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Perspective: Morning Commentary for June 26

By: Arlan Suderman, Chief Commodities Economist

June 26 – Chip stocks weighed on stock futures overnight, contributing to general weakness across the board as Iran tries to take control of the Strait of Hormuz once again, testing the fragility of the ceasefire. The VIX elevated to trade near 21 this morning, while the dollar index slipped lower to trade near 101.1. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 4.10% as the yield curve steepens a bit this morning. WTI crude oil traded back below $70 per barrel this morning, as Brent traded near $73, while the grain and oilseed markets traded mostly weaker as well ahead of the weekend.

Iran is again demanding that its “rights” in the Strait of Hormuz be respected, as it is demanding control of ships passing through the Strait. Iran’s Revolutionary Guard was angered by a joint statement released by the United States and other Gulf States that rejected Iran’s insistence on charging tolls for those ships that pass through the Strait. That resulted in the Revolutionary Guard firing on a cargo ship yesterday that was attempting passage near Oman’s coast. The ship’s bridge was damaged by what was believed to be a drone. The strike resulted in a slowing of ship movement through the Strait today. Iran insists that all ships clear passage via a route near its coast. It insists that it has had control of the Strait over the past century.

President Trump wants low gas prices in the United States ahead of the midterm elections that could determine whether his agenda gets curtailed beyond that point. A curtailed agenda would include a loss of power to battle the Revolutionary Guard in their eyes. They saw the narrow vote in the Senate this week that came close to passing a resolution to demand withdrawal of U.S. forces from the region. They believe that a flip in power in Congress in November could effectively handcuff the U.S. military’s ability to strike them, leaving them in a stronger position in their eyes. As such, they’re willing to “poke the bear” to trigger a Trump response. Trump looks weak if he doesn’t respond, but he risks losing Congress via high gas prices if he does respond. That’s why I have remained skeptical that commerce will return to normal through the Strait for the foreseeable future. The markets are pricing in expectations that the flow of commerce will be fully restored, as that is what President Trump wants. But the Revolutionary Guard will do all that it can to hamper that effort, and it still has enough arsenal left to disrupt things.

Brazil added momentum to China’s goal of internationalizing use of the Chinese yuan. It initiated plans to raise up to 5 billion yuan ($735 million) via its inaugural issuance of panda bonds. As such, Brazil became the first Latin American country to issue yuan-denominated sovereign debt notes in China’s onshore market. China championed the move as an indication of a growing appetite among international entities to diversify funding sources beyond the U.S. dollar and the euro. Panda bond issuance reached nearly $20 billion in value in the first five months of this calendar year, according to the People’s Bank of China. Increased issuance of yuan-denominated bonds gives China increased influence in countries who utilize these debt certificates.

Money flow out of the broader commodity sector continues in what has been a notable shift in fund priorities this month. Only four of the 27 commodities contained in the StoneX Commodity Tracker posted gains in value over the past month, including live cattle (+2.38%), natural gas (+6.84%), cocoa (+24.40%), and coffee (+5.40%). All other commodities in the basket saw losses over the past month, led by a 21.78% drop in silver, and an 18.26% drop in Brent crude oil. The decline comes at a time when some stocks have posted record highs in the equity markets. A return to hostilities in the Middle East could restore a positive money flow to the commodities, with the food and energy commodities historically most sensitive to such hostilities. But for now, fund managers continue to demonstrate that they wish to believe in the most positive scenarios.

The U.S. corn and soybean markets should focus on three things going forward if the hostilities in the Middle East remain contained. The first will be Tuesday’s USDA quarterly grain stocks and planted acreage reports that are known for their surprises. Barring any surprises there, the focus will primarily be on the predominant Midwest weather pattern for July and August when the size of this year’s U.S. crops is determined. El Nino already has record strength for June, suggesting that it will be a major influencer of that weather pattern. The market is currently assuming that El Nino will keep weather generally favorable for Midwest crops. That could change at any time, but that is the current market assumption. Longer-term, the demand side of the balance sheet will be shaped by whether we see confirmation of the White House’s claims for buying by Iran and China, as I’ve previously outlined. I’m skeptical that we’ll see Iran use the frozen assets to purchase U.S. commodities, but it would certainly impact the balance sheets. The scope of China’s compliance to its agreement will substantially do the same.   

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Perspective: Morning Commentary for June 26

June 26 – Chip stocks weighed on stock futures overnight, contributing to general weakness across the board as Iran tries to take control of the Strait of Hormuz once again, testing the fragility of the ceasefire. The VIX elevated to trade near 21 this morning, while the dollar index slipped lower to trade near 101.1. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 4.10% as the yield curve steepens a bit this morning. WTI crude oil traded back below $70 per barrel this morning, as Brent traded near $73, while the grain and oilseed markets traded mostly weaker as well ahead of the weekend.

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