January 29 – Both stock futures and commodity prices faced modest headwinds this morning as traders weigh the failure of Chinese property giant Evergrande Group against the death of three U.S. service members and an attack on a fuel tanker in the Red Sea that could escalate the war in the Middle East. And, of course, this is Fed week, with Wall Street bracing for what the Federal Reserve may say about future monetary policy when it meets on Tuesday and Wednesday of this week. The VIX is trading near 14 this morning, reflecting the heightened nerves on Wall Street, while the dollar index is firmer at 103.7. Yields on 10-year Treasuries are trading near 4.11%, while yields on 2-year Treasuries are trading near 4.34%. Crude oil prices are trading roughly 1% weaker this morning, after trading to fresh eight-week highs above $79 per barrel earlier in the session, while the grain and oilseed complex traded mostly lower overnight on concerns of deteriorating Chinese demand in the months ahead.
A Hong Kong court today ordered Chinese property giant Evergande Group to liquidate its assets to pay off creditors, further destabilizing the Chinese property market. The company, which reportedly has more than $300 billion in total liabilities, has been unable to reach a restructuring agreement with its creditors after a year and a half of negotiations. The primary question now is, will China’s Mainland courts recognize the decision handed down by the Hong Kong court? If not, we continue in limbo over the issue. If so, it dumps a lot of property on an already depressed market, while delaying completion of some 1,200 projects spread across China. Downward pressure on the property market due to the liquidation could push other struggling property firms into liquidation as well. Evergrande’s chief executive Siu Shawn spun the story in a positive light, while speaking with Chinese media, saying this will begin a long process of restructuring and liquidation that will not affect its operations, but today’s ruling did little to restore confidence in the Chinese economy.
A drone strike killed three U.S. service members today in Jordan, creating fears of an escalating regional war in the Middle East. The strike by Iran-backed militants wounded at least 34 other service members. Iran denies involvement, but it’s widely believed that Iran is involved in the dozens of attacks on U.S. forces in recent months, with today’s fatalities bound to raise political pressure on the Biden Administration to have a strong response in an election year. U.S. forces have been attacked by Iran-backed groups more than 150 times since the Middle East war began October 7th, but this is the first that a strike resulted in deaths of U.S. service members. U.S. warships have been fired at by Iran-backed Houthi forces in the Red Sea, triggering U.S. strikes on Houthi positions in Yemen, but this now risks a broader conflict that could put energy shipments and infrastructure at greater risk. In fact, firefighters had to put out a fire on a tanker in the Red Sea attacked by Houthi’s over the weekend.
The Federal Reserve will meet on Tuesday and Wednesday this week to discuss potential changes to its monetary policy. No changes are expected at this week’s meeting, but Wall Street hopes that the Fed will signal that changes are coming. Fed fund futures are currently trading roughly 50-50 odds of the first rate cut coming in March. I still do not see that happening, especially after seeing economic data of the past 10 days or so showing renewed strength in the shelter sector, as well as resiliency in the labor market. We’ll also see more data on the latter when the monthly jobs report is released on Friday of this week. Nonetheless, Wednesday’s Fed statement could create additional volatility in the markets this week.
The commodity sector faces notable headwinds to start the week, led by the news out of China. Middle East geopolitical risks offset those headwinds to some extent for the energy sector, but much less so for the grain and oilseed sector. The grain and oilseed sector otherwise lacks fresh fundamental direction. We should see updated production estimates coming out of Brazil this week, including our updated StoneX Brazil customers survey production estimates on Thursday. There are few indications at this point that the updated production estimates will drop enough to change the market dynamics. Meanwhile, Argentine production estimates are rising to further offset losses in Brazil. The focus will soon shift to the U.S. Midwest planting season. Corn must loses acres this year to avoid a ballooning balance sheet. Some analysts are proclaiming that soybeans must gain acres to avoid being tight in the year ahead. I do expect soybeans to gain acres, and corn to lose some, but I disagree that soybeans “must” gain acres. Such a position would be based on an assumption that Brazil will not expand production again next year and/or that it will have a significant weather event next year. We can’t assume either at this point.
