Spots and certs shall attract interest
The devaluation of the Chinese currency to its lowest level in more than ten years – a couple of days after Trump decided to tax pretty much all imports from China (adding further pressure on the FED to eventually cut rates more rapidly) – has driven the markets away from risky assets earlier last week.
In subsequent sessions, however, US stock indices were able to recover losses leaving the S&P500 “only” 3.5% below the historical record (last Friday). Today, though, investors panicked after a steep devaluation of the Argentinian Peso and continued protests in Hong Kong that forced the closure of the airport of the province that has a different system under the same government.
Forecasts of slower World economic growth from different analysts are somehow counterbalanced by ease monetary policies, which has taken yields to negative levels on US$ 15 trillion of global bonds.
At the same time, dividends distributed to shareholders of companies listed on the S&P return the equivalent of 1.9%, according to an article published by Bloomberg. While much of the proceeds are generated by stock-buybacks, investors seeking better compensation for their money end up “fueling” stock market to new highs, or at least not letting them fall – given the volume of cheap money made available by expansionary monetary policies that has been in place for more than ten years.
For commodities the risk of slower GDP growth, along with low World inflation and a generally stronger US dollar put pressure on prices pushing the CRB to levels we had not seen since June 2017.
Coffee in New York lost almost 400 points at one point on Monday the 5th of August, being able to recoup during the week to then drop again today after the Brazilian Real traded above R$ 4.00 – dragged by the poor primary votes results in Argentina that signals the left wing taking office again on the October presidential election .
Fundamental Focus
The weakness of the Colombian Peso and the Real are not enough to make up for the losses of the “C” and as a reflection differentials are firming up, even more so as Brazil has virtually finished harvesting and most of the milds are at the peak of in-between-crops – meaning: farmers either are no longer in need for money or do not have much coffee available to sell, respectively.
Consuming countries faring through the hot summer also diminishes the overall activity, with buyers not seeing offers attractive enough to step in aggressively.
Future terminals are trading mostly spreads during the daily sessions as traders roll their positions ahead of the delivery periods for September contracts.
Among buyers, the concern with the quality of the current Brazilian crop is a recurring theme in conversations, especially from those who need non-naturals and fine cup coffees. While it is true that the 19/20 crop has suffered the impact of multiple flowerings, uneven maturation and rains at the beginning of the harvest – which took place a lot earlier this season – one shall not take as a basis the 18/19 crop, which was (if not the best) one of the best Brazilian crops in history – quantity and quality-wise speaking.
In other words, the 18/19 crop was an exception to the rule, which is a broad quality crop that comprises everything from Rio Zona to Specialty coffees within one country – maybe the current one being a little bit more challenging than what is usual in Brazil.
With the lower availability of semi-washed and high-quality beans (that competed with other-milds) Brazil will likely lose a bit of the market-share that it gained in 18/19, also influenced by a smaller overall arabica production.
Assuming the boards will then remain under-pressure by the influence of the macro, plus the contango and also by the perceived comfortable availability of coffee, inventories being held at destinations shall become attractive and disappearance of certs could happen faster.
The result could be tighter spreads for NY, but to see a substantial change we would have to see a significant drop of stocks, while in London it seems unlikely to avoid more conilons being shipped to warehouses where few players have interest to receive.
It would also be important to see shipments slowing in Brazil, which shall export a lot less on the current crop. Brazilian exports in July though totaled 3.16 million bags, a record for the month, reflecting the so mentioned suffice availability of coffee from both previous and current crop.
The next events to pay attention are rains in the two largest producers. In Vietnam they have returned and in much larger volume than desired, unfortunately causing disruption to the population but dispelling the fear of drought. In Brazil we will monitor the forecasts, but lack of rains at this point and probably until mid/end of September shall not cause any reaction.
The devaluation of the BRL and the COP trigger new sales by algorithm-traders and at the same time system-funds see a poor technical figure signaling further weaknesses.
Commercial buyers might participate on better volumes at current levels, hopefully providing enough support to avoid the markets to make new lows.
Technical Focus
December19 contract in NY broke the key support at 98.70, looking now for 96.20, 94.40, 93.70 and 89.00 and 87.60 as next support. Resistance starts at 98.70, followed by 100.60, 102.30, 103.45 and 106.70. In London November19 contract made a new low today, forcing us to look at the weekly chart that shows us support at 1,267 (low of the year), 1,212 and 1,156 dollars per ton. On the upside we shall observe 1,343, 1,369 and 1,416.
Wishing you a pleasant week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091