November 6 – The 2024 Election cycle is over, although a few more questions are left to be answered regarding the makeup of Congress. Wall Street is going forward on the expectations that we will see a pro-business agenda coming out of the White House, which it hopes will include some deregulation and possible tax cuts, but at the least hopefully not tax increases. That’s its hope and expectation. By also getting the Senate, that should allow Trump to get his appointees approved to carry out his agenda, although legislative changes will require support of both the House and Senate, and that is still not a certainty. Nonetheless, stock futures soared on the above overnight, with Treasury yields leading the dollar higher, while the commodities found the environment less favorable.
In fact, overnight activity suggests that we could see new record highs for both the S&P and the Dow today. The VIX is trading below 16 this morning after hitting fresh two-month lows on easing Wall Street election concerns, while the dollar index is trading sharply higher at a fresh four-month high near 105.2. Yields on 10-year Treasuries are trading near 4.47%, after hitting a fresh four-month high near 4.48% this morning, while yields on 2-year Treasuries are trading near 4.29%. Crude oil prices are trading more than 2% lower on the strong dollar and on expectations that we’ll see restrictions on fossil fuels ease, although that may be partially offset by tighter sanction enforcement on Iran and Venezuela. The grain and oilseed markets were notably lower as well on the strong dollar and on fears of a renewed trade war with China.
A bloody selloff ensued for China’s stock market this morning as traders watched the returns come in during our overnight period. Traders fear that a Trump victory will result in a renewed trade war with China, further hurting its economy. Many traders had speculated that we would see a larger stimulus program emerging from China this week to counter the effects of a Trump win, but wire service reports indicate that is not likely. The trade policies of the Biden-Harris Administration toward China were very similar to the previous Trump Administration, but observers inside of China expect a Trump 2.0 Administration to ratchet up the deleveraging process, encouraging less investment in China’s economy and fewer imports of Chinese produced goods. However, a round of active buying of the selloff stabilized the Chinese market somewhat. A breakdown of the data revealed that state-backed institutions poured billions of dollars’ worth of buying into the market to create that more stable atmosphere, similar to what it did to trigger the stimulus backed rally in late September. That strategy eventually failed when authorities failed to follow through with sufficient stimulus details, but it is yet to be seen how the strategy will work this time.
China’s Ministry of Finance reportedly will raise a U.S. dollar denominated bond worth $2 billion next week in Saudi Arabia. The last time this occurred was in Hong Kong in 2021, and it amounted to a $4 billion bond program. Observers see this as an effort to increase offshore bond liquidity, suspecting that the fund was developed to support global investors related to the Belt and Road Initiative. The fact that China is doing this provides further evidence that Chinese efforts to globalize the yuan are losing momentum after a recent SWIFT report reflected a sharp decline in the yuan’s global payment share, and after the recent BRICS conference in Russia unexpectedly resulted in the halting of development of its payment alternative system. As such, the U.S. dollar remains as a strong global currency. I doubt that China will give up on its efforts to displace the dollar as the world’s primary currency of trade, but its efforts appear to have run into significant obstacles for now.
Soybean prices fell sharply on the fear that a Trump presidency will result in a tariff war with China, hurting U.S. sales to it. But history tells us that we have been moving in that direction for years regardless of Trump’s election. Looking back at the previous trade war, most observers will point out that U.S. sales plummeted during that time. But that had more to do with suppressed demand due to how African Swine Fever had decimated China’s hog herd. China’s “unofficial” policy has been to buy as many soybeans as it can from South America, and then to buy the rest of what it needs from the United States. You can point to geopolitical tensions as a motivation for that, but the fact is that currency exchange rates generally make South American soybeans cheaper than U.S. supplies, when those supplies are available in South America. That was true prior to the trade war, it was true in 2019-2020, and it has been true since then, with sales declining as Brazil continues to expand production, increasing the availability of soybeans. This will continue to be the case. China will still pay what it needs to get the soybeans it needs – tariff war or not. Besides, China will already be making the switch to new-crop Brazilian supplies by the time that Trump takes office. The one thing that could alter that would be if China makes a move on Taiwan, resulting in U.S. sanctions on it that makes it difficult to purchase commodities from the United States. We must recognize that as a risk. Chinese soybean reserves are now likely large enough to deal with such sanctions barring a Brazil crop failure.
