November 19 – Stock futures pulled back overnight as geopolitical risks rise in the Black Sea Region, causing money to flow modestly into safe haven assets. The VIX is trading near 17 at this hour, as the dollar index trades near 106.3. Yields on 10-year Treasuries are trading near 4.36% as money flows into the relative safety of government securities, while yields on 2-year Treasuries are trading near 4.25%. Crude oil prices are modestly weaker, while the grain and oilseed markets are mixed, with soybeans falling on favorable Brazil growing conditions, wheat rises on rising war risks in the Black Sea and corn prices are caught between the two.
Ukraine reportedly fired six U.S. made ATACMs missiles at the Bryansk region of Russia following yesterday’s reports that President Biden signed off on the use of U.S. made weaponry deep inside of Russian territory. Russia reported the strikes against its forces, while Ukraine merely acknowledged that missiles had been fired. The strike coincides with Putin’s signing of a revised nuclear doctrine that lowers the bar on the use of nuclear weapons. The document was first announced in September, but it wasn’t signed by Putin until this week. It indicates that an attack using conventional weapons made by any nation that is considered a nuclear power would be considered a joint attack on Russia. It does not indicate specifically that such an attack would trigger a nuclear response, but it does say that a massive aerial attack against Russia could trigger a nuclear response. Wheat prices would likely be up the daily limit, with sharply higher crude oil prices as well, if the market truly believed that we were on the cusp of a nuclear war in the region. In fact, crude oil prices are modestly weaker at this hour. But wheat prices added a bit more war premium again this morning on the chance that we could see this escalation result in tit-for-tat attacks on export infrastructure and/or the ships themselves. Again, the market response has been modest thus far, so fear levels are still relatively low, but it is a possibility that’s on the minds of traders.
Fed fund futures are trading 38% odds this morning that we will not see another rate cut from the Federal Reserve when it meets again next month. That leaves 62% odds that we will see a rate cut, but the above reflects a rapidly changing perception toward Fed monetary policy following Donald Trump’s victory on November 5th. The market is currently pricing in the possibility of just two more rate cuts by June, which is 4 to 5 fewer cuts than it was pricing in a couple of months ago. As I’ve previously noted, Fed Chair Jerome Powell had his staff work on anticipated policy shift proposals following Trump’s first presidential victory in 2016, which were then presented at the December meeting of that year, including future rate hike proposals. I anticipate that we will again see the Fed discuss possible shifts in policy when it meets on December 17 and 18. I’m not saying that it will propose rate hikes at that meeting, but I do believe that its statements on the 18th will leave the door open to that possibility. At the very least, we are already seeing Fed officials walk back expectations for additional significant rate cuts. Trump has proposed forming the Department of Government Efficiency run by Elon Musk and Vivek Ramaswamy, with a goal of reducing government spending by 30%. An aggressive Fed rate cut policy at a time of tax cuts and deregulation – as supported by the incoming Trump Administration – would be considered inflationary by the markets if not also accompanied by significant spending cuts to reduce fiscal stimulus currently in the economy. The question then will be, will the Trump Administration be successful at doing what no other administration has done – make massive cuts to government spending?
The People’s Bank of China emphasized “strengthening expectation management” in its third quarter policy report, focusing on maintaining the yuan’s flexibility while mitigating excessive volatility. Read that as, it wants to control movement of the yuan on the global currency market so that it is seen as a strong alternative to the dollar. As such, the PBOC reinstated its counter-cyclical factor in daily yuan fixing to counter sharp currency moves amid the U.S. dollar’s current strength. The PBOC frames its move by saying that it wants to curb speculative selling pressure that could lead the yuan to overshoot its fundamental value, while maintaining the needed flexibility to adjust as needed amid anticipated tariff discussions with Trump 2.0. In other words, it wants to determine the value of its currency, rather than allow the market to do so, and that will not sit well with other countries.
November ’25 soybeans futures posted a bullish key reversal on the charts yesterday, and it meant little to overnight traders, who pushed prices lower again. Brazil is currently on track to harvest another big soybean crop if the current weather pattern holds. On the other hand, wheat prices are building back some war risk premium, as indicated above, with corn prices caught between the two, with pretty solid underlying demand now as harvest wraps up. All of this as we slip into the holiday malaise phase of the markets in the weeks ahead. Fund managers are beginning to put corn in their portfolio, and they may soon add wheat as well.
