Perspective: Morning Commentary for February 8

By: Arlan Suderman, Chief Commodities Economist

Tue, 08 Feb 2022, 14:32

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 8 – Stock futures were mixed early this morning on a disappointing earnings report from Pfizer, combined with rising nerves over Thursday’s anticipated inflation data. The general weakness spread across much of the equity and commodity sectors. The VIX is trading near 23 this morning, so the fear index hasn’t changed much, but there is a bit more caution in the air. The dollar index firmed to trade near 95.6 as yields on 10-year Treasuries hit new two-year highs near 1.96% ahead of Thursday’s consumer price index release. Crude oil prices are down by more than 1% this morning, with similar losses seen in the Ags as well in early trade. The Ags have seen significant gains in recent days on geopolitical and weather risks, but they face USDA WASDE report risks tomorrow, providing some incentive for profit taking, although few speculative traders want to be short at this time.

Diplomacy efforts to avoid a war in Ukraine are stepping up, with diplomats scurrying to avert a crisis, even as Ukraine braces for an insurgency that the U.S. State Department says is imminent. We can all speculate on Russian President Putin’s intentions, but only he knows for sure what they are. One thing that he has had a measured amount of success in doing is to create a divide inside of NATO. It’s yet to be seen whether the split is deep enough to last beyond this crisis, but that in itself would be a massive win for Putin. He very well may be wanting to put the old U.S.S.R. together, but he also fears an invasion from the west, whether justified or not. Putin fears that NATO wants to add Ukraine to its membership so that it can base a military attack from there. He may or may not want to conquer Ukraine, but he does not want NATO in Ukraine. He would see that as an immediate threat to his security, while it would certainly close the door to future annexation to Russia as well. Meanwhile, NATO wants to have some type of close relationship of support for Ukraine to provide a buffer against feared aggression from Russia. The U.K. is sending troops and equipment to provide a deterrent against a Russian invasion, while the French are busy talking in an attempt to diffuse the situation. Germany just doesn’t want Russia to turn off the gas supply, which would be expected to lead to energy shortages across much of Europe. Commodity traders fear a prolonged military conflict that would disrupt trade of wheat, corn, crude oil, fertilizer, sunflower oil, and other products. The next two weeks are likely the most critical in determining the direction of the conflict.

The Iranian nuclear talks resume today, igniting rumors in the energy sector that we may soon see sanctions against Iran lifted, opening the valve for more crude oil to flow onto the global markets. It’s believed that Iran currently has the capacity to add 1 million barrels per day to global supplies. That’s only about 1% of world demand, but that makes a big difference in a just-in-time market that is currently tight. The news hit the markets this week after WTI crude oil prices traded above $93 per barrel on Friday. The rise toward the $100 benchmark has shale oil fields adding crews and rigs to increase output as well. The sector has been reluctant to invest in reopening many areas of the shale oil fields, fearful that OPEC+ would again open the spigot to flood the world with cheaper oil to punish them. However, OPEC+ has struggled to meet its own production targets in recent months, removing that fear. Drilling economics are very attractive currently – perhaps the most attractive that we’ve seen.

Inflation has been a risk to the equities, but it has been good for the commodities – particularly the food-based commodities. We’ll get updated inflation data at the consumer level on Thursday. Data for November and December would have been worse, but moderating energy prices softened the blow. However, WTI crude oil prices rallied by more than 17% during the month of January, and they are up by roughly two-thirds over the past year. As such, the market is bracing for the possibility that we could see the consumer price index rise by 7.3% year-on-year, with the core CPI number up 5.9% year-on-year. Both numbers would be a new high for the move. Previous reports confirming strong inflation created concerns among equity traders about the potential aggressiveness the Fed’s response, with money often times rotating into the commodity sector in the days and weeks that followed.

USDA confirmed another sale of 17 million bushels of soybeans to China and unknown destinations (also believed to be China) this morning. The sale was entirely for new-crop, which makes sense considering the discount of the new-crop bids. Meanwhile, Brazilian farmers continue to be tight-fisted with their soybeans, refusing to sell due to the belief that the crop is short enough to justify higher prices. Brazil export bids are now near U.S. Gulf bids for March and April loadings, and they are above U.S. bids for June and beyond bids. Exporters and domestic crushers are left to fight over available supplies. Near-term however, the focus is on potential surprises from USDA tomorrow.

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