June 24 – Wall Street loves a ceasefire, although there is still some doubt over what this ceasefire means. Nonetheless, stock futures rallied overnight on hopes that the 12-day war has come to an end. The VIX is trading below 18 this morning, while the dollar index is trading near 98.0. Yields on 10-year Treasuries are trading near 4.36%, while yields on 2-year Treasuries are trading near 3.85%. Crude oil prices are trading near $65.30 per barrel this morning, after rallying above $78 on Sunday evening. The grain and oilseed complex is again under active selling pressure this morning as weather forecasts for the Midwest improve.
President Trump called for a ceasefire between Iran and Israel late on Monday, following Iran’s retaliatory strike following the weekend U.S. hits on its nuclear sites. Those strikes are believed to have obliterated Iran’s nuclear program, although it will likely take some weeks to confirm that. The war between Iran and Israel lasted 12 days, assuming that it is over. Israel’s goal – and the long-stated goal of President Trump – was to eliminate the Iranian nuclear threat. That seems to have been accomplished. Israel also hoped to destroy Iran’s Revolutionary Guard that was formed as a separate military branch in 1979 when the current regime took over the country. It’s yet to be seen how effective Israel was in reaching that objective. The depth of communication between Israel and the United States became apparent in the successful U.S. bombing of Iran’s top nuclear sites on Saturday night. The success of the program was dependent on close coordination between the two nations. We have to assume from President Trump’s ceasefire declaration that he knew that Israel had accomplished most of its objectives.
The ceasefire was broken when a missile strike against Israel appeared to originate from within Iran, resulting in a strong response from Israel, which triggered strong objections from President Trump. Iran claimed that the missile strike came from a proxy group, which is the standard response we’ve heard over the years. Iran itself likely wanted to see this war end, which resulted in its nuclear program likely being set back by decades, although the possibility remains that it could still accept nuclear weapons from one of its allies. However, the current regime has a history of fighting most of its battles through proxy groups to avoid direct fights with Israel or the United States, which it will likely try to resume – albeit with limited resources. That’s likely what any future potential negotiations will be about – trying to limit Iran’s funding of proxy groups via resources generated by its oil revenue.
The ceasefire came following a limited retaliation initiated by Iran for the weekend strikes on its nuclear sites. Iran’s retaliation involved limited missile launches against U.S. bases in Qatar and in Iraq, which were reportedly telegraphed ahead of time to allow for evacuation of personnel. Many of the missiles were intercepted in what was largely considered to be a symbolic response. One could argue that Iran’s ability to respond has been curtailed by the 12-day war, but I would argue that it is more reflective of Iran’s desire to avoid further escalation. Iran saw in Saturday night’s U.S. strike what the full might and power of the U.S. military can accomplish. The next target could very well have been Kharg Island, where 90% of Iran’s oil is loaded for export to fund its economy, and to fund its proxy groups. It would make more sense to end this war as quickly as possible to retain that funding mechanism, which keeps its proxy groups as a risk. Nonetheless, the world is breathing easier today, content that a more regional conflict appears unlikely at this time, resulting in the removal of the war premium from crude oil prices, while stocks rally. Fertilizer prices are also starting to remove their war premium.
Beijing announced that it will have a massive military parade on September 3, and that Russian President Vladimir Putin will attend as part of a four-day visit to China. The event is meant to bring China and Russia back into the spotlight after the world has been focused on the Israel – U.S. military success of the past two weeks – while also celebrating the 80th anniversary of the end of World War II. Beijing wishes to show the world its military power in the parade, after the U.S. military power has been on display in recent days. Meanwhile, a drain of foreign direct investment continues to provide a significant drag on China’s economy. FDI in May fell to 37.4 billion yuan ($5.2 billion), which is its lowest level since reporting began in 2014. Year to date FDI is down 13.2% on the year, continuing the pattern of double-digit year-on-year declines that we’ve seen over the past several years. FDI stabilized following China’s massive stimulus programs through the fall and winter, but the decline has resumed.
Condition scores declined this week for corn and wheat, while holding steady for soybeans. The decline in corn was more modest than we normally see in late June. Wheat conditions declined reflecting some quality issues, but we’re still overwhelmed with bushels – both old- and new-crop – and global cash prices are weak. Longer-range weather models are improving for the Midwest, leaving market bulls with little to cling to currently.
