Here are my comments regarding the futures markets for the week ending December 18, 2020.
Equity Futures
U.S. equity futures closed with modest gains as the focus remains on a potential Covid-19 stimulus bill and the Covid-19 vaccine. The E-Mini S&P 500 futures closed the week with a gain of almost 53 points, while the E-Mini Nasdaq 100 futures closed up 344 points. Both closed at new all-time weekly highs.
Currency Futures
It was a rough week for the U.S. Dollar, as it sold off against most major currencies this week. The Dollar Index is now trading at its lowest price since June 2018.
On a percentage basis, the British Pound made the strongest gains, as it gained just over 2% against the Dollar on the week. The Euro and Aussie $ both finished with gains over 1%.
Financial Futures
Eurodollar futures were basically flat after last week’s modest gains.
The Treasury yield curve widened modestly, as the 30 Year Bond lost over 1 1/2 points, the 10 Year Note lost 11/32, but the 2 Year Note was only fractionally lower.
Given the losses in the Dollar in recent months, along with big moves in commodities, one would expect more pressure on Treasuries.
Based on this chart, it appears that the 30 year bond is winding up for a sizable move to the downside, which would push yields higher. Right now, it is sitting about 1 1/2 points above major support.
Naturally, short sellers will be fighting against the Fed, which likely feels it needs to keep rates low to keep the economy from sliding into recession. But, if the Dollar continues to slide, it will be hard to find other buyers of Treasuries at such low yields.
Metals
Silver broke out to four week highs on Wednesday, and then 12 week highs on Thursday, before closing modestly lower on Friday. Gold broke out to four week highs this week, but is still trading well below its 12 week highs.
The fact is, Copper continues to be the start performer among the metals. It was up almost 3% on the week, and continues to climb. It now stands at better than six year highs.
Copper is totally inversely correlated to the Dollar at this point, so as long as the Dollar continues its declines, expect to see Copper head higher.
Energy Futures
The energy markets had another strong week, led by the RBOB gasoline futures, which were up nearly 7% on the week. Even Natural Gas managed its second consecutive weekly gain.
While cold weather has gripped much of the U.S., it appears that the potential for a sizable Covid-19 stimulus package appears to be a primary driver, given that the RBOB is leading the way higher.
The RBOB futures have now completely closed the down gap that occurred in early March.
Grain Futures
Grain futures finished the week mixed, with Wheat futures closing a bit lower, but Soybeans made their largest weekly gain since this bull move began in the Spring. Corn futures closed the week up 14 cents, but still sit just below the highs of this bull move.
While the trend in Soybeans has been strong, it has been orderly, and there is no sign of a major blow off top.
Softs
Cotton futures made better than 3 cent gains this week, as the current bull move shows no signs of letting up. Cotton appears to be somewhat correlated to Soybeans at the moment.
Coffee was up over 3.5 cents, while Sugar was flat on the week, Cocoa was off $116 and Lumber traded up $55. Lumber is trading at the highest prices I’ve seen since I started following futures markets in 1994.
Final thoughts
We continue to see weakness in the Dollar and strength in many commodity markets. Yet, the Treasury market refuses to sell off in the face of building inflationary pressures.
Because yields on Treasuries remain so low, traders continue to take on greater risk, as evidenced by these moves in the futures and in equity markets.
We are heading into the last two weeks of trading for 2020. January tends to be a tough month after big gains are booked in December. I read recently the hedge fund leverage is also quite high right now.
With that in mind, while many of the current trends look solid, don’t be surprised by significant reversals in the weeks ahead.
The risk of loss in trading commodity futures contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.