Perspective: Morning Commentary for August 2

By: Arlan Suderman, Chief Commodities Economist

Tue, 02 Aug 2022, 13:26

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

August 2 – The eyes of the world are on U.S. Speaker of the House Nancy Pelosi. For better or for worse, she set up a showdown with China when she scheduled a visit to Taiwan as part of a broader East Asia trip. The anticipated stop in Taiwan over the next few hours, and China’s response to it, will have significant implications. For now, the unknown has global stock and commodity traders nervous, with money generally moving to the sideline and to safe-haven assets. The VIX is modestly elevated above 24 this morning, reflecting those heightened fears. The dollar index firmed to trade near 105.6, while yields on 10-year Treasuries are trading near 2.58%, after hitting fresh three-month lows. One exception to the above is crude oil, which is mixed at this hour as it consolidates near an area of chart support following sharp losses on Monday. However, the Ags continued under pressure overnight, along with many of the other markets, with some added pressure coming from better-than-expected crop ratings.

The showdown is upon us. The timing of Nancy Pelosi’s trip is very poor considering what is currently on the Chinese plate and calendar. Yet, she made a commitment to land in Taiwan that she had to keep once China very publicly issued a threat to prevent her from stopping. She had little choice at that point, but to follow through with her visit to Taiwan. China sees this as a direct afront to its sovereignty. We in the West can argue that point, but that’s the way that they see it, particularly considering the timing of the visit. As such, it escalated the response beyond diplomatic channels to a very public threat from its military. As such, it will have no choice but to respond to her stop in Taiwan. It reportedly posted a threat to shoot down Pelosi’s plane on social media, but then removed that threat.

Yet, President Xi Jinping knows that the people of China, as well as many countries around the world, are watching. He will have to respond to her visit. But Xi Jinping does not want a military conflict with the United States. Shooting down the plane containing a high-ranking U.S. official would demand a military response from the United States, further escalating the military side of this conflict. Neither side wants that. As such, I expect China to choose a response that is very clear, but that also gives the United States an out so that it doesn’t have to counter respond. Yet, the market anxiety continues to be over the possibility of an error of judgement on one side or the other that quickly escalates this conflict into something much larger than necessary. In the meantime, China has reportedly locked down a portion of the South China Sea for “military training” today through Saturday, while saying that it “will be ready to bury all enemies that dare to invade Chinese territory.” It has also intensified live-fire military exercises and deployed more forces around the Taiwan Straits. Global traders should breathe easier once this immediate conflict is behind us – hopefully by the end of the day.

The first ship carrying Ukraine corn successfully departed from Odessa yesterday, and it continues to travel through the Black Sea without incident. Another 15 ships are lined up to follow it as they seek to finally exit Ukraine ports after being trapped there since February, which is down from yesterday’s report of 16 ships. One of those ships is not technically ready to depart yet, while yet another ship is close to being added to the list as well. Each of these ships can carry between 10K and 60K metric tons of grain. Reports on Monday indicated that these 15 ships would caravan starting later this week, but reports this morning suggest that they will leave at a pace of one each day for a while. These are all ships that had been trapped at the ports during the conflict. Officials are still negotiating the details for returning empty ships to the ports to get additional grain. Those negotiations include getting affordable insurance for the ships, as well as finding crews willing to operate the ships in the region. Roughly a third of the 2022 spring crops have been harvested to this point. The path of movement had been toward the western border, but the Ministry of Infrastructure is expected to redirect that grain to the southern ports in the days ahead. Ukraine is also considering negotiating the addition of Mykolaiv’s port to the agreement for safe passage. This is a very important port for Ukraine, along with Odessa, but it was left off the original agreement due to extensive military activity near the port.

Crop ratings stabilized in the Midwest over the past week. Actually, we saw more deterioration in the western belt, but those were offset by gains in the eastern belt. Heat is expected to ebb and flow in the Midwest, but it will focus primarily on the western Ag Belt. The eastern belt should see regular opportunities for showers. Some of those showers may occasionally occur in parts of Nebraska and Iowa, but totals and coverage are expected to be lacking, while evapotranspiration rates remain high. StoneX’s first survey-based production estimates come out later today.

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