Trend Following - Week in Review - June 21, 2024

Welcome to "This Week in Trend", where each week, we cover key movements and trends in the futures markets, offering insights on commodities and indices shaping the economy. From price surges to notable declines, we provide an overview of the factors driving these changes. Stay informed about the latest developments and navigate the market with confidence. Join us weekly to explore the dynamic world of futures trading and the trends that matter most.

A Mixed Week for Trend Followers

Trend Barometer

This week, the Trend Barometer dipped again from 30 to 23, indicating progressively weaker market conditions for trend followers providing a challenging environment. The 10-day rate of change is falling moderately, highlighting the increasing difficulty in finding consistent trends to capitalize on.

So far this month, the SG Trend Index has decreased by -2.98% (as of Thursday), bringing the year-to-date gain down to 8.35%. This decline highlights the challenging period currently faced by many trend followers.

The Top Traders Unplugged (TTU) Trend Barometer is a proprietary tool that measures the percentage of markets with medium to strong trends. Just as a thermometer reading of 0 degrees Celsius equates to freezing, when the TTU Trend Barometer reads a value that is less than 40%, market trendiness begins to get “colder” or weaken. Likewise, when the TTU Trend Barometer gets above 55%, the environment gets “hotter” (better).

Weekly Asset Class Snapshot

This week featured significant variations across asset classes, propelled by a combination of supply dynamics, economic reports, and evolving market sentiment. The overall market landscape was shaped by persistent inflation concerns, anticipated interest rate adjustments, and ongoing geopolitical tensions.

In the energy sector, gasoline (RBOB) prices jumped by 4.6%, marking the most prominent gain. This rise was primarily driven by increased demand forecasts due to the summer driving season and supply constraints exacerbated by geopolitical factors. The surge in gasoline prices underscores the influence of seasonal demand and geopolitical events on energy markets.

Metals experienced an overall increase, with platinum prices rising by 3.93% and palladium up by 2.62%. This upward movement was driven by strong industrial demand and supply constraints. The ongoing economic recovery and increased industrial activity have bolstered demand for these metals, particularly in the automotive sector.

Soft Commodities experienced a sharp downturn, with cocoa prices plunging by -11.61%. Soybean meal prices fell by -1.99%, while orange juice prices edged up by 0.76%. Enhanced weather conditions in critical growing regions resulted in better-than-anticipated crop yields for some commodities, stabilizing prices. This underscores the sensitivity of agricultural markets to weather changes and crop forecasts.

Bond prices saw a slight decline of -0.30%, reflecting market reactions to changing interest rate expectations and economic data. The anticipation of continued monetary tightening by central banks has kept bond yields elevated, as investors seek safe-haven assets amidst equity market volatility.

Equity indices posted a modest increase of 0.74%, influenced by varied economic data and earnings reports. Persistent macroeconomic concerns, such as inflation and potential interest rate hikes, have maintained cautious investor sentiment, leading to a tepid performance in equity markets.

Currency markets showed a minor decrease of -0.23%, with the US dollar weakening against other major currencies. This decline is attributed to fluctuations in interest rate expectations and economic policy signals from the Federal Reserve.

Overall, this week's market activities were shaped by a complex interplay of weather conditions, economic policies, and geopolitical events. Energy prices were significantly affected by seasonal demand and geopolitical tensions, while metals benefited from strong industrial demand and supply constraints. Soft commodities were influenced by weather conditions and crop forecasts, while equities, bonds, and currency markets responded to macroeconomic data and policy expectations. ​

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Gasoline prices have surged by 4.6% this week, largely driven by the anticipation of increased demand during the summer driving season. This seasonal spike in gasoline prices is a common occurrence as more people take to the roads for vacations and travel, leading to higher consumption of fuel. The U.S. Energy Information Administration (EIA) reports that gasoline prices are expected to average around $3.70 per gallon during the summer months, which is reflective of the heightened demand from May to September​.

Additionally, supply constraints have played a significant role in the recent price increase. The reduction in refinery capacity and increased production costs have contributed to market volatility. Specifically, refinery maintenance and operational challenges can lead to temporary shortages, further exacerbating price hikes. This year, the refining sector has been urged to plan ahead to ensure adequate supply, as unplanned maintenance or lack of resupply strategies could lead to significant price spikes, similar to those observed in previous years​​.

Geopolitical factors are also influencing gasoline prices. Global oil markets are experiencing fluctuations due to various international events, including production decisions by major oil-exporting countries and geopolitical tensions. These factors impact crude oil prices, which in turn affect gasoline prices at the pump​.

