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Focus returns to Ukraine from Fed chatter.

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight were mixed without geographic pattern with the Russian market still closed. Critical economic news released overnight included an avalanche of reports from Australia with the standouts being a better-than-expected Commonwealth bank services PMI for February, a significant expansion of the Australian trade surplus, a softer than expected Caixin Chinese services PMI for February, much hotter than expected Swiss consumer prices, a significant contraction in Japanese consumer confidence for February, and disappointing services and composite PMI readings from France, Germany, overall Euro zone and the UK. The North American session will start out with the February Challenger job cut survey followed by a weekly reading on initial jobless claims, which is expected to have a modest downtick from the previous 232,000 reading. Ongoing jobless claims are forecast to have a minimal downtick from the previous 1.476 million reading. Fourth quarter readings for non-farm productivity and unit labor costs are expected to have minimal upticks from their previous readings. February readings for the Markit US services PMI and Market US composite PMI are forecast to have moderate upticks from their previous readings. January factory orders are expected to have a moderate uptick from December's -0.4% reading. The February ISM services index is forecast to have a modest uptick from January's 59.9 reading. Fed Chair Powell will testify in front of the Senate Banking Committee during morning US trading hours, while Richmond Fed President Barkin and New York Fed President Williams will speak during the afternoon. Earnings announcements will include Kroger, Brown Forman, and Best Buy before the Wall Street opening while Broadcom, Costco Wholesale, and Marvell Technology report after the close.

GOLD / SILVER
Just seeing news reports of a massive explosion in the capitol city of Ukraine last night provides flight to quality lift for gold and silver and most specifically palladium. The potential for a gold mining strike in Africa could also provide support today, but that news will likely take a backseat. The situation in Ukraine continues to attract gold ETF investment with year-to-date gold holdings now up 3.4%. And while silver ETFs were down overnight, they remain 2.1% higher on the year, and they provided investors with a greater return than gold last month. Gold and silver prices could have been tracking lower this morning following Powell's telegraphing of the March rate hike and from the Fed Beige book, which noted inflationary spiral concerns. However, the gold market could rally off the thought that the Fed might only hike rates 25 basis points, thereby allowing inflationary pressures to build further. We suspect that precious metal markets are seeing spillover support from record aluminum prices and surging zinc, nickel, and copper. However, the last COT positioning report in gold showed a spec and fund net long of 307,240 contracts, and since the data was collected the gold market has added $26 into the high at the end of February. Therefore, the net long in gold could now be the largest since July 2020. Going forward, even temporary calm will leave gold and silver extremely vulnerable to large declines. Certainly, the Russian president could launch the feared massive ground attack on the Ukraine capitol today and in turn bring video of severe carnage, and that would likely increase flight to quality interest in precious metals. If the Russian president doubts his capacity to capture the cities he has surrounded, we suspect cease-fire talks will begin in earnest with the Russians settling for the land "gained." We assume surging oil and grain prices are also adding to the upward track in precious metals this week, and therefore gains in those markets again today should cheer the bull camp. On the other hand, the bull camp should be discouraged by the discounting of commodity-driven inflation by the US Fed Chairman in his testimony to the US Congress yesterday.

PGM
The palladium market continues to rally as if the flow of Russian supply will be at least temporarily disrupted. Some supply is likely to be delayed because of port congestion and fears by shipowners their cargoes and ships could be seized. Fortunately for the bull camp, the most recent COT positioning report in palladium showed a spec and fund net short of 1,114 contracts, and therefore the market retains speculative buying capacity. Carmakers are already expressing alarm at the upward price pressure on neon gas, palladium, and nickel, as that in turn will likely result in increased retail car and vehicle prices. With the highest close since early August and uncertainty spiraling, more gains and more volatility are likely in June Palladium. If talks break down again and/or Russia launches its military convoy against Kyiv, we see a trade above $2,960 in June Palladium. While the platinum market continues to be pulled higher by palladium, the market lacks definitive speculative buzz. Uptrend channel support in April platinum today is $1,073.30.

MARKET IDEAS: The bias remains up in gold and silver, but volatility also looks to remain extremely high in the coming session. Our gut suggests that Putin desires a quick capture of the Ukrainian capital as he races against the negative impact of ever-expanding sanctions. On the other hand, in the event the Russian President realizes the potentially lethal isolation of the Russian economy ahead and attempts to "settle" for the land gained, gold and silver prices should correct significantly. Unfortunately for the bull camp, even a temporary cease-fire could be justification for significant corrective action. Therefore, those with long gold and silver positions should seek protection from long puts.


COPPER
The bias is up but volatility could make for a wild ride.

The copper market continues to draft support from gains in crude oil, grains, and most significantly from surging oil and aluminum prices. While copper probably drafted support from favorable Chinese manufacturing PMI readings earlier this week, overnight Chinese economic data flipped negative, which should temper demand hopes. The copper bulls do not need formal sanctions against Russian copper exports to see prices rally off precarious supply conditions. In other words, difficulties at shipping ports, difficulty in finding customers willing to take the risk of buying Russian supply, and the potential for the shipments to be "confiscated" all act like a specific sanction on copper exports!

MARKET IDEAS: As in many other physical/industrial commodities, the copper market appears to be settling into a "buy the rumor" rally off the idea that Russia is poised to spark even more sanctions with a bloody attack of the capitol. On the other hand, the Russian president might be coming to the realization that the capture of Ukraine's capitol city will result in massive casualties on both sides and that in turn will prompt more sanctions with broader implications for all Russian exports. While the path of least resistance is pointing up, the risk and reward relationship of being long copper at current levels is wholly unattractive.

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