May 12 – Stock futures soared overnight following an announcement that the weekend talks in Geneva had produced a temporary deal with China. The euphoria spread into the commodity sector as well on hopes that the deal will increase demand for U.S. commodities, while also easing many of the global tariff issues. The VIX slipped below 20 this morning for the first time since March 28th, as many stocks rose to values not seen since March. The dollar index firmed to trade near 101.6, which was its highest level since April 10th. Yields on10-year Treasuries are trading near 4.47%, while yields on 2-year Treasuries are trading near 4.00%. Crude oil prices were up 4% earlier this morning, while the Ags were mixed. Soybean prices surged nearly 2%, with corn following on ideas of increased Chinese buying, while wheat prices struggled ahead of today’s USDA WASDE crop report.
China and the United States struck a deal over the weekend to slash tariffs for 90 days, giving them the time to work on a more comprehensive trade deal. The United States will reduce its reciprocal tariffs to 30%, down from 145% currently. In return, China will slash its tariffs to 10%, from the current 125%. The deal apparently did not include sector-specific tariffs, which are expected to continue for now. As such, the United States is expected to continue its rebalancing work in areas such as medicines, semiconductors, and steel, where President Trump believes that we have supply chain vulnerabilities. The United States continues to press China on the fentanyl coming from there to the States, but talks on that subject were said to be very constructive as well, although on a separate track.
The progress made over the weekend was impressive, exceeding the expectations of the most optimistic observers. Negotiators met on an outdoor patio overlooking Lake Geneva – a setting that allowed for relaxed conversation and the building of relationship between negotiators on both sides. Relationship is critical to the Chinese culture for doing business. Both sides assigned negotiators who fit that better this time. However, this is just a 90-day agreement, and considerably more work must be done to work through all of the issues at hand. There is an expectation that orders for goods will surge as retailers seek to rebuild inventories during the 90-day window, just in case things fall apart again by August when the window closes. Nonetheless, the progress made thus far encouraged Wall Street investors, who believe that it may have averted a broader domestic and global recession. That spurred active buying of crude oil on hopes that we’d see economic growth spurred by this deal, while the grain and oilseed markets tried to follow. However, it should be noted that Brazil will continue to have cheaper supplies of soybeans available to China over the next 90 days, regardless of tariffs, so the real question will continue to revolve around whether we get a deal that forces China to buy more grain and oilseeds from the United States in the future.
Brazilian President Lula will be in Beijing this week to meet with President Xi regarding trade relationships between the two countries. Brazil seeks to take advantage of the current trade tensions between China and the United States to get more agreements signed with China. Brazil already owns a currency exchange advantage over the United States with China but look for it to sign agreements for more money coming from China to support Brazilian infrastructure. China recently opened a major port in Peru, and it has interest in helping finance a railroad over the mountains to the heart of Brazil’s Center-West soybean production region. That would further cheapen the freight costs for buying Brazilian commodities. Brazilian soybeans landed at the port in China today were 70 cents per bushel cheaper than U.S. soybeans from the U.S. Gulf ports, and that was prior to any applied retaliatory tariffs.
We had a setback in our relationship with Mexico over the weekend, when the United States once again suspended imports of cattle, horses and bison from that country due to concerns about the New World Screwworm. Imports were cut off for a period last year, until an acceptable screening process could be established to make sure that the pest could not enter the United States on animals coming north from Mexico. USDA Secretary Rollins expressed more concerns about the pest earlier this year, but an agreement was again reached between the two countries. However, Rollins reinstated the suspension on Sunday on a month-by-month basis, seeking to further encourage Mexico to step up efforts to control the pest, stating that it took 30 years to eradicate it the previous time that it entered the country. The move is expected to further tighten the supply of cattle in the United States at a time when the U.S. cattle inventory is already down due to a multi-year drought in the West.
It’s all about today’s WASDE crop report in the Ags today, but then the focus will quickly shift back to expectations that we will hear biomass diesel production mandates from the EPA in the next week to 10 days, based on comments emerging from the EPA. Obviously, trade talk headlines will also remain a factor.