Overall, the combination of increased seasonal demand, potential supply constraints, and geopolitical uncertainties are driving the current surge in gasoline prices. As the summer progresses, continued monitoring of these factors will be essential to understanding and predicting further price movements​.

Despite recent upward movements, gasoline prices have remained in a sideways congesting phase since late 2022, with no definitive signs of a bullish breakout. Trend followers are likely keeping a close eye on this market, watching for indications of a decisive move out of this congestion zone.

Platinum prices have seen a notable increase of 3.93% this week, primarily driven by ongoing supply concerns and robust industrial demand. The economic recovery has significantly bolstered the demand for platinum, especially in the automotive and industrial sectors. In the automotive industry, platinum is crucial for manufacturing catalytic converters, which are essential for reducing emissions in vehicles. This demand has reached a seven-year high, further emphasizing its importance​.

Supply disruptions have also played a critical role in the recent price surge. South Africa, which accounts for roughly 75% of the global platinum supply, faces continuous challenges including operational issues and power supply instability. These factors have led to decreased mining output and heightened concerns about future supply stability. Additionally, recycling supply remains low, although a slight recovery is expected as the year progresses​.

The platinum market is also impacted by broader geopolitical factors. For instance, Russia, another key platinum producer, has been experiencing economic sanctions and other geopolitical challenges that further constrain global supply. These disruptions have contributed to the forecasted market deficit, which is expected to be around 476,000 ounces for the year​.

Overall, the combination of strong industrial demand, particularly from the automotive sector, and significant supply constraints due to geopolitical and operational challenges, has driven the recent increase in platinum prices. As the global economy continues to recover and industrial activities ramp up, these factors are likely to maintain upward pressure on platinum prices in the near term​.

Despite the recent positive price movement, trend followers are likely sitting on the sidelines remaining cautious, as there is currently no clear material trend formation.

Crude oil (WTI) prices increased by 3.25% this week, supported by a tighter supply outlook and robust demand expectations. The recent price rise is largely attributed to production cuts from OPEC+ countries, which are designed to balance the market amid fluctuating demand. These cuts have led to global stock drawdowns, tightening supply and pushing prices upward.

OPEC+ has been implementing these production cuts to stabilize the market. The U.S. Energy Information Administration (EIA) projects that these measures will continue to reduce global oil inventories through the rest of 2024, putting further upward pressure on prices. The EIA also forecasts that the average price of WTI crude oil will rise to approximately $90.91 per barrel in 2024, reflecting the impact of these supply constraints​.

Demand expectations are also playing a crucial role in supporting higher prices. Global oil demand is anticipated to grow, driven by economic recovery and increased industrial activities. The EIA expects global oil demand to rise from 100.92 million barrels per day in 2023 to 102.24 million barrels per day in 2024​.

In summary, the combination of OPEC+ production cuts and robust demand expectations is leading to a tighter supply outlook, which has resulted in the recent increase in crude oil prices. These factors are expected to continue influencing the market dynamics through the remainder of the year​.

Despite the upward movement, trend followers are unlikely to interpret this as a bullish signal. The recent price action has been stuck in a congestion phase since early 2023, with no clear indications that the asset is starting a new trending phase.

Crude oil (Brent) prices rose by 2.95% this week, reflecting a similar pattern of supply constraints and strong demand expectations as seen with WTI crude oil. The price increase is primarily driven by the ongoing production cuts from OPEC+ and the sustained global economic recovery, which have significantly influenced market dynamics.

OPEC+ has been proactive in managing oil supply by implementing substantial production cuts. These measures are aimed at balancing the market and mitigating the effects of fluctuating global demand. According to the U.S. Energy Information Administration (EIA), these cuts are expected to continue reducing global oil inventories throughout the rest of 2024, thereby exerting upward pressure on Brent prices. The EIA forecasts that Brent crude prices will average around $94.91 per barrel in 2024, highlighting the impact of these sustained supply reductions​.

The demand side also plays a critical role in supporting Brent prices. With the global economy rebounding and industrial activities ramping up, the demand for crude oil has been robust. The EIA projects global oil demand to increase from 100.92 million barrels per day in 2023 to 102.24 million barrels per day in 2024. This growing demand, coupled with constrained supply, creates a tighter market, further supporting higher prices​.

Additionally, geopolitical factors and seasonal variations contribute to the volatility and upward trajectory of Brent prices. Seasonal increases in fuel consumption, particularly during the summer driving season, add to the demand pressure on oil markets​.

In contrast to WTI, Brent prices are more influenced by international market conditions and geopolitical developments, which can cause additional price volatility. However, the fundamental drivers of supply cuts by OPEC+ and strong demand expectations remain central to the price dynamics of both crude benchmarks.

