December 3 – Stock futures were quietly mixed overnight, as traders brace for a plethora of jobs data the remainder of the week, and as they continue to assess the steady flow of headlines being created by President-Elect Donald Trump. Inauguration Day doesn’t arrive until January 20th, but Trump is already influencing international policy with his tariff threats, which are flowing on almost a daily basis now. The VIX is trading below 14 this morning as stocks trade just below record levels, reflecting a sense of calm with all of this thus far on Wall Street, while the dollar index is trading near 106.2 as the euro stabilizes amid worries that the French government is teetering. Yields on 10-year Treasuries are trading near 4.18%, while yields on 2-year Treasuries are trading near 4.16%. Crude oil prices are more than 1% higher as traders focus on expectations that OPEC+ will delay production increases once again, while the grain and oilseed markets bounce.
French lawmakers are scheduled to vote Wednesday evening on a no-confidence measure to oust a fragile coalition currently in place. It is expected to be the first successful no-confidence vote to force the government out in more than 60 years. France, which is Europe’s second largest economy, is battling a massive budget deficit that creates its own set of challenges for the eurozone economy. The no-confidence vote was called for after Prime Minister Michel Barnier tried to push the Social Security portion of the budget through Parliament without a vote amid a lack of support. Meanwhile, Germany, which is Europe’s largest economy, faces an election of its own. Keep in mind that Trump has threatened tariffs that would create additional challenges for both of these economies, as well as the broader eurozone. Yet, the eurozone would like to have the United States’ support against the lingering threat of Russian aggression on its eastern border.
Ukraine is currently one of nine candidate countries to join the European Union, and it has requested membership into NATO. Ukraine wants to marry into the European community to find protection against Russian aggression. However, that also increases the threat that Russian President Vladimir Putin feels from Europe. Russia has been invaded 50 times throughout the centuries, but it was easiest to protect when its borders stretched west to the European mountains. That appears to be Putin’s goal – to extend his borders to the mountains where he can feel more secure. But that means moving through Ukraine and beyond. Ukraine President Volodymyr Zelenskyy reportedly offered this week to allow Russia to keep territory that it has taken since February 24th, 2022, along as Ukraine is able to keep Russian territory that it has taken, and as long as Ukraine is granted membership into NATO. He then believes that territories can be negotiated back to their original owners diplomatically after fighting has ceased, since he will have the security of membership in NATO that will be bound to protect Ukraine as a fellow member. But that NATO membership will be unacceptable to Putin, which sees NATO as a threat to Russia. Ukraine has been the buffer between NATO and Russia. Europe finds itself in this tug-of-war and obligation to support Ukraine in the war at a time when it cannot afford to do so, and now Trump tariffs are on the table as well. This is why the euro is struggling in currency markets, which is why the dollar remains so strong, in addition to garnering support from expectations for a strong U.S. economy going forward.
Relations with China appear to be at a pivot point as well. China has made no secret of the fact that it wants to use the BRICS coalition and its relationship with Belt and Road Initiative countries to replace the U.S. dollar as the world currency with a currency of its own – whether it be the yuan or a crypto-type currency that it controls. Trump issued his threat over the weekend to put 100% tariffs on any country that participates in this scheme. China also faces increased direct tariffs promised by Trump at a time when its economy is struggling. It’s making progress toward turning that economy around, but the Trump tariffs may pull the rug out from that recovery. As such, President Xi Jinping is doubling down on his efforts to build the Belt and Road Initiative – which now includes 139 countries. He’s calling for decisive actions to move the BRI forward. Doing so will create significant financial commitments from China to “buy” the support of these 139 countries at a time when China’s budget deficits are already surging as it tries to support its own economy ahead of the Trump challenges. China is at a pivotal point in its history, with Xi making a significant gamble of China’s future to win this bet. It’s a giant winner-take-all game of chess for Xi, and he doesn’t want to lose to the United States. He’s willing to lose individual battles as long as he winds the long game, although Xi is already 71 years of age.
Xi’s short game may include a trade agreement with the Trump Administration that eases tariff pressure on consumer goods exported to the United States in exchange for purchases of greater quantities of U.S. agricultural commodities. That option is being discussed among people in the industry in China, but they also do so with a healthy dose of skepticism. Yet, any such agreement would be expected to be a short game move to last through four years of a Trump Administration while allowing China’s economy to recover for the long game fight that would become the focus after Trump leaves office in four years. Geopolitical risks are escalating in this giant chess game, and the commodity markets are certainly in the midst of that conflict. For now, I take note that the weakening of Brazil’s real makes its soybeans cheaper than U.S. soybeans for January delivery to Chinese ports, and that’s a problem for U.S. soybeans.
