Good morning and Happy Wednesday,
I think it’s fair to say few could have expected yesterday’s price action, a violent downturn was observed across the board in Commodities, and Coffee felt the brunt of the pain – dropping 4 cents in 10 seconds. A mighty recovery followed though, and we closed the session relatively unscathed with a settlement of 130.45 (-0.30) in the March contract. The chart below (overlaid commodity basket) shows the extent of the damage that hit in such a short time frame). Gold was the only contract that went the other way whilst everything else was getting smacked.
Arabica closed the week in fine fashion, posting a closing print (KCH 130.90 +1.10) well above the previous intraweek high and settling less than 2 ticks below the upper Bollinger band. Spreads again dominated the day with 29,536 total on the day and total futures volume of 73,591. Z/H traded nearly 19k times as OI officially rolled into the March contract. Both the UBB and the abundance of option-expiration related selling capped the market in a day of mixed commodity trading. Robusta settled down $8 at 1816 for the session amidst terrible volume. The 5860 lots of total trading were exceeded in futility over the prior year on only 3 occasions – one of which was US Independence Day, another the Friday before Christmas break. That figures to change come Monday following the release of today’s COT which revealed 8322 lots of net Managed Money selling as the short cohort grew by 9. Short funds now outweigh longs by a better than 2 to 1 margin. The current net -15,057 number is the largest since March 15, 2016’s report. Meanwhile commercials added 7715 lots of net length as 2 traders appeared to flip from short too long. The net commercial long of 13,191 comes in at the longest since April 12, 2016.
What a difference a year makes in the coffee market. One year after the U.S. presidential election and the market posting a 22 month high of 17955, KCZ traded in all of a 170 point range with the day’s low 3 cents above last Wednesday’s 5 month lows. Last year funds were carrying record net and gross long exposure, while today they are carrying a record short. About the most exciting part of the action in today’s outrights was the market taking out the double top formed against yesterday’s highs of 12580 by all of 10 points on the close. Total volume was 71,068 lots, the bulk of which was accounted for in 31,890 spreads traded. Dec/March traded 19,693 times and held steady at 345 under. Robusta in the meantime traded by $1 to its lowest level traded since August 25th 2016, and has traded a lower high for 8 of the past 9 sessions, the exception being the Nov 2-3, 1877 double top basis the January contract.
The International Coffee Organization flagged a “well supplied” coffee market as it ditched an estimate of a global production deficit last season – and lowered ideas on shortfalls for the two previous years too.
The ICO, which had estimated world coffee production in 2016-17 at 1.19m bags behind consumption, revised its forecast to show a surplus of 2.38m bags for the season, which ended in September.
The revision reflected an upgrade, “on the basis of new information from member countries”, of 3.57m bags to 157.4m bags in the estimate for world production.
Meanwhile, the organisation held at 155.1m bags its estimate for world consumption.
‘Market is well supplied’
“After increasing for two consecutive years, world coffee consumption is estimated to have remained stable,” the ICO said.
“Given the rise in global coffee output against stable consumption, coffee year 2016-17 is now seen in surplus after two consecutive years of deficit.”
The world coffee market “is well supplied at the start of coffee year 2017-18 by the replenishment of stocks over this past year”, the organisation added.
Indeed, the ICO cut too its estimate for the world output deficit in 2015-16, by 688,000 bags to 3.22m bags, and for 2014-15 by 315,000 bags to 2.71m bags.
These revisions reflected in the main higher estimates for robusta coffee output, particularly in Asia.
Combined, the revisions to these two seasons and the figure for 2016-17 added more than 4.5m bags to the organisation’s estimate for world coffee supplies.
‘Prices drifted downwards’
The ICO flagged that coffee prices “have drifted downwards since the end of August”, averaging 120.01 cents a pound last month, according to an ICO composite index - a 17-month low.
For “other milds”, the index dropped to 4.0% month on month 140.71 cents a pound, the lowest since January 2014, undermined by the soaring exports from Honduras.
An ICO robusta coffee index fared relatively well, in easing by 0.8% to 98.39 cents a pound.
However, robusta futures proved less resilient on Tuesday, closing down 1.7% at $1,824 per tonne in London for January delivery, a 14-month closing low for a nearest-but-one contract, in a decline seen as fuelled by ideas of supplies coming online from the newly-started Vietnamese harvest.
New York arabica coffee futures for December eased by 0.7% to 124.70 cents a pound.
Arabica shook off early grogginess on its way to a 125.55 closing, +160 points. Correlations were strong on the day (see chart below), with commodities as a whole trading sideways early and finding a convincing bid around 10am – followed by a dollar move that was similar in pattern yet lagged the complex. Some credit was given to a bullish market report from an oft-quoted analyst suggesting a substantial decrease in Brazilian 18/19 crop potential, yet the timing of the news article matches equally well to the rally in cocoa, and not long before the moves in crude, sugar and others. While the COT fell in line with market consensus Friday, providing a non-event for a recalibration trade, most discretionary traders struggle to justify prices at current levels with limited Brazilian participation in the nearby contracts. The Z/H roll is a touch behind schedule and 4700 lots of trading pushed structure in a tick, settling at -3.50. The hedged Put Spread / Call Spread tandem (legged iron condor) showed up again in the May contract, trading 1500x each on screen. London slipped a dollar in rangebound trading, settling 1855 basis F, while spreads remained firm.
On the wake of the new month, London market did not find any reasons to look north and spec pressure continued to punish the flat price. The first thirty minutes of trading set the stage for the fall of robusta, it tumbled below yesterday’s lows and the inability to find buying interest only added to the dire picture. The active trading period brought another round of selling which the market was unable to absorb. Robusta moved on a down spiral path ending half an hour before the close at a new low in more than a year, 1830 vs January. The Nov/Jan spread spiked on the day moving to $59 premium while Jan/Mch was contained within previous two days’ range 14-26 premium. Option trading was active with F18 1900/2050 CS vs 1846Δ24 trading 2350 times @ 29. On first notice day for the November robusta coffee contract 3,351 lots were tendered to the market with ABN Amro being the main contributor and benefactor.
