December 30 – Hopes for a Santa Claus rally are rapidly drying up after global stocks were steady to mixed, while U.S. stock futures came under pressure once again overnight. Meanwhile the broader commodity sector found some tail winds. Traders fretted about high interest rates, even though Treasury yields worked lower overnight, but the net effect continued to be for traders to take profits to show on their year-end books on what has overall been a very good year for stocks. The VIX is trading 18 this morning, reflecting modestly higher anxiety on Wall Street, while the dollar index consolidates near 108.2. Yields on 10-year Treasuries are trading near 4.56%, while yields on 2-year Treasuries are trading near 4.27%. Crude oil prices are modestly higher, and trading just below the top of the trading range that has largely contained prices over the past couple of months, while the grain and oilseed markets were modestly higher overnight as well.
The markets are largely still in holiday mode, and they may stay that way through the week. The markets will be closed on Wednesday for the New Year holiday, and many traders would simply like to remain on the sideline until next week. We continue to see some end of the year positioning to show profits on the books. We’re also seeing some erratic movement in some of the thinner traded markets in these holiday conditions due to the low volume. As such, caution is advised before reading too much into market moves made over the past week, or those of the coming week as well, until they can be tested under more normal trading conditions as we get into next week. The Goldman roll comes in the fifth to the ninth trading day of the new calendar year, which will also impact asset movement. That’s also the time when we see many of the funds rebalance their portfolios. That generally means that assets that saw larger gains in 2024 see some selling pressure, while those that experienced big losses over the past year garner some support. We saw the softs and precious metals see the largest gains over the past year, while the grain and oilseed sector was the only sector of the commodities that saw net losses over the past 12 months; amounting to roughly 16.5% according to our StoneX commodity tracker. Rebalancing also often includes some modest adjustments in the desired size of the pie that managers seek for each asset as well.
The outlook for 2025 includes expectations for economic growth here in the United States, with most economic projections elevating their expectations for gross domestic product. That growth is expected to be driven by more business certainty with extensions to the 2017 tax cuts – with more cuts possibly added – while also seeing some reductions in business-hampering regulations. Meanwhile, the outlook is just the opposite for Europe and China, where promised tariffs from the incoming Trump Administration could hurt trade, reducing demand for products produced in those regions. As such, global investors are shifting their resources to the United States, which requires more dollars, keeping the greenback elevated relative to other global currencies. The euro is slowly working its way lower, getting close to par with the dollar, while China’s yuan is trading very close to 7.3 yuan to the dollar, which is where policy intervention appears to currently be capping it. Meanwhile, the Brazilian real is trading at 6.16 reais to the dollar, which is just below its recent record low. All of these currency valuations are critical to commodity trade, making U.S. grain, oilseeds, and meat exports more expensive, while making those produced by our competitors more competitive.
Good rains again fell over key crop production areas of Brazil over the weekend, although they continue to be focused on more of the northern portions of the belt. We also saw rains focused on some southwestern portions of Argentina’s crop belt. The southern 20% of Brazil’s crop belt will likely see some degree of developing dryness stress for crops over the next several weeks. The same is true for the northeastern third of Argentina’s crop belt, although that could expand to 50% of the belt in the weeks ahead. Corn and soybean condition ratings are off their highs due to this expanding stress, although they’re still the highest in some years for this point in the growing season. Even so, I anticipate that we will see those crop ratings continue to trend lower in the weeks ahead as long as the current weather pattern holds.
We would normally see the first planted soybean fields in Center-West Brazil be harvested by now, but this year’s later planting pushed that back probably into next week. Yet, we don’t expect to see any meaningful supplies of soybeans harvested and moving to the ports before the last week or so of January, and then it will take another 45 days to reach Chinese ports. There are some indications this morning that the Biden Administration is trying to get the 45Z guidelines out before Biden leaves office on January 20th. The question is, will that give biofuel producers the confidence they need to commit to buying feedstock for production until they know if the Trump Administration will undo the guidelines to replace with their own? I question whether it will give them the needed confidence.
