October 28 – Crude oil prices plummet while stocks pushed higher to start the week. Geopolitical risks are perceived to have eased following Israel’s retaliatory strike on Iran over the weekend while stock traders look to earnings reports, job numbers, and the upcoming election for direction. The VIX continues to trade near 19 this morning, while the dollar index is trading near 104.2 after briefly probing to fresh three-month highs earlier in the session. Yields on 10-year Treasuries are trading near 4.24% after testing three-month highs above 4.29% overnight, while yields on 2-year Treasuries are trading near 4.10%. Crude oil prices are down by more than 6% after gapping lower on last night’s open, while the grain and oilseed markets are generally mixed to lower.
Israel finally carried out its anticipated retaliatory strike on Iran following Iran’s strike on it nearly four weeks earlier. The market’s fear was that Israel would strike Iran’s energy and/or nuclear infrastructure, resulting in aggressive retaliatory strikes by Iran on Israel, as well as on any other country’s infrastructure whose airspace was used in the strike. That cold dramatically escalate the war in the Middle East, while restricting energy supplies emerging from the region. Those fears eased somewhat earlier this month on wire service stories that Israel had agreed to focus on military targets, but the fears lingered. The current perception is that Israel retaliated against Iran in a way that allows both sides to “save face” to de-escalate the conflict, while striking a blow to Iran’s military capability. The conflict is not going to go away. It’s been simmering for thousands of years. But the collapse of the crude oil markets on the open on Sunday indicates that energy traders believe that the threat has eased for now, allowing them to focus on an abundant supply in the midst of struggling demand – largely due to China’s ailing economy.
As such, this week’s focus is expected to be on quarterly earnings, the upcoming election and on jobs. We’ll get the JOLTS job opening and quits report tomorrow, followed by the ADP private sector jobs report on Wednesday, the weekly jobless claim report on Thursday, and the government’s monthly jobs report on Friday. Surprises are quite possible in this week’s reports due to the impact of two major hurricanes in recent weeks. The general expectation is that posted job openings declined, while weekly claims for unemployment benefits rose and the number of jobs created likely slipped as well. The hurricanes provided a major hit to the Southeast’s economy, although they had little notable impact on the rest of the economy, which will create some challenges for the Federal Reserve when it meets to determine future monetary policy in 10 days.
China’s Vice Minister of Finance Liao Min was present at the World Bank meeting in Washington, D.C. over the weekend, making broad promises of Chinese stimulus to turn China’s economy around. He indicated that China will “double down on its countercyclical fiscal measures, implement strong initiatives to address local government debt, stabilize the real estate market, raise incomes for key groups, ensure people’s livelihoods, and promote equipment upgrades and trade-in programs for consumer goods.” That falls in line with promises made by China’s finance minister earlier this month where he hinted that China would significantly increase government debt to support the stimulus. China’s Caixin reports that the government is considering a three-year package worth 6 trillion yuan ($843 billion). However, such a large stimulus would be expected to put downward pressure on the value of the yuan, especially if a resilient U.S. economy and lingering inflation signals limit the ability of the Federal Reserve to cut interest rates here in the States. So far, the economy is primarily responding to promises, such as these, but eventually we’ll need to see substantial substance. Existing home sales in 22 representative Chinese cities rose nearly 24% week-on-week as a result, but that’s still down more than 4% year-on-year.
It's difficult to sustain a rally in the corn and soybean markets in the midst of a record harvest when storage is limited and rains are falling in South America, leading to expectations of record crops there as well. Demand for corn and soybeans has been good lately, as end users seek to increase coverage at what is perceived to be harvest lows. But demand needs to be good due to the sheer size of the anticipated supply this year. That’s particularly a concern for soybeans, where export demand is still lagging the pace needed to hit USDA’s target and production prospects have improved dramatically for South America. Cheap prices are expected to support demand for U.S. corn going forward, while soybeans may struggle to find that story. Meanwhile, wheat prices continue to find support from adverse weather across several key production areas of the Northern Hemisphere, with a particular focus on the Black Sea Region and the U.S. Southern Plains. But the fact that Russian wheat continues to make its way onto the world market in large volumes at relatively cheap prices makes it difficult to sustain rallies at this point. Like corn, wheat’s story is likely one for later in the marketing year, although it finds modest underlying support from that expectation now, as does corn.
