May 31 - Stock futures came under modest pressure overnight as traders braced for today’s anticipated vote by the U.S. House of Representatives on the brokered debt ceiling deal reached on Sunday. Furthermore, the major energy and Ag commodities continued to see pressure on fears that demand for these raw materials will remain soft, particularly following disappointing economic data out of China. The VIX is trading near 18 this morning, while the dollar index is trading near 104.5 after posting a nearly 11-week high earlier in the session. Yields on 10-year Treasuries are trading near 3.67% this morning, while yields on 2-year Treasuries are trading near 4.41%. Crude oil prices are down another 2% today, with follow-through selling from yesterday’s price collapse. Fresh pressure comes from the weak Chinese data and a strong dollar. The grain and oilseed sector is also posting losses of 2 – 3% following big losses yesterday as big money continues to leverage out of these commodities, continuing a trend that started nearly a year ago, but is picking up momentum now as the impacts of global monetary tightening are being felt.
China’s official Purchasing Managers Index fell to 48.8 for May, registering its second consecutive month of contraction for the sector in the manufacturing sector. China’s service sector continues to see growth, with a PMI of 54.5, but that growth is slowing. China’s economy is heavily dependent on exports, and that’s a problem when U.S. and European economies are struggling, and also when many buyers within those regions are decoupling from China due to rising geopolitical concerns. Add a cooling property market and hidden local government debt issues to the list for China, and the concerns are magnified even more. China needs outside investment to strengthen its economy. It believes that its national security depends on it building the world’s top military, and it cannot do that if it has a failing economy. Furthermore, it cannot have a strong economy without that outside investment, which continues to see growing headwinds from the United States and Europe due to rising geopolitical risks.
Today’s edition of China Direct, published by our Shanghai office, noted that President Xi Jinping chaired a top-level national Security meeting on Tuesday, calling for recognition of the complicated and challenging external circumstances facing China. He urged efforts to enhance the security system and capacity, noting that the national security issues facing China are “considerably more complex and much more difficult to resolve.” He went on to emphasize the necessity of being fully prepared to deal with worst-case and extreme-case scenarios and to be ready to withstand “high winds, choppy waters, and even dangerous storms.” This shows that the Chinese leadership views threats that risk China’s national security as unprecedentedly grim, even though it did not mention the danger was imminent. Rising fears over national security are obviously not good for the economy, and that broadly strengthened the risk-off sentiment in China’s stock and commodity markets today, spilling over into the U.S. markets as well. We need to recognize that China interprets our stand on Taiwan and the recent building of coalitions to facilitate trade with other Pacific partners for essential minerals, etc., as a direct threat to its national security, and its decisions will reflect that sentiment, with broad implications for commodity trade.
China purchased another 30 cargoes of Brazilian soybeans in the latest week, mainly for July and August shipment, keeping the pace of soybeans coming into the country above the pace needed to supply sluggish demand for a soft soymeal market. Our cash sources suggest that China arranged loadings of a total of 45 million metric tons of soybeans in March, April, May, and June, which would be up 12 mmt or 37% over the previous year’s pace. This suggests that the surplus soybeans will be going into China’s reserve, which means that it needs to purchase fewer soybeans from the United States in the coming season. However, it does have another problem developing with its wheat harvest. It’s still in the first 10% of its wheat harvest, but the crop coming in so far has a high degree of problems with quality issues, including sprouting, due to persistent rains in recent weeks. The Henan province rolled out a 200-million-yuan ($28.3 million) emergency fund to help farmers dry the harvest crop to prevent further damage. The extent of the problem still must be verified, but officials fear it may be more widespread.
Falling demand for commodities is the fear of managed money that continues to short the energy and grain and oilseed sectors. The war in Ukraine is escalating this week, with drone attacks on buildings in Moscow, as well as key oil infrastructure within Russia, but the funds continue to sell these sectors. USDA rated 69% of the U.S. corn crop Good to Excellent Monday afternoon, below trade expectations of 71%, and below the five-year average of 75%, but the funds kept selling. It’s hot and dry across much of the Midwest this week, but the forecasts continue to pull forward increasing rain chances as we move into June, particularly the second full week of June. It’s not that the rain in the forecast is causing the selling in the grain and oilseeds, but rather that it eliminates the only current threat to fund managers shorting the complex and driving prices lower. As such, they continue to move from long to short in the energies and the grains.
