December 13 – Stock futures pointed higher this morning, despite weakness in the Asian markets due to disappointment that China hasn’t announced any more specific stimulus measures that would win the confidence of consumers or investors. The VIX is trading near 14 this morning, while the dollar index is trading near 106.9. Yields in 10-year Treasuries are trading near 4.35%, while yields on 2-year Treasuries are trading near 4.21%. Crude oil prices are modestly higher, while running into an area in the low $70s per barrel that have previously invited fresh selling interest. The grain and oilseed markets were modestly weaker overnight.
Stocks tumbled on China’s market today, reflecting investor disappointment that we didn’t see anything more concrete in the way of stimulus come out of this week’s Central Economic Work Conference. Investors continued to hear plenty of rhetoric from Party officials about how they will do whatever is necessary to support the economy, but those promises continue to be short on details to give investors the needed confidence that policymakers know what to do, and / or are willing to do what needs to be done, to turn China’s economy around. Some analysts continue to propose that China needs to consider direct stimulus payments to consumers, similar to what the United States and other countries did during the pandemic. But that goes against the Chinese culture of simply handing out “welfare” payments, so direct payments are not likely to happen. Authorities seem frustrated that consumers and investors don’t just “trust” them to do the right thing. But one of the theories also is that authorities are quite content with the current level of economic health, or the lack of it, as being a necessary component of reaching the Party’s long game goal of displacing the U.S. dollar’s position of prominence in the world, and with that, displacing the United State’s position of prominence.
The return of the Trump Administration presents a new set of challenges to that long game goal. But it is round two for the Trump Administration, and President Xi Jinping knows what he’s dealing with this time. As such, expect a different approach to Trump in round two. Trump eventually gained a trade agreement with Xi late in his first term in office. Xi is in a weaker position of negotiation this time around, considering China’s weak economy. But Xi also has something else that he didn’t have in 2016 – a pre-established relationship with Trump. Relationship is highly valued in the Chinese culture. The Chinese figure that they can do business with those with whom they have a relationship of respect, even if they are an adversary. Trump and Xi built such a relationship in Trump’s first term in office. That’s why Trump extended an invitation this week for Xi to attend his inauguration on January 20th. It’s yet to be seen whether Xi will accept the invitation, but he is taking pre-emptive steps to prepare for Trump’s return to office, while pre-positioning China for the anticipated negotiations, which China seems to want.
China launched a probe into Nvidia, while also placing a ban on rare mineral exports to the United States. Meanwhile, Trump is taking steps to block China’s efforts to side-step sanctions by establishing operations in countries with which we have trade agreements, such as Mexico. China won’t admit to it, but it appears that it might be prepared to allow its currency to depreciate to offset the impact of Trump tariffs. The bottom line is that China will be better prepared to enter the negotiations this time around, but it still cannot afford the trade war that could ensue if an agreement is not reached. It's economy cannot withstand it. That’s why I think that Xi will reach an agreement with Trump that will boost U.S. agricultural exports at the expense of Brazilian exports, while also possibly including U.S. crude oil, in exchanged for eased tariffs on consumer goods coming to the United States to help weather the Trump years, before China resumes its long game goals. But it will likely take some months for this to unfold, leaving us all quite nervous that things could unravel until a deal is done.
Grain and oilseed prices continued to pull back overnight as we make our way through this period of holiday doldrums between Thanksgiving and the New Year holidays. Corn garnered the bulk of the news following Tuesday’s USDA crop report in which the agency slashed 200 million bushels off its projected stocks estimate due to increased exports and ethanol demand for the feed grain. Yet, the lead contract was unable to sustain the resulting buying through resistance at the 200-day moving average, which also coincided with the October 2 high. That triggered active farmer selling in the United States, with more coming from Brazil as well, to go along with speculative profit taking. The dynamics simply were not there to justify pushing through that resistance at this time. Soybean and wheat prices struggled to sustain strength without support from corn. Brazil’s crop continues to look good. We may see stress start to impact Argentina’s crop in the last half of this month, but its crop currently looks quite good as well. U.S. soyoil exports are surging amid tighter supplies of palm oil, but U.S. domestic demand for soyoil looks quite suspect in the weeks – and possibly months – ahead amid a lack of clarity on 45Z guidelines.
