August 8 – Today’s focus shifted to the banking sector after credit rating agency Moody’s downgraded several small- to mid-sized banks overnight and Italy laid a 40% windfall tax on its banks, creating a bit of a “risk off” sentiment across the commodity and equity sectors. The VIX is back to trading near 17 this morning, which is just below its recent two-month highs. The dollar index is trading near 102.7, which puts it just below one-month highs, even though Treasury yields are falling this morning. Yields on 10-year Treasuries are trading near 4.02% in early trade, while yields on 2-year Treasuries are trading near 4.76%. Both the energy and grain and oilseed sector are under pressure this morning as well. Weak Chinese economic data and improving crop ratings added a fundamental factor to the risk-off selling in the above commodity sectors.
Moody’s cut its credit ratings for several small- to mid-sized banks overnight, while saying that it could also downgrade the ratings of some of our nation’s largest lenders as well. It cut the ratings of 10 banks by a single notch, while indicating that it was placing six other banks on review for potential downgrades. Reuters reports that list of six other banks includes Bank of New York Mellon, US Bancorp, State Street and Truist Financial. The overnight downgrades come in the wake of Fitch recently cutting its U.S. credit rating a notch to AA+. S&P did so a dozen years ago, leaving Moody’s to yet address the problem with U.S. debt. Nonetheless, the combination of the Fitch downgrade of U.S. credit and Moody’s bank downgrades sends a message to investors that there’s a bit more risk in the financial world, leading some to take some of their risk exposure in the equities and in the commodities off the table. A portion of that money moved to the traditional safe-haven markets of the U.S. dollar and to U.S. Treasuries overnight, leading to a stronger dollar and lower Treasury yields, as stock and commodity values fell.
Italy sent shockwaves through the European banking sector overnight when it surprised its banks with a 40% tax on profits that were earned from higher interest rates, while reprimanding those banks for not rewarding depositors. This follows similar action by Spain and Hungary, raising fears that other countries will follow as well. Reuters quotes sources saying that the windfall tax is expected to bring in nearly 3 billion euros, or $3.3 billion US dollars to the treasury. That would be similar to the estimated 2.8 billion euros that came in from a windfall tax on energy companies earlier this year. Ironically, Italian banks were never credited for not charging depositors for deposits when Europe’s interest rates were negative over the past several years, creating losses for them, but the government wants to confiscate profits when the tables are turned. The market has a way of evening these things out, but government intervention to confiscate profits tends to stifle economic activity and slow growth. It’s largely the profits within these banks that tend to fuel investment, but that fuel will be missing if the profits are confiscated.
China’s exports fell 14.5% year-on-year in July, following a 12.4% decline in June and the largest decline since February 2020 when Covid hit. Analysts had been expecting a 5% decline. The decline reflects decoupling of Europe and the United States from dependency on imports from China, but it also reflects a decline in prices. China’s exports to Europe fell 20.6% year-on-year in July, while shipments to the United States dropped for the 12th consecutive month by 23.1%. China’s trade with Belt and Road Initiative countries was up by 7.4% year-on-year, including a 51.8% increase with Russia, but that wasn’t nearly enough to offset lost trade with Europe and the U.S.
The U.S. Midwest weather continues to look favorable for corn and soybean production over the next two weeks, with generally mild temperatures reducing moisture needs for crops while lengthening the grain fill period to allow more time for crop yields to recover some previously lost potential. Some areas are expected to see below normal rainfall, particularly in week #2, but crop needs will be lower as well due to the milder temperatures. USDA reported improved corn and soybean crop ratings on Monday afternoon from the previous week, reflecting the change in the weather pattern to more favorable conditions over the past week. The crops generally responded well to the change, although the greater positive response was seen west of the Mississippi River where conditions had been more stressful the previous week. USDA will be weighing in with its revised production estimates when it releases its August WASDE crop report on Friday. Pre-report estimates released late yesterday suggest that the trade expects the U.S. corn yield to decline to 175.5 bushels per acre, down from USDA’s 177.5 bpa estimate last month and below StoneX’s customer survey estimate of 177.0 bpa. The trade expects USDA to lower its soybean yield to 51.3 bpa, down from 52.0 bpa previously, but up from StoneX’s estimate of 50.5 bpa.
