MACROECONOMIC BACKGROUND PRESSURING COMMODITIES
The Chinese stock market reopened today, after the holidays to celebrate the new lunar year, collapsing almost 10% at one point and settling down 7.7% due to the coronavirus outbreak.
With more than seventeen thousand cases confirmed and almost four hundred deaths the fear of becoming a pandemic disease has forced Chinese schools to remain closed, airlines to stop flying in and out of China and offices being shut – two the largest coffee chains have also closed some of its stores in the country.
Equities in the US rebounded today expecting the efforts to contain the flu will limit the damage to the economy, but commodities continued the free fall with the CRB flirting with the lows of last year – in a spam of a month it has lost 10% from what was the high of more than twelve months.
Among the components of the CRB basket, arabica coffee, which had risen 50% at the end of last year, melted 24% since December 31st, a similar fall in percentage to heating oil – in reality only cocoa, raw sugar and gold rose in the first month of 2020.
Fundamental Focus
The “C” started the year losing ground partially suffering with the influence of the overall pressure on commodities and by reported good amount rains in Brazil.
One other narrative that was being used by the bulls during the rally that took the market from US$ 95.80 cents to US$ 142.45 cents per pound in forty-three sessions lost strength and helped to fade the enthusiasm.
It was the drawdown of stocks at the destination and as certified stocks are naturally the “most visible” ones several players were following it closely, arguing that the strength of the differentials in all origins would attract even more interest on these coffees. In this matter, though, not only certs stopped falling, but overall the exchange has reported an increase, which even if not in a significant volume it has at least temporarily changed the “trend”.
Other factors that impacted negatively were the appreciation of the US dollar – including the BRL last Friday making a new historical low – as well as important key support levels being broken that attracted funds to sell the market and finally the Wuhan flu threat.
Now everyone is wondering if we will see NY making a new low.
It will depend on the extend of the outbreak of the coronavirus, the performance of the greenback and how much commodities will be sold – in other words, how the macroeconomic scenario will playout.
Other than that, it seems to me that everything inherent to coffee S&D points towards the market finding value at current levels, given that Brazil has already sold around 85% of the current crop and more than 30% of the upcoming 2020/21 harvest.
In this regard, it is worth mentioning the poll released by the Reuters pointing to a Brazilian production of 66.9 million bags, which will generate a global surplus of only 2.5 million bags.
If proved to be right, the surplus is practically nothing and taking into account a smaller production cycle on 21/22 (due to Brazil off year) along with the 2% annual growth in global demand – equivalent to 3.3 million bags – the market will have to rise at some point to sort out future deficits – as at current levels it does not stimulate the increase in production.
Once again the stiff differentials such as 30 cents per pound over for Colombia, US$ 10 cents per pound over for Honduras, single digits discount for Brazil and 130 dollars per ton above for Vietnam are important indicators from the origins, kind of saying that they will not let go their coffees easily or that they “do not agree” with the terminal.
Technical Focus
The 2nd month continuous chart settled today below an uptrend line traced from the low of May and October of 2019. It means that the May contract needs to stay above 101.80 until Friday not to create further downside pressure that might test 95.80, 90.85, 88,45 and 87.60. Resistance levels are at 100.00, 102.00 and 106.15. London first support is at 1,287, followed by 1,261 and 1,234. On the upside 1,353, 1,374 and 1,410 are resistance areas to be observed.
Wishing you a pleasant week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091