Perspective: Morning Commentary for November 30

By: Arlan Suderman, Chief Commodities Economist

Tue, 30 Nov 2021, 14:28

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 30 – A broad market sell-off was again seen overnight as fears over the new Covid variant Omicron were triggered again. The sell-off spread across global equity and commodity markets on fears that Omicron will produce widespread shutdowns in the weeks ahead. The VIX remains elevated near 26 this morning, reflecting the heightened fear on Wall Street. The dollar index is trading near 95.7, after trading to its lowest level since November 19^th, while yields on 10-year Treasuries hit a three-week low below 1.42% early this morning on expectations that Omicron will lead to an extension of the Fed’s easy-money policy. Crude oil prices are trading roughly 4% lower, while the Ags are mostly lower as well, on fears that shutdowns will reduce demand for commodities.

Moderna’s Chief Executive Officer triggered selling in the global markets early today by stating that existing Covid-19 vaccines would be less effective against the Omicron variant of the virus than they were against the Delta variant. That statement was countered by the executive director of the European Medicines Agency, but the markets chose to put more stock in the drug maker’s comments. The chair of the European Centre for Disease prevention and Control reported that the 42 cases of the new variant seen in Europe thus far all had either mild or no symptoms at all, although all were in the younger age group. Health authorities also announced that they isolated cases of the Omicron variant in Europe 11 days ago, which was prior to the known cases traveling from South Africa to Europe. It continues to appear likely that Omicron spreads very quickly and easily. We still do not know how lethal this variant is, but we do know that there are not yet any reported deaths, nor have we seen reports of any serious symptoms. It’s still early, so we must be careful not to draw too many conclusions, but it is very encouraging that the variant has thus far presented itself with mild or no symptoms. The fear with any new virus outbreak is that it will overwhelm the healthcare system, resulting in large numbers of deaths. It may change, but we thus far see no evidence that is the case with the Omicron variant in the early stages of this outbreak. Yet, the markets continue to respond with fear.

The next question is, how will policymakers respond? Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen are both scheduled to testify before Congress today. Powell’s released statements speak of the significant risks that Omicron presents to the U.S. economy, while Yellen’s speak of the strength of the U.S. economy. Both obviously view the elephant in the room from different sides. The markets interpret Powell’s comments as a leaning toward favoring an easy-money policy until more is known about the longer-term impacts of Omicron, which may include slowing or halting tapering, while delaying interest rate hikes. Thus, we’ve seen a lower dollar as yields on Treasuries decline. Yellen wants to project a strong economy, as we are now less than a year away from the mid-term elections, which would support moving forward with the Administration’s agenda. It marks the first time that the two policymakers have taken a different road now that Powell has the nomination for another four-year term. That provides market confirmation that Powell feels freer to act independently now that he has the nomination, which for the moment, appears to be a flip back toward easy-money policy.

Retail sales remain quite strong headed into the holiday season. Today’s Redbook showed same-store retail sales up 16.9% year-on-year for the week ending November 27, continuing the trend that we’ve seen for much of November. Some of that was due to consumers pulling purchases forward due to warnings of supply chain problems that could delay deliveries, or even create shortages. As such, analysts will be watching to see if same-store sales continue strong through December, relative to the previous year. Keep in mind that these sales numbers reflect both volume of goods and services, as well as value. They reflect both actual demand, as well as inflation. Just an increase in price alone results in a year-on-year rise in sales, assuming constant volume. In this case, it appears to be a combination of both increased volume and value, with buying boosted by the large amount of fiscal and monetary stimulus still in the economy.

One can blame much of the weakness in the Ag commodities on the broad-based market sell-off over Omicron fears, and that is a factor. However, it also provides a good excuse for an end-of-the-month round of profit taking as the lead contract goes into delivery after prices reached significant chart objectives. The edible oils are increasingly being treated as energy feedstocks, contributing to their weakness as crude oil falls on Omicron fears. Yet, stocks of quality milling wheat remain tight, and the corn market must still respect record high fertilizer prices that threaten next year’s production. Fertilizer prices are still rising. Nothing has changed regarding those fundamentals.

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