Perspective: Morning Commentary for February 23

By: Arlan Suderman, Chief Commodities Economist

Wed, 23 Feb 2022, 14:34

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 23 – Russia’s attack on Ukraine remains the primary focus on Wall Street this morning, although we’re seeing an evolution in how that plays out in the markets. Stock futures traded modestly higher this morning, with the VIX slipping lower to trade near 28. The dollar index is trading near 95.9, with yields on 10-year Treasuries rising to trade near 1.97%, as money slowly emerges again from the safe-haven assets. Crude oil prices were modestly lower, while the Ags traded mixed to mostly higher.

The primary question now is, how far will Russian President Putin go? Putin has already moved troops into areas of eastern Ukraine that were already held by Russian-backed rebels. It’s anticipated that he will quickly extend his troops to possess the two states that contain these rebel-held areas. He’s found relatively small resistance from Ukraine troops to this point, because his troops have not yet reached the areas where most of Ukraine’s troops are positioned. President Putin has positioned troops, equipment, and blood supplies in strategic locations to suggest that he is prepared to move much deeper into Ukraine – possibly as far as the capital, or possibly all the way to Ukraine’s western border with Poland and several other NATO member nations. That’s where the United States is positioning troops because we have a commitment to protect NATO members. We have no choice but to defend these nations, although Putin will likely use that to his advantage to spin the situation at home, calling it Western aggression to justify moving troops closer to these NATO nations. That’s where the risks grow considerably higher that something previously unintended could occur.

Stocks have rallied before in times of war, but Wall Street to this point has largely been trading the uncertainty of war. Those uncertainties start to gain greater clarity as we get deeper into the conflict. Wall Street traders want to know how the conflict in Ukraine will impact the U.S. economy. Part of that depends on the sanctions that President Biden chooses to put on Russia, and part of it depends on the impact of counter sanctions inflicted on us by Putin. The Biden Administration has already warned Americans that we can expect higher energy prices, which can be detrimental to the economy. But there are also many other strong fundamentals to the economy that should keep it functioning, which is why Wall Street shows easing concerns this morning. The ebb and flow of those emotions will likely continue as Wall Street gains confidence in how the conflict in Ukraine will impact us here in America, although some of that will also be influenced by how our trading partners in Europe are impacted.

It’s a different story for the commodities. The global supply and demand of key commodities is directly impacted by the conflict in the Black Sea Region. A significant portion of the world’s crude oil, natural gas, fertilizer, wheat, corn, sunflower oil, etc. are at risk of being removed from the global market. The extent of the impact is not yet known, so few speculative traders want to risk being short those commodities most likely to be impacted. No one wants to be caught on the wrong side of this crisis when it comes to owning these commodities. Most of these commodities already have significant risk premium priced into their values, with prices consolidating overnight as traders wait for Putin’s next move on the chess board. So far, we’ve seen little to shut off crude oil or natural gas coming from the region. In other words, the pipelines are largely still functioning. But much of the wheat and corn exported from the region must travel through these disputed areas to ports on the Black Sea, where buyers are worried about Russian naval exercises currently occurring. Actual trade can be shut off, or buyers and shipping firms may simply not want to take the risk of depending on supplies from the region, effectively tightening global supplies available to the market.

But keep your eye on soybeans. Very few soybeans are exported from the Black Sea Region, relative to global trade. But they have also been strong in recent days, and they posted double-digit gains again overnight. Cash basis bids are surging higher in Brazil as strong domestic crush margins set up an intense battle between processors and exporters for a limited supply of soybeans. U.S. soybeans at Gulf ports are 30+ cents cheaper than Brazilian supplies from March forward, indicating that we should expect to see an increase in inquiries for U.S. supplies from China and other customers. Production losses continue to grow in South America, and the world has begun a rationing process as it tries to reallocate available Western Hemisphere supplies. The fact that we have a war in Ukraine and inflation at home helps highlight the opportunities at hand for fund managers, adding to the price volatility. Strength in soybeans then means that new-crop corn prices must defend acreage for the feed grain.

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