Overall, the combination of strategic production cuts by OPEC+ and robust global demand expectations has created a bullish environment for Brent crude oil prices. These factors are likely to maintain upward pressure on prices through the remainder of the year​. Despite the positive movement, market analysts and trend followers are monitoring these developments closely to assess the potential for sustained trends beyond the current congestion phase observed since early 2023.

Like WTI, the positive movement in the Brent price this week is unlikely to get Trend Followers excited. The recent price action has been stuck in a congestion phase since early 2023, with no clear indications that the asset is starting a new trending phase.

Palladium prices climbed by 2.62% this week, driven by strong industrial demand and ongoing supply constraints. The economic recovery and increased industrial activity have notably bolstered demand for palladium, especially within the automotive sector, where the metal is crucial for catalytic converters in vehicles. This demand is expected to remain robust as global economies continue to recover.

The supply side also presents significant constraints. Palladium production is highly concentrated, with the majority of global supply coming from Russia and South Africa. Any disruptions in these regions, such as labour disputes or geopolitical tensions, can significantly impact supply levels. Currently, the market faces challenges due to limited recycling and high stockpiles, which add to the tight supply conditions​.

Moreover, the shift towards cleaner energy and tighter emissions regulations, especially in major markets like China and Europe, has intensified the demand for palladium. This is because palladium is essential in manufacturing catalytic converters that reduce harmful emissions from internal combustion engines. Despite some headwinds, including the increasing adoption of electric vehicles, the demand for palladium in traditional automotive applications remains strong​.

In summary, the combination of strong industrial demand and constrained supply continues to support higher palladium prices. As the global economic recovery progresses and industrial activities increase, these dynamics are likely to maintain upward pressure on palladium prices in the near term​.

This positive move likely caught trend followers off guard this week, as they are probably heavily short in this market due to the significant decline following its previous peak in early 2022.

What’s Moving Down

Cocoa prices fell sharply by 11.61% this week, primarily driven by improved weather conditions and increased supply expectations. The favourable weather has led to better-than-expected crop yields in key producing regions like Ghana and Côte d'Ivoire, significantly boosting supply. Ghana's cocoa production for the 2024/25 season is projected to rebound to 700,000 metric tons from 425,000 metric tons in the previous season due to these favourable conditions​.

This increase in supply has alleviated previous concerns about shortages, thereby putting downward pressure on prices. The decline suggests the continuation of a bearish trend that has been ongoing since early 2022, despite occasional price rallies​. Furthermore, the global cocoa supply is anticipated to decline by nearly 11% in the 2023/24 season, contributing to the current market dynamics​. This combination of factors continues to impact the market, resulting in lower cocoa prices.

This sharp decline in cocoa prices is likely to have been unwelcome news for trend followers, who are probably holding significant long positions in this market due to recent bullish price action.

Lumber prices decreased by 9.01% this week, driven by reduced demand in the housing market and improved supply conditions. The slowdown in the housing market is primarily due to higher mortgage rates and broader economic uncertainties, which have led to decreased demand for new construction. This reduction in housing starts has directly impacted lumber demand, as construction is the primary driver of softwood lumber consumption in the U.S.​

Additionally, improved supply conditions have contributed to the price decline. Sawmill production has normalized after the disruptions caused by the pandemic, leading to increased lumber availability. Moreover, transportation and logistical issues that previously hindered supply have largely subsided, further easing supply constraints​.

These factors have combined to push lumber prices downward, continuing a trend of price stabilization after the extreme volatility experienced during the pandemic years. As the housing market remains subdued and supply conditions improve, lumber prices are expected to remain under pressure in the near term​.

This significant drop in lumber prices is likely to be of great interest to trend followers, who might view it as confirmation of a short breakout in the market. Recognizing the ongoing bearish momentum, they are likely to start entering short positions to capitalize on the downward trend.

Wheat prices dropped by -8.3% this week, driven primarily by favorable weather conditions in major growing regions and higher supply forecasts. Improved weather has led to better-than-expected crop yields, significantly increasing supply and alleviating previous concerns about shortages.

The USDA's latest outlook indicates that U.S. wheat production is benefiting from larger domestic supplies and reduced competition from other key exporters. Notably, Russia and Ukraine have faced production challenges due to adverse weather conditions, including freezing temperatures and droughts. Similarly, excessive moisture in France has impacted the European Union's wheat production, further contributing to the global supply dynamics favouring U.S. wheat​.

These factors have collectively resulted in a more abundant wheat supply, leading to a significant drop in prices. The increased supply has eased market concerns about potential shortages, contributing to the sharp decline in wheat prices this week​.

