July 17 – Stock futures fell notably lower overnight from the previously lofty levels, led by a sharp losses among chipmakers. Shares of chipmakers were more than 4% lower ahead of the opening bell this morning amid reports that the Biden Administration has told its allies that it is considering more severe trade curbs if chipmakers continue to give China access to the most advanced semiconductor technology. Additional weakness came from a report that former President Trump had stated that Taiwan should pay the United States for our defense of it. The VIX is trading near 14 at six-week highs on the above, while the dollar index is notably lower near 103.7 at nearly four-month lows. Yields on 10-year Treasuries are trading near 4.18%, while yields on 2-year Treasuries are trading near 4.47%. The broader commodity sector found support from the weaker dollar this morning. Crude oil prices are more than 1% higher in early trade, while the grain and oilseed complex consolidated higher following recent sharp losses.
New housing starts jumped to an annualized rate of 1.353 million units in June, up from analyst expectations of 1.305 million units. Furthermore, the May numbers were revised to 1.314 million units, up from the 1.277 million that were originally reported. Permits for new housing starts rose to an annualized rate of 1.446 million in June, up from analyst expectations of 1.395 million, and up from an upwardly revised 1.399 million in May. The above data shows what happens whenever interest rates drop, as they did in June. The need for housing remains strong, so demand surges anytime that mortgage rates drop – something that the Federal Reserve needs to keep in mind as it contemplates an easier monetary policy. That dynamic continues to keep housing costs trending higher, contributing to inflation when rates ease.
China’s stock market was again stagnant today as traders wait for the results of this week’s Third Plenum policy meeting, which is scheduled to end tomorrow. Thus far they’ve heard nothing but silence from the meetings, but that’s not unusual for this event. Traders did take notice though of an article published in “Qiushi”, which is the Communist Party’s media mouthpiece that typically publishes articles that reflect President Xi Jinping’s philosophy that party members are expected to learn and to follow. The article called on party members to show unwavering faith and commitment to the development path, although it failed to provide details on what that path looks like. It also stated that China should walk a tailored way to solve problems and it warned that no “ready-made solution” or “foreign instruction manual” can follow. Other Chinese publications echoed the comments, leading observers to believe that there will be no significant policy shifts emerging from the Third Plenum, despite growing challenges abroad and at home, but they are expected to continue to trust the Party.
China is the world’s largest importer of commodities, including crude oil. However, imports declined in the first half of the year, even as it added to its reserves. China added 1.48 million barrels per day to either its commercial or to its strategic oil reserves in June as lower refinery activity exceeded crude oil imports. That exceeds the average of 900K bpd put into reserves through the first half of this calendar year, showing how the pace of building reserves has been growing. China doesn’t actually disclose what is going into its reserves, but the above numbers are a product of calculation, considering imports, domestic production, and refinery activity. This suggests that a) China’s economy continues to struggle, and perhaps at a deepening pace, and b) China continues to build reserves of key essential commodities, including soybeans and other commodities. The latter point reflects a growing insecurity held by China’s leadership as tensions with the West increase, or perhaps preparation for repercussions from the West for a possible strike on Taiwan. President Xi Jinping has clearly communicated a determination to “reunite” Taiwan to the Mainland during his tenure. He’s already made shifts in his leadership circle to facilitate such a move, and he’s made changes to China’s constitution to legitimize it. He would prefer to play the long game, but the recent acceleration in tensions with the West may be changing his thought process on the timing. And it is possible that his view of the upcoming U.S. election may influence his timing as well. The market would likely assume that such a move on Taiwan could result in sanctions on Chinese banks that would make imports of U.S. commodities difficult.
Grain and oilseed prices rebounded overnight, with wheat prices leading the rebound. Support comes from a notably weaker dollar today, but the fact that many of these markets had seen such sharp losses recently provided some incentive for bargain hunters to re-enter the market. Farmer selling of new-crop winter wheat should slow from this point forward, although we could see some additional selling as the initial 30 days of free storage ends. Otherwise, farmer selling should end until they need to empty bins for the fall harvest, which often triggers a seasonal firming of prices as end users return to the market amid the weaker selling. Big supplies of farmer-owned corn, soybeans and wheat limit the upside risk until / unless a more significant threat to supply emerges.
