lows as banks rebounded from a two-day selloff and energy shares rallied. ECB purchases have helped make even riskier Euro-area government bonds behave more like safe havens rather than risky assets. Euro-area bond markets have posted another impressive rally lately, fuelled by more ECB buying, a weakened economic outlook and a search for yield.
Given the second virus wave and the state of European banks, he believes the euro may pull back. The decline in euro rates was safe haven/bond driven yesterday, as swap spreads widened. Euro-area bonds have seen a broader rally, and e.g.

Metals

Gold’s been trading in a narrow range so far in October amid uncertainty surrounding the prospects of a stimulus deal being passed before the Nov. 3 presidential election. Gold may drop more, driven by a wave four Base metals may keep their bullish momentum awhile, but with limited upside. He believes the safety valve for the inflation play will be precious metals and he remains bullish on gold. Iron ore shipments fell 5% in the third quarter on maintenance work, the company said.
Own some bonds, some gold, and some real estate.

Oil

The company’s restructuring risk remains high despite the improved outlook for 2021 natural gas prices, as longer-term natural gas price expectations are lower. Meanwhile, in the near term (one year or less), oil demand is likely to build in the advent of new vaccines and therapeutics to treat COVID-19. At 2020 production levels and $2.60 longer-term natural gas prices, Gulfport’s new equity may be worth around $1.2 billion (assuming an enterprise value of around 3.5x EBITDAX).
Adding to the global supply picture, Libyan oil production is said to have reached 500,000 barrels a day. Here’s the narrative (straight from the CNBC website): “Oil declines, posts third negative week in four on demand concerns.” Remember, we went from oil glut in the early 1990s to peak oil forecasts in 2005. Oil prices were weighed by concerns about the coronavirus and its impact on the world economy. Gulfport’s leverage is much too high even for $3 natural gas prices.
REUTERS TECHNICAL ANALYSIS Q4 OUTLOOK 2020 – WANG TAO Oil may have completed a strong bounce from its April low and is expected to fall deeply. OPEC Secretary-General Mohammad Barkindo said the alliance won’t allow the oil market to plunge again.

United States

While much of Europe grapples with a second wave of coronavirus infections, the US may already be on the cusp of its third. There are stocks that will clearly do well if Biden wins, and there are stocks that will clearly do well if Trump wins. If they strike back, then we ll strike much harder, President Donald Trump told reporters. Add to this the risks posed by the US elections, negotiations around Brexit and the lack of inflation, and the macro outlook is quite supportive of bonds.
The Trump administration wants to remove WeChat from mobile app stores in the U.S. and impose other restrictions, though a court has blocked the move.
We’re not sure if President Trump referred to Lockheed’s ARRW in July, but he touted a new hypersonic weapon as “super-duper.” The US has been increasing its efforts on hypersonic development in recent years as Russia and China power ahead in their developments. The European rally looks even more impressive when compared to the US, where longer yields have risen in the past few months. FBI-doubters know the bureau launched a sophisticated operation against the Trump campaign, Trump transition, and finally the Trump administration.
Would the news media blow the anti-Trump dog whistle and blame the president for a kidnapping that never actually happened?

China

Adding insult to injury, there was a story out on China citing Xi Jinping’s goal to make China carbon-neutral by 2060.

Europe

For the first nine months of the year, the ECB has bought an estimated EUR 570bn in government debt vs. net issuance of EUR 510bn in EUR government bonds. The ECB will also continue to buy more than the net issuance of government bonds going forward, see our note: Bond Watch: PEPP rally. The large issuance needs also increase the odds that the ECB will be a big net buyer in the EUR government bond markets for a long time. The ECB will continue to buy more than the net issuance of government bonds also going forward.
While the ECB has slowed down the pace of its purchases, also issuance pressure has eased compared to the spring and early summer. assuming no 5-year EU bond issuance (yet) and no related paying flows from investors, the 2/5/10y butterfly spread may stay low. Regarding the EUR swap curve shape, the 5-year sector should remain low, assuming that the ECB will keep rates at current or lower levels for a long time. Last night, the talks were plunged into deep crisis when the U.K. reacted badly to the outcome of leaders’ Brexit discussions at the summit.
Against this background, the ECB has to eventually cut rates – or current yield levels might not be sustainable in the longer term. Brexit trade talks are in the balance, there’s yet another potential setback in Covid-19 medicine, and a luxury giant reported earnings.

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