Perspective: Mid-Day Commentary for October 20

By: Arlan Suderman, Chief Commodities Economist

Fri, 20 Oct 2023, 15:32

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

October 20 - Risk is rising! That's the primary factor impacting the markets today. By no means do I want to communicate that there is panic on Wall Street, but the slow rise in anxiety on the Street is impacting money flow, especially in the commodity space. That rise in nerves is most focused on headlines flowing out of the Middle East, where U.S. troops are now involved via attempted attacks on them in Iraq and Syria and via the shooting down of missiles and drones in the Persian Gulf by a U.S. destroyer. It's easiest to see how escalation in the Middle East that begins to involve other areas beyond Israel and Gaza could negatively impact crude oil output and shipments. That's a big reason that we've seen a war premium being built into the energy markets. But traders are also focused on the negative effects of interest rates trending higher - especially on the long end of the yield curve. Then we throw in the slowly rising risk of another credit rating downgrade as the next budget showdown approaches in Washington, D.C.

Increased risk makes fund managers holding large positions in the commodities uncomfortable. Who wants to be short crude oil, for example, as the risk of a broadening conflict in the Middle East rises? The grain and oilseed complex isn't as directly impacted by the Middle East conflict, but there are indirect relationships that make fund managers who had built large short (sold) positions in the corn and wheat markets nervous. As such, they've been unwinding some of those positions, especially ahead of the approaching weekend, to reduce their risk exposure. That eventually turns chart signals, which then triggers additional short covering, explaining much of the recent strength that we've seen in those markets. Soybeans have a bit more of a fundamental story, with relatively tight U.S. stocks, questions about the start of the growing season in South America, and improving demand in recent weeks. As such, the funds did not have the size of short positions in soybeans, as they had supportive fundamentals. Yet, the potential bullish factors of a short Brazilian crop and/or bigger than expected export demand may or may not develop. Much of that question will likely be answered in the next several weeks. As such, buying interest has struggled as prices for the lead contracts approach several significant layers of chart resistance. The risks still provides support, along with solid soymeal demand, but thus far we haven't seen enough support to justify another leg higher in prices. That could change at some point, but thus far it has not.

One way to measure that risk on Wall Street is with the VIX index, as shown below. The VIX is approaching 22 at midday, which is up from a probe below 13 five weeks ago, but still at relatively low levels from a historical standpoint. I've observed over the years that it's difficult for any commodity to sustain a rally when the VIX is above 30, unless that commodity has a strong story. We're not at that level of fear yet. Note how the VIX tends to take the elevator up, while taking the escalator down. Stocks are lower today as the VIX rises. The dollar index is trading near 106.2. Yields on 10-year Treasuries are trading near 4.90%, while yields on 2-year Treasuries are trading near 5.07% as money flows into Treasuries after they traded in the 5% range. Crude oil prices are 1% higher on the Middle East story. Corn and wheat prices are generally firm on the above technical trading, while soybeans pulled back from chart resistance.

The VIX measures fear levels on Wall Street. SOURCE: Reuters Eikon

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