August 7 – Stock futures have a positive tone to start the new week, following a turbulent time of trading last week. This week’s focus is expected to largely be on inflation data scheduled to be released on Thursday and Friday, along with lingering earnings reports. Traders continue to monitor the escalating Russian-Ukraine war, which took another step toward escalation over the weekend, even as peace talks took place in Saudi Arabia. Traders are also anticipating a round of stimulus in China in the near-term to boost its economy. The VIX is trading near 17 this morning, while the dollar index is trading near 102.1. Yields on 10-year Treasuries are trading near 4.07%, while yields on 2-year Treasuries are trading near 4.79%. Crude oil prices are modestly lower, while grain and oilseed prices are mixed to lower.
Analysts believe that August is a ripe opportunity for China to stimulate its economy, with the next US Fed meeting still 44 days away. There’s rising speculation within China that its central bank will cut the reserve requirement ratio for commercial banks, or possibly cut interest rates shortly. August and September are typically the peak months for issuing local government bonds, and a lower rate would be expected to stimulate demand for property, which accounts for more than 30% of GDP in China. China’s State Taxation Administration rolled out 28 measures to support the private sector over the weekend, largely extending the duration of tax exemption or tax cuts for small and medium-sized enterprise and individual businesses. Beneficial tax policies were also introduced for small and medium sized business R&D projects.
The Russia-Ukraine war continued to escalate over the weekend, increasing the risks that we could see an eventual slowdown in the movement of commodities out of Russian ports, but there is little evidence that such has happened yet. Ukraine hit an oil tanker near the Kerch bridge over the weekend – close enough to close the bridge for a few hours. It was a sanctioned ship reportedly in Ukraine waters, which Ukraine claimed was delivering fuel to Russian forces in the war. But, it was probably being used to transport fuel to Russian forces in Syria. Nonetheless, it was a Russian ship hit in the Kerch straight, further illustrating Ukraine’s expanded capacity to strike beyond its borders. Another Ukraine drone was shot down on its way to Moscow, following a couple of successful strikes on a government building in Moscow last week. This also comes on the heels of a Ukraine water-drone strike on a Russian naval ship in the port of Novo last week. Grain and oil currently are still flowing out of Russian ports through the Kerch Strait, although apparently more during the day than at night for security reasons. The market is aware of the increasing risks that we could see Russian shipments curtailed, but thus far it must also trade the reality that ships continue to carry low-priced commodities through the Strait.
An international peace conference took place in Saudi Arabia over the weekend, with representatives of more than 40 countries taking part in the talks. The United States and Europe were joined by Ukraine at the conference, but Russia was not in attendance. China attended this summit, after sitting out the previous one. A growing number of countries that do business with both Russia and Ukraine are seeking a peaceful solution to the war, but the two sides remain far apart. With all the talk, there is little evidence of a near-term end to the war, with the storyline largely being one of the war continuing to escalate, increasing risks for commodities leaving the region.
Recent flooding problems pose a greater threat to rice production in northeast areas of China than to soybeans and corn, since rice is in the pollination stage in the region. Our own Ivy Li highlights the risk in today’s edition of China Direct, which outlines the risk area. The area impacted is known for its high-quality rice production. Quality problems are expected to push more rice into the feed stream this year, similar to what we saw happen with the wheat crop when persistent rains hurt the quality of the crop. As such, we may see China increase imports of quality rice and wheat, while feeding more low-quality rice and wheat at the expense of corn demand. However, the world’s supply of quality exportable rice is getting tight, with both India and Russia implementing export bans that are elevating prices. Risks continue for China’s corn and soybean crops in the region as well, although not to the same extent as for the rice crops. Like in the U.S., milder temperatures and ample rains support improved production potential, albeit with disease risks.
Some previously dry areas of the Midwest received good rains over the weekend, some many of these areas seeing 1.5 to 3.0” of rainfall, with more on the way. Temperatures are mild across the Midwest, easing any remaining stress on crops, with those Midwest areas seeing below normal rainfall over the past 30 days rapidly shrinking. That doesn’t mean that all previously stressed areas will return to trend or higher yields, but it does help set new pods on soybeans and it does help add length to existing kernels of corn on the ear. USDA will give its first USDA-NASS produced yield estimates in its August WASDE crop report on Friday. This week’s NASS estimates will be based largely on farmer surveys and satellite data, with its first field-survey production estimates not coming out until September. Trade pre-report estimates are expected to be released over the next 36 hours, setting the tone for Friday’s reports.
