February 21 – Stock futures traded cautiously lower ahead of today’s earnings report from Nvidia, which they hope will justify the recent AI-driven rally. We’re four weeks away from the next meeting of the Federal Open Market Committee, which will again consider changes in monetary policy. Yet, the VIX is creeping higher – trading above 16 this morning – as traders worry that the central bank may actually do what it’s been saying – keep rates higher for longer. The dollar index is trading near 104.0 this morning. Yields on 10-year Treasuries are trading near 4.27%, while yields on 2-year Treasuries are trading near 4.60%. Crude oil prices are mixed as traders worry about sustained interest rates, while grain and oilseed prices are mostly lower following yesterday’s gains.
China’s stock market pushed higher for the sixth day in a row today, as the government steps up its efforts to turn the economy around. Today’s strength follows yesterday’s move to cut mortgage loan rates by 25 basis points in an effort to jumpstart the property market in China. However, much of today’s strength was credited to buying by state-run funds that were active buyers during the session. Regulators held over 10 meetings with major market investors over the past two days to convince them that the government is serious about turning the economy around. The Chinese government is also cracking down on short selling of stocks, as well as quant trading, which it blames for some of the sharp selloff days in the past. All of this raises questions about the sustainability of the current rally – whether it’s actually based on fundamental strength in the economy?
Local governments released a list of 1,591 projects worth 1.98 trillion yuan that they are seeking private funds to jumpstart, which they hope will generate further economic activity. It’s not unusual for government entities to release this list, but the release came early this year due to the need to energize the economy. Yet, the business sector of China’s economy continues to struggle amid weak consumer demand. Furthermore, we’ve seen a significant selloff in DCE iron ore futures in recent days, declining more than 6% this week, in what is seen as a “buy the rumor-sell the fact move. Yesterday’s rate cut was seen by traders as confirmation that fundamental demand remains weak.
Saturday will market the two-year anniversary of Russia’s invasion of Ukraine, and we appear to be no closer to resolving the conflict. China is vested in Russia not losing the war, and the West is vested in Ukraine not losing. But nobody seems committed to winning the war. History teaches us that such wars continue to slowly escalate as the powers that support each side slowly escalate the scale of weapons provided to the side that they support, slowly raising the stakes. From a commodities point of view, the Black Sea remains a major exporter of food and energy commodities. Ukraine’s commodity exports are largely food grains. They were initially shut down, resulting in a surge in global food prices, before the Black Sea Grain Initiative allowed controlled shipments of grain out of Ukraine ports. They shut down again when Russia withdrew from the initiative last summer, but Ukraine found another way to export, bringing shipments back to nearly pre-war levels. Ukraine has done little to slow Russian exports of energy and/or wheat – at least until recently. It recently stepped up attacks on oil refinery capacity deep inside of Russia to reduce the supply of fuel for Russia’s war effort, which could also negatively impact supplies for Russia’s grain production. Thus far, both sides have largely avoided direct attacks on civilian ships transporting energy and/or food grain export shipments. The odds of such are still considered relatively low, as neither side wants to be seen by the world community as that nation that would attack the world’s private food and energy supply. However, the risk of such also continues to slowly creep higher as each side becomes increasingly frustrated with the lingering war – seeking some way to flip the tide in their favor. Geopolitical risks in the Red Sea impact the transportation of commodities, but such a development in the Black Sea would impact supply. That would be more of a game-changer, should it happen.
Rumors circulated through China’s soybean industry today that China may be on the cusp of releasing 1 million metric tons of reserve soybeans onto the cash market. The rumor could not be confirmed, but it pressured the DCE soybean market today. Chinese soybean imports are expected to drop 4 mmt below year ago levels in the first quarter, based on shipping commitments, which may provide justification for the release of reserve soybeans. If true, it would mean that China may need to make a downward adjustment to its soybean import forecast – mainly from Brazil – which could pressure Brazilian basis during the current harvest period. Meanwhile, debate continues in Brazil over why USDA only lowered its production estimate by 1 mmt to 156 mmt in its February WASDE report amid reports of low yields due to adverse weather in Center-West Brazil? Much of the chatter regards indications from satellite data that the area planted to soybeans may have expanded faster than previously believed in recent years, meaning that the current production potential is greater than believed, even at lower yields. This might help explain why previous year’s production has been revised upward, and why the cash market is so weak currently, showing no indication of concern over low supplies.
