Delivery period, weather or just de macro?
US stock markets traded at new historic high after the Fed hinted that it will cut interest rate this year – not necessarily on the next FOMC meeting, in July.
A full employment background and inflation slightly below the target might allow the committee to postpone on lower rates, but the central bank left its option opened perhaps awaiting a negative effect from a non-trade agreement with China or a potential conflict with Iran.
For investors the “guaranteed” monetary stimulus in case negative economic data arises works as a being long a free “put” (option to sell), therefore stimulating the appetite for risk-assets – not bad at all.
The US dollar collapsed, treasuries rose (yields declined) and the CRB gapped higher led by gains of crude oil, coffee, gasoline, heating oil, gold and silver.
Tension in the middle east helped the rally of energy commodities as well as precious metals, while coffee was also influenced by strength of the spreads and maybe by the beginning of the winter in Brazil.
Fundamental Focus
The start of the delivery period for the July 2019 contract gave a boost to the market with the spread against September 2019 firming to a discount of US$ 0.65 cents per pound. Certificate holders should in theory be interested in letting go some certs and in not doing so (even if the OI is small) they give the impression to the market that there is value for these coffees – warning signal for bears?
We need to see a higher pace of de-certification to prove the thesis, in theory something that should happen if quality becomes an issue not only from the origins that are deliverable, but also from naturals – and here it would make a case for quality concerns on the coffee being harvested in Brazil – although the weather has been dry for all June.
Another factor that would contribute to demonstrate the concern with “availability” would be the whole structure narrowing, meaning the spreads from September 2019 onwards diminish the discounts – Sep19/Sep20 still pays 12.5% a year.
Let’s follow it closely to see if we are experiencing a change of perception or if the recent move is just reshuffling of investments on ease monetary policy expectations.
US inventories in May (certified and non-certified arabica and robusta) rose 264,518 bags, according to the Green Coffee Association, down from 6,867,594 in the same month of 2018 – with records of exports from various origins it could have gone up, sign of higher consumption?
In Europe though it went up to 11.6 million bags, from 11.37 mm in March.
Stiff FOB/ex-whse differentials and replacement remaining at firm levels in the origins still does not attract the volume of businesses that sellers have been waiting for – and eventually it could get slower during the summer in the northern hemisphere.
At the same time though, many market participants seem to believe that a lot of buying still needs to be done for the second half of the year, but with the origins being more expensive than usual the strategy of buying from hand to mouth shall continue, even more so from those who believe that the terminal will fall again.
Apart from weather news or a much stronger BRL (after the approval of the pension reform in July), we may just see the “C” contract oscillating between US$ 90 and US$ 110 a pound for a long time.
Technical Focus
NY bounced steeply from US$ 96.25 cents per pound leaving a key-reversal to the upside and it had another outside-day today, settling near the highs. Next resistance levels are 105.75 and 108.75 and support areas are at 99.60 and the 96.25 (mentioned above). London first resistance is at 1411, followed by 1468 and 1511 and on the downside, we shall observe 1402, 1372 and 1311 dollars per ton.
Wishing you a nice week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091