June 7 – Stocks have a firmer tone to start trade this morning, with traders looking ahead to next week’s Federal Reserve meeting amid expectations of a rate hike pause from the central bank. The VIX is trading near 14 this morning, after dipping briefly below it yesterday for the first time in three years, while the dollar index is trading near 103.9 in early trade. Yields on 10-year Treasuries are trading near 3.71%, while yields on 2-year Treasuries are trading near 4.54%. Crude oil prices are nearly 1% higher this morning, while the grain and oilseed sector is mixed to weaker ahead of Friday’s USDA WASDE crop report.
Global realignment continues to impact trade, with significant implications for China’s economy. Chinese customs data showed today that its exports fell 7.5% year-on-year in May, which exceeded analyst expectations of a 0.4% decline. The rapidly falling export pace was largely due to declining shipments to Europe and to the United States as those regions experience slowing economic growth, along with a trend toward diversifying sources for goods away from China due to rising geopolitical tension. China’s trade with Europe fell 3.7% year-on-year in May, which exceeded the January to April trend of a 3.2% decline. Trade with the United States fell 12.3% year-on-year in May, versus a 11.2% decline in April. Meanwhile, Chinese trade with the Association of Southeast Asian Nations grew 2.1% year-on-year in May, although that is down from 5.6% growth in April. China’s trade with Russia grew at a rapid 40.7% pace year-on-year in May, with exports rising 114.3%, and imports rising by 10.1%. Chinese year-to-date trade with its “Belt and Road” countries is up 13.2% year, with exports up 21.6% and imports up 2.7%. This illustrates the importance of China’s developing relationship with Russia, as well as its continued development of relationships with those countries in its “Belt and Road” plan, which extends across parts of Asia, Africa, Europe, and South America. It should also be noted that Chinese imports of energy commodities rose in May, with crude oil imports up 12.3% year-on-year, and coal imports up 93% year-on-year, and liquified natural gas imports up 11.4%.
China imported a record 12 million metric tons of soybeans in May, up 34.4% year-on-year, bringing year-to-date imports to 38 mmt, up 11.2% year-on-year. Scheduled loadings for shipment to China currently suggest imports of 13 mmt in June, 11 mmt in July, and 9 – 10 mmt in August, with the three-month total up 12 mmt or more than 35% from the same period last year. Considering current demand, the import pace suggests a reduced demand for this fall’s U.S. soybean crop, which is why I believe that USDA is overstating U.S. exports for the 2023-24 marketing year, although it is also likely under-stating crush for the year.
Water continues to flow through a massive breach in the Kakhovka dam on the Dnipro River in southern Ukraine following a failure of the dam yesterday. The wall of water flowing through the breach rapidly flooded villages and farmland below the massive reservoir, while the declining water levels above the dam create additional risks for the Zaporizhzhia Nuclear Power Plant, which is Europe’s largest nuclear facility. The power plant has enough water to sustain cooling from the Kakhovka Reservoir for now, but that water will eventually disappear. This nuclear facility has been the focal point of rising risks since the war started in February 2022, with the risks continuing to escalate.
The failed dam, built in the 1950s, backed up water on the Dnipro River. The reservoir behind the dam was about the size of the Great Salt Lake in Utah. The river provides a separation between Russian and Ukrainian troops – it’s the front line of the war in southern Ukraine. Ukrainian troops control the western bank, while Russian troops control the eastern bank. Ukrainian and NATO officials say that Russia set off explosive charges in the dam’s power plant overnight yesterday to create the breach, while Moscow blames Ukraine, saying that its forces fired on the dam. There’s also evidence of previous structural weakness from satellite photos taken in the days prior to the breach. Water behind the dam had risen to record levels following a period of persistent rains in Ukraine. Water from the reservoir is the source for nearly 1,000 miles of irrigation canals that feed 31 field irrigation systems in Dnipropetrovsk, Kherson, and Zaporizhia regions, impacting 584K hectares or 1.44 million acres of crops. At 8.a.m. local time this morning, water levels for the reservoir were at 16.4 meters, or nearly 54 feet. Water can no longer be pumped to the nuclear plant for cooling after water levels fall below 12.7 meters, or 41.6 feet. The six reactors have been shut down for months as a precaution, but they still need roughly the equivalent of a fire hose-worth of water to sustain cooling. They should have that for a while.
Forecast models continue to pull the anticipated pivot in the weather pattern forward, with widespread rains expected across much of the central and southern Corn Belt in the coming week. I am concerned that a dry bias remains for the northwestern Ag Belt, although crop maturity is later in that region. Nonetheless, concerns remain for nearly a third of the nation’s corn acreage that risks eroding the national average yield for the crop. This is something we’ll need to watch.
