January 24 – Stock futures pulled back a bit overnight, as traders digest headlines coming out of the Trump Administration at a dizzying pace. The VIX continues to trade near 15 this morning, reflecting relative calm on Wall Street – or better said a general lack of anxiety. I’m not sure that I would call it calm with the flurry of headlines hitting the market. The dollar index is trading near 107.7 this morning after falling to fresh five-week lows. Yields on 10-year Treasuries are trading near 4.65%, while yields on 2-year Treasuries are trading near 4.28%, as the yield curve starts to steepen once again. Crude oil prices are modestly higher, while the grain and oilseed markets traded in the red overnight.
President Trump won his first election in 2016 on a promise to “drain the swamp” in Washington, D.C. His supporters were anxious for change in the bureaucracy that seemed to run things in this country, versus the elected officials who we send there. Trump stated when he left office four years later that he failed in that initiative – that the swamp was much deeper than he anticipated. He spent four years thinking about what he would do differently if he would get another chance, and he’s wasting no time implementing his plan. Reuters reports this morning that the Trump Administration is moving with “stunning speed to begin removing or sidelining hundreds of government workers,” while also garnering the power needed to possibly fire “hundreds of thousands” more. The latter quote is probably overstating it, although it is still possible. But the bottom line is that he is wasting no time working to change the culture of Washington. The debate will continue whether that is good or bad, with Americans falling on either side of that debate, depending on how they voted. But the bottom line is that things are changing fast in Washington, and the markets are trying to digest it all fast enough to react. We’ve seen significant volatility in the dollar, Treasury yields, stocks, and even in commodity prices. Policy statements are emerging on a daily basis. President Trump believes that he has two years to implement his changes in Washington before the mid-term elections could derail his plans. That’s a very short time in the political world. As such, he’s wasting no time in implementing his agenda.
China’s stock market firmed today on signs of easing tensions between the United States and China. President Trump and China’s President Xi Jinping have had conversations that both have seen as constructive. They seem to have re-established a working relationship of respect. They may not trust one another. They definitely have opposing values for their respective countries. But they are re-establishing the relationship of mutual respect that allowed them to make deals in Trump 1.0. In fact, traders were encouraged when Trump hinted that he is confident that a trade deal can be reached with China, while also stating that he would like to go to China in the relatively near future. This combines with indications in the cash market that Chinese state buyers have been active at various levels in the U.S. corn, soybean, and wheat cash markets. That often is an indication of “good-will” purchases by China, reflecting a sense of working towards a trade deal. I would not see Xi reversing his long-term objectives of toppling the U.S. position as the world’s top global power, or the dollar’s position as the global currency. However, I do believe that Xi is a pragmatist, and he understands that China’s economy can’t necessarily survive a trade war currently. He’s still going to play the long game to reach his objectives, while being willing to make a short-term (4 year?) deal that helps heal his economy and avoids conflict in the near-term while Trump is in office. That could provide a win-win situation for both China and the United States the next few years, creating increased demand for U.S. commodities despite our strong currency that makes the purchase of those commodities more expensive.
Argentina slashed its export taxes yesterday for many agricultural commodities. Most notably, the export tax on soybeans was reduced to 26%, down from 33% previously. The tax rate on soybean oil and soybean meal were cut to 24.5%, down from 31% previously. The tax on corn and wheat fall to 9.5%, down from 12% previously. The Milei Administration is cutting the taxes for two reasons. First, it’s a part of his promised reforms that got him elected a year ago. He promised to unleash Argentina’s economic potential by slashing these export taxes, which also required that he dramatically reduce social spending as well. Voters gave him that grace because they were fed up with 200+% inflation. But there’s another reason as well. He likely needs to increase foreign reserves in the central bank for meeting debt obligations. It is reported that exporters desiring to take advantage of the tax reductions will need to liquidate their foreign currency to be received in the export transaction within 15 days, rather than at the time of the shipment which might be several months later. But they have to pay the remaining export tax within five days. It is feared that the process may hinder the participation rate, and not result in the anticipated surge in export sales expected by many in the marketplace. Yet, the tax reduction combined with a wetter extended forecast for Argentina are weighing on prices in early trade today.
