Did the Commodities Complex See Turnaround Activity Overnight?

• The 30-year US Treasury yield is at a 19-year high due to continued inflation fears. 

• US stock indexes stumbled Monday and were under continued pressure early Tuesday morning. 

• The Grains sector was higher across the board on the continued inflow of investment money, with some commercial interest thrown in for good measure. 

Morning Summary: Given the normal Manic Monday activity seen yesterday, I kept an eye out for a round of typical Turnaround Tuesday trade in the commodity complex overnight through the pre-dawn hours. However, as of this writing, there are only a few markets that would fall into that category. One of them is a star, though, with diesel fuel (distillates) down 2.75 cents and near its session low to start the day. Before we get overly excited, trade volume was light with the spot-month issue registering only 2,000 contracts changing hands while the first deferred issue was showing 3,000 contracts traded. Meanwhile, WTI crude oil was holding above $85, and Brent crude was north of $91 early Tuesday morning. As for today’s early headlines, there were no surprises as the 19-year high by the 30-year Treasury yield grabbed the top spot while others mentioned the US president dumping another long-time ally, this time South Korea^[i]. Despite talk of inflation ramping up, gold and silver were both under pressure, both viewed as potential Turnaround markets following Monday’s rallies. On the other hand, US stock index futures were lower pre-dawn, extending Monday’s selloff. With US Treasury yields climbing, this is what would be expected of stock indexes. 

Corn: A look at Tuesday’s early morning radar, as well as today’s forecast map, it looks the intrepid scouts on this year’s Midwest Crop Tour are going to get a bit soggy. Other than that, weather doesn’t mean much in the Grains sector these days. What matters now is the flow of fund money, with the spigot on full stream into the markets this Tuesday-to-Tuesday positioning week. Recall December (ZCZ26) closed Monday’s session with a strong gain of 6.25 cents and was sitting 39.0 cents higher for the positioning week. This indicated funds were adding to their net-long futures position, last reported at 244,910 contracts as of Tuesday, August 11. Total open interest in corn increased by 15,300 contracts during Monday’s rally with December adding 22,370 contracts, pushing its positioning week increase to roughly 87,000 contracts. That is substantial. Meanwhile, the carry in the Dec-March futures spread weakened by only 0.25 cent, still covering a neutral 52% calculated full commercial carry at Monday’s close. Technically, Dec26 is solidly overbought on its short-term daily chart, though it’s hard to say if or when this might trigger a round of fund selling. National average basis weakened last night, coming in at 50.75 cents under December. 

Soybeans: Despite diesel’s overnight dip, the oilseed sub-sector was glowing green early Tuesday morning. In what could be considered a different type of Turnaround, the overnight rally was led by soybean meal with the more heavily traded December issue up $3.30 (1.0%) at this writing after adding as much as $4.60 overnight. Soybeans were running close behind as the November issue (ZSX26) gained as much as 9.5 cents and was sitting 8.0 cents higher pre-dawn on trade volume of 22,000 contracts. Recall Nov26 jumped out of the gate Monday, closing 23.5 cents higher to start the week. However, unlike what we discussed in corn, total open interest in soybeans decreased by 820 contracts, with November losing 5,900 contracts of its own. For the positioning week, through Monday’s close, open interest in the Nov issue is down 15,000 contracts. A look at futures spreads shows the carry in the Nov-January spread weakened by 0.5 cent since last Tuesday’s settlement while the carry in the Nov-March weakened by 4.5 cents. Given the decrease in open interest, this has the look of commercial covering of November short hedges, an interesting development this time of year, likely due to in   creased sales, crush or exports, of new-crop supplies.  

Wheat: The wheat sub-sector was also in the green across the board early Tuesday morning. Technically, this could be considered Turnaround activity in the HRS and SRW markets given December SRW (ZWZ26) finished 0.25 cent in the red to open the week. But in reality, the Turnaround started during Monday’s session as the December issue dropped as much as 7.75 cents during yesterday’s session. For the positioning week, Dec SRW was up 41.0 cents from last Tuesday’s close at Monday’s settlement. Given Watson was last reported holding a net-short futures position in SRW of 24,910 contracts, an increase of 10,150 contracts from the previous week, we would expect to see open interest has come down due to short covering. A look at the CME website shows Dec added 3,770 contracts during Monday’s rally and is up 38,280 contracts since last Tuesday. This complicates the analysis a bit, particularly when we add in the carry in the Dec-March futures spread has weakened by 1.5 cents through Monday’s close. Over in HRW we see the December issue (KEZ26) up 7.25 cents to start the day after rallying as much as 9.25 cents overnight. This puts Dec up 63.0 cents for the positioning week indicating Watson has been adding to its net-long futures position. 

^[i] This is not a surprise given the US president’s admiration for North Korea’s leader Kim.