In summary, the combination of improved weather conditions in key producing regions and higher supply forecasts has led to a notable decrease in wheat prices, reflecting a more stable and ample supply outlook for the commodity.

This price movement would have been advantageous for trend followers, who likely held existing short positions since the peak in early 2022.

Oats prices experienced a significant decline of 6.78% during the week, primarily attributed to favourable weather conditions and increased supply expectations. The optimal weather has led to improved crop yields, resulting in an abundant supply of oats. This surplus has exerted downward pressure on prices as the market adjusts to the higher availability of the commodity.

Favourable weather conditions have played a crucial role in boosting the yield of oat crops, leading to an increase in supply. Regions known for oat production have reported ideal growing conditions, including adequate rainfall and favourable temperatures, contributing to robust crop health and higher-than-expected yields.

As a result of this increased supply, market dynamics have shifted. Traders and producers are now anticipating a continued supply glut, which has influenced the price decline. When supply exceeds demand, prices typically fall as sellers compete to offload their surplus produce, leading to a buyer's market where prices are driven down.

In addition to weather conditions, advancements in agricultural practices and technology have also contributed to the higher yields. Enhanced farming techniques, improved seed varieties, and better pest management strategies have all played a part in maximizing crop production.

The impact of these factors on oat prices is a clear demonstration of how external conditions, such as weather and technological advancements, can influence agricultural markets. As the season progresses, market participants will continue to monitor weather patterns and crop reports to gauge future price movements and supply levels.

Trend followers likely welcomed this week's decline, as many have been shorting oats since their price peak in early 2022. For shorter-term trend followers, this downward movement probably serves as confirmation of a short breakdown in price, reinforcing their trading strategies.

Natural gas prices declined by 5.62% this week, primarily due to reduced demand and improved supply conditions. The decline reflects several key factors:

1. Milder Weather Conditions: The weather across significant regions in the U.S. has been milder than expected, reducing the demand for natural gas for heating and cooling. The National Weather Service noted that the majority of the lower 48 states could experience above-average temperatures over the next few months, which would typically increase demand for air conditioning and thus natural gas. However, the immediate past week's milder weather contributed to the lower demand​.
2. Increased Supply: There has been a significant increase in natural gas supply, with production remaining robust. The U.S. dry natural gas production was reported at 101 billion cubic feet per day, up 1.4% year-over-year. Furthermore, natural gas inventories saw a substantial injection, adding 98 billion cubic feet to underground storage, bringing total stocks to 2,893 billion cubic feet, which is 25% higher than the five-year average​.
3. Pipeline and Storage Factors: The completion of maintenance on key pipeline infrastructure has restored capacity, aiding in the improved flow of natural gas. Additionally, higher levels of natural gas in storage have cushioned against price volatility, helping to stabilize the market​.

These combined factors of lower-than-expected demand due to weather and an abundant supply have driven the decline in natural gas prices this week.

Trend followers are unlikely to have capitalized on this price move, as they have probably been on the sidelines, observing this asset. This is due to the prolonged period of congestion in the market since early 2023, which has made it difficult to identify clear trends.

Conclusion

This week's trends in the futures markets have presented a complex landscape for trend followers and investors alike. The Trend Barometer's decline to 23 underscores the increasingly challenging environment for identifying consistent market trends. The SG Trend Index's -2.98% drop this month reflects the broader difficulties faced by trend followers as market conditions remain volatile and unpredictable.

Despite these challenges, significant movements were observed across various asset classes, driven by a mix of supply dynamics, economic policies, and geopolitical events. The energy sector saw a notable rise in gasoline prices due to seasonal demand and supply constraints, while metals like platinum and palladium experienced gains driven by strong industrial demand and supply disruptions.

Conversely, soft commodities like cocoa and wheat saw sharp declines due to favourable weather conditions and increased supply expectations. Lumber and natural gas prices also fell, influenced by reduced demand and improved supply conditions. These movements highlight the sensitivity of agricultural and energy markets to external factors such as weather, geopolitical tensions, and economic policies.

As we navigate these dynamic market conditions, it is essential for investors and trend followers to remain vigilant and adaptable. The interplay of various factors driving price movements requires a nuanced understanding of the underlying market dynamics. By staying informed and continuously monitoring these trends, market participants can better position themselves to capitalize on emerging opportunities and mitigate potential risks.

Join us next week for another edition of "This Week in Trend" as we continue to explore the ever-changing world of futures trading and provide insights to help you navigate the market with confidence.

List of Resources used in the Week in Review

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