On arabica, it is the last straw that breaks the camel’s back, and so it did. Unable to gather interest to push higher in the last 2 sessions, New York followed the faith of its cousin tumbling lower on the day. The second position reached the 126.60 low area dating back to August and after bouncing from it 5 times during October we finally broke on system’s trading technical signals. Interest from natural buyers is not present at least not in any form to absorb the running of the bulls we suffered today as previous buyers turned into sellers. The spread position certainly added to today’s big volume with Dec/Mch adding about 10,000 and Mch/May about 7,000 lots. Only the later weakening on the process. Options were not behind on activity as the Z17 120P traded 2,376 lots and the Z17 127.5 C traded 2,187 lots. Certainly the 125.00 area has been pivotal place in the past. Holding the area should give us room to move forward otherwise, the 76.4% Fibonacci retracement from the low of June is 2 cents away.
LRCF8 settled $40 lower with volume estimated at 26,208 lots, including 7,433 spreads, 817 EFP's and 0 EFS's. 6,221 calls and 2,100 puts also traded. Open interest 102,844+2,562.
KCEZ7 settled -2.15 cents lower with volume estimated at 81,168 lots, including 32,068 spreads, 1,258 EFP's, 106 EFS's and 1,262 TAS. 7,247 calls, 6,075 puts also traded. €=$1.1634. BRL: 3.2727/$. CRB: 1.8755. Crude oil 54.64. S&P500 2576. Open interest 239,067-48.
KC managed to hold yesterday’s 15 week low by 30 points and traded in a range of down 10 to plus 210 on the day, ultimately settling with a 90 point gain. The rhythm of trading mirrored that of the BRL which traded steadier on the day but started to erase gains once news got out that President Michel Temer was not feeling well and hospitalized in Brasilia as the lower house gathered to vote (currently delayed) , on whether he should stand trial before the Supreme Court on corruption charges. Open interest climbing by 3,733 lots encouraged discretionary spec and bits of industry buying however overall volume was light and volatility went lacking.
Arabica closed the week on a disappointing note after an encouraging start settling down 160 points at 125.25, after posting a low of 124.00. European hours were muted yet higher, however as the Americas session commenced the failure to post a new high for the week seemed to send short term long specs to the exit. Roasters were quiet on the day – indeed commercial traders in general seemed to treat the session as a summer Friday. Arabica closely mirrored the BRL from 8am EDT onwards, with the DXY closely entangled as well. Given the recent irrelevance of the currency trade to KC, chalk that up to one of the several surprises in today’s trading. The COT is likely weighing on the minds of many as traders wait for a recalibration of the short side magnitude through Tuesday’s low. Options were slow, led by 600 N 100 Puts. Robusta was more resistant to the selling, settling down $8 at 1965 as structure supported flat price. X/F led the charge settling one tick off the high at 55 over. Options were quiet, led by paper buying of 425 H 1900 Puts.
KC put in its best performance since the 15th of September and was only bested by sister product Cocoa as the top performer in the CRB index. The H/H arb widened by 150 points as London put in its strongest performance since October 2nd, whilst the Nov/Jan spread strengthened yet again today to its highest level of 57 over. The primary catalyst for the move in New York was the ever increasing open interest which today rose by another 1,503 to a record 231,461 lots. Traders grow encouraged by the double bottom of Tuesday/Wednesday and the willingness for the market to find support in the 125-127 level since the middle of July when funds have been short in excess of 30,000 lots net. Today’s high of 13175 was just above the 13165 mid Bollinger band and slow stochastics have crossed positive which is starting to paint a constructive technical picture in what otherwise has been a rather bleak performance on the charts. Dec/March tightened 10 points to a 370 discount as funds remain short the front contract and trade demonstrate a willingness to position before the non- commercial sector starts to roll what very well could be a record gross short. Tomorrow should prove interesting especially after today’s pop and ahead of the COT report which will be accompanied by a 13,642 lot increase in open interest. Keep an eye on the gaps at 13355-13375 followed by 13745-13770, but in the meantime we will take today’s performance…baby steps.
Markets showed another day of consolidation as ideas about the condition of Brazil’s 18/19 crop are still far apart from each other. There is the camp which believes that the crop is healthy enough to produce a “monster crop” while the opposite opinion is also on the table. The market, already oblivious to the chatter at least in the short term, did not move far away from yesterday’s low levels.
Speculative short selling was still adding pressure to the terminal markets, but since the levels trading are as low as we have seen since June2016 (without counting the drop from June17) in arabica and since September 2016 in robusta, hedgers seem comfortable adding cover. Structure activity added considerable volume to London while trading up to +40 on the front month position. New York’s spread on the other hand traded in a 1-tick range at the bottom of its range. OI explosion in arabica adds to the equation perhaps giving a line to the bulls in the event of a weather mishap, which can cause a considerable short covering rally.
LRCX7 settled $7 lower with volume estimated at 23,363 lots, including 11,066 spreads, 508 EFP's and 0 EFS's. 2,640 calls and 1,286 puts also traded. Open interest 97,671 -2,145.
KCEZ7 settled 0.40 cents higher with volume estimated at 27,902 lots, including 7,678 spreads, 807 EFP's, 97 EFS's and 582 TAS. 4,170 calls, 5,243 puts also traded. €=$1.1766. BRL: 3.1711/$. CRB: 1.8462. Crude oil 51.92. S&P500 2553.75. Open interest 226,320+3,316.