Perspective: Mid-Day Commentary for May 18

By: Arlan Suderman, Chief Commodities Economist

Wed, 18 May 2022, 15:49

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 18 - It's "risk-off" on Wall Street thus far today, after Federal Reserve Chair Jerome Powell managed to stoke fear emotions again late yesterday in public comments that he made about inflation. Additional fodder for the bears came from Target's earnings report, which indicated that the retailer expects a bigger margin hit in the next quarter due to rising energy and freight costs, after profits were cut in half in the previous quarter. The VIX is trading back near 29 as fear levels elevate once again, and stock values plummet, with money moving to safe-haven assets, and to the sideline. The dollar index is trading firmer near 103.6 at midday, while yields on 10-year Treasuries are trading near 2.93%, after probing above 3.00% earlier in the session. The broader commodity sector is also participating in the sell-off, with crude oil prices down roughly 2%, and most of the Ags notably lower as well.

Wheat prices fell roughly 4% as the broader rout gained momentum. Those assets posting the largest gains of late face the greatest risks on sell-offs, as a general rule. Fundamentals take a back sea when fear is the driver. Selling spread across the board, negatively impacting the grain and oilseeds, as well as the protein sector. Traders largely ignored social media posts from the Wheat Quality Council tour showing drought-ravaged wheat fields in the western Plains. Those pictures will have to wait for another day when momentum swings the other direction. For now, momentum traders are punishing both the equities and the hard assets.

U.S. commercial crude oil stocks (excluding the Strategic Petroleum Reserves) fell by 3.4 million to 420.8 million barrels in the week ending May 13, putting them roughly 14% below the five-year average for mid-May. Gasoline stocks fell by 4.8 million barrels, leaving them 8% below seasonal levels. Distillate stocks rose by 1.2 million barrels, but they still remain 22% below levels typically seen in mid-May. Ethanol stocks slipped to 23.8 million barrels in the week ending May 13, down from 24.1 million the previous week, but up from the 19.4 million barrels seen in the same week last year. Ethanol production was unchanged at 991K barrels per day last week, although that was down from 1,032K barrels per day in the same week last year. Estimated corn use for the production of ethanol last week totaled 99.3 million bushels, unchanged on the week, but down from 102.2 million bushels last year. Estimated marketing year to date corn use for the production of ethanol totals 3.745 billion bushels, up 265 million or 7.6% from the previous year's pace, but down 18 million from the seasonal pace needed to hit USDA's target for the year.

The VIX is widely known as Wall Street's "fear index." The graphic below shows movement of the VIX over the past decade. Note that it normally trades between 10 and 20 on the scale. It spiked above 85 as the pandemic shut things down in early 2020, which was second only to a spike above 87 in the financial crisis of 2008. The VIX rarely sustains a move above 50. More significantly, I've observed that a move above 30 indicates fear levels high enough to curtail money flow into many hard assets. In fact, it's difficult for a commodity to sustain a rally when the VIX is above 30, unless that commodity has a strong fundamental story. It can do so in that case, but it just has to worker harder to do so.

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