March 22 – Stock futures slipped lower overnight, dragged down by a selloff in Chinese stocks on Friday. Meanwhile, commodity prices faced headwinds from a strong dollar that pushed to fresh nine-week highs. Traders will also be monitoring comments made by Federal Reserve Chair Jerome Powell as he addresses a Fed Listens event this morning. The VIX is trading near 13 this morning, while the dollar is strongly higher near 104.3, despite a decline in Treasury yields following Wednesday’s Federal Reserve meeting. Yields on 10-year Treasuries are trading near 4.20%, while yields on 2-year Treasuries are trading near 4.59%. Crude oil prices are modestly higher ahead of the weekend following their recent break, while the grain and oilseed sector is mostly lower on a stronger dollar and increased farmer selling, especially in Brazil.
China’s Shanghai Composite Index fell roughly 1% today, while the Shenzhen Composite Index dropped 1.2%, while the yuan fell sharply to trade near 7.23 to the dollar in today’s trade. There are signs that the rally off February’s five-year low may be over, at least for now, as traders fret about the lack of substantive stimulus from policymakers. The rally off multi-year lows had come on hopes that the Chinese government was about to take significant steps to turn its economic problems around, but traders are losing patience – still waiting for something that will impress them, especially for the troubled property sector. Instead, the property sector’s problems continue to build, raising increased concerns about the future of the Chinese economy.
The governor of China’s Central Bank hinted earlier this week of the possibility of further monetary easing, leading to hopes of another RRR cut, or reduction in the deposit ratio required of commercial banks that would create more favorable credit conditions for economic activity. However, that would also widen the interest rate gap between China and the United States, shifting capital flows away from the yuan toward the greenback – something that Chinese officials have been trying to avoid. They want the world to see the yuan as a strong alternative to the dollar, not the other way around. Today’s sharp selloff of the yuan is an indication of a lack of confidence by Forex traders in China’s economic recovery at a time when it believes that the United States may need to keep rates higher for longer due to the strength of its economy. Keep in mind that a Chinese Central Bank official stated earlier this year that China should have more room for stimulus this year, with the United States cutting rates. The Federal Reserve may cut its rate by 25 basis points in June, as the market expects, but there’s still reason to doubt whether it will be able to do much more than that, keeping the pressure on China to turn its economy around without significant amounts of stimulus. That’s a challenge, and traders in China’s stock markets are well aware of that.
Lower Treasury yields would normally suggest a weaker dollar, but that hasn’t been the case this week. It’s a global market, and the dollar is also subject to what’s happening with other currencies. The yuan is struggling, as noted above, while the euro has its own set of problems as Europe’s economy continues to struggle as well. Even the yen is struggling, despite Japan’s first rate hike 17 years. Yet, the U.S. stock market is the one that shines, as it sets record highs on a strong and resilient economy. That has foreign investors seeking greenbacks on the desire to participate in the U.S. markets. For now, that creates headwinds for the commodity sector. It doesn’t mean that an individual commodity, or even a significant portion of the commodities, cannot rally. It simply means that they need to have a stronger story to do so. The dollar is not as much of an impediment to a commodity rally as it once was, but it’s still a factor. Part of the reason for that is today’s elevated geopolitical risks.
Brazil farmers have sold an estimated 38% of this year’s soybean crop, which is roughly two-thirds harvested currently. This week’s number for soybean sales to date is up 6 or 7 points from the previous week as farmers there take advantage of the recent rally in Chicago futures. That’s one reason why both corn and soybean futures have struggled to sustain a rally of late – farmers on both sides of the equator are looking for rallies to sell, and they’re doing so. Farmer selling of both this year’s soybean crop and the winter corn crop currently in the ground is the slowest that it’s been over the past five years that our Brazil team has surveyed farmers. Fund managers are reluctant to be buyers of these commodities until the farmer has sold his portion. It’s not that the funds want to punish the farmer, but it’s more that they are afraid of farmer selling. They’re reluctant to be long corn or soybeans if the farmer is long those commodities. That said, they’re also reluctant to hold massive short positions going into the season of the year when weather risks increase for major producing areas of the world amid rising geopolitical risks.
