August 14 – Stock futures were mixed overnight as sentiment calmed following last week’s volatility, while traders wait for tomorrow’s retail sales data. Traders are keeping an eye on China’s spiraling markets amid fresh concerns about mounting debt tied to its property sector. The VIX is trading near 16 this morning, while the dollar index is trading at a five-week high near 103.2. Yields on 10-year Treasuries are trading near 4.19%, while yields on 2-year Treasuries are trading near 4.95%. Crude oil prices are modestly lower to start the week, while the grain and oilseed markets are mixed to weaker following Friday’s big USDA WASDE crop report.
The Chinese yuan traded just below nine-month lows versus the dollar today, while Chinese stocks gapped lower following sharp losses on Friday as fears mount regarding the financial security of China’s property markets. The latest round of selling was triggered by reports that asset management giant Zhongzhi Group was rumored to have delayed payments of maturing wealth products roughly a week ago, with several more trust groups in China said to be facing similar problems over the weekend. There is speculation in the Chinese markets that the delayed payments were related to investments in property products.
Additional fears were fueled by a default from property giant Country Garden, whose properties span nearly every province and city within China. Country Garden reportedly suspended 11 domestic bonds on Saturday, indicating that it will hold a meeting with bondholders soon to discuss debt management measures. The suspended bonds total $2.18 billion in value. Country Garden issued a warning on the Hong Kong Stock Exchange on Thursday, confirming a net loss of $6.25 - $7.6 billion in the first half of this year, largely due to the impact of declining sales of real estate projects. Property sales fell 5.3% year-on-year in China in the first half of the year. Traders remember when property giant Evergrande defaulted on interest payments on an international loan late last year, as it continues to struggle with a debt of more than $300 billion, and they fear that the two property giants represent a much bigger systemic problem within China’s economy that policymakers thus far seem unable to address. This comes as ten of China’s new-energy vehicle makers offer another round of price cuts and other incentives to stimulate sales, suggesting struggling demand.
Russia fired warning shots at a cargo ship approaching Ukrainian waters on Sunday, raising concerns that civilian ships moving grain through the Black Sea could face increased risks going forward. Russia said that the ship ignored its request to come on board for inspection, after it had previously warned that it would treat any ships approaching Ukrainian ports as potential military vessels. It’s worth repeating that Ukraine responded to that initial statement by saying that it too would consider any ships moving toward Russian ports as potentially military targets, raising concerns that Ukraine might respond to this latest provocation by striking at Russia’s ability to export commodities. Yet, overnight trade in the crude oil and in the grain markets suggest that global traders are not too worried about that happening at this point. Ukraine has certainly demonstrated its ability to strike at Russian ports, but it has not shown the ability to effectively bring a halt to Russian exports at this point. Rather, the market continues to focus on the volume of commodities coming out of Russia that continue to weigh on global grain markets, while supplying energy to the world as well. Nonetheless, it should be noted that the war continues to escalate in the Black Sea, and this continues to keep the possibility of further curtailment of commodity movement a risk that must be respected.
USDA confirmed smaller than expected corn and soybean crops on Friday, which quickly triggered buy orders by the headline-reading Algo computers. However, the human trading element quickly emerged to sell that rally, focusing more on USDA’s cut of the demand projections going forward. Soybean prices stabilized, with the market continuing recent consolidation while we wait to see if more production cuts down the road further tighten that balance sheet. Yes, we’ll likely see more cuts to new-crop soybean exports, but USDA is expected to eventually bump domestic demand higher. The mere possibility that we could see ending stocks dip below 200 million bushels down the road keeps traders from building short speculative positions for the time being. That’s not the case for corn and wheat though, where very weak export demand continues to be an anchor to those markets that pulls them lower. The Midwest Pro Farmer crop tour next week should provide the industry with its first broad-based look at this year’s crops to help sort out how widespread some of the problems heard in anecdotal reports actually are.
