January 3 – Stock futures bounced following yesterday’s selloff, as the dollar pulled back from yesterday’s 25-month high, while Treasury yields did the same. Yet, traders continue to monitor declining markets in China, where government officials are fighting an uphill battle to win the confidence of the consumer. The VIX is trading near 17 this morning, while the dollar index pulls back to trade near 109.0. Yields on 10-year Treasuries are trading near 4.56%, while yields on 2-year Treasuries are trading near 4.24%. Crude oil prices are modestly higher as they consolidate just below yesterday’s 11-week highs, while the grain and oilseed sector is mostly weaker today.
Active selling was again the feature for China’s stock market today, with the Shanghai composite index down another 1.57%, and the Shenzhen composite index down by 1.89%, following big losses on Thursday. Consumer-related stocks led the selloff today, with the composite index tracking Chinese retailers published by WIND falling by more than 6.44% today. The past two days of selling come after President Xi Jinping addressed the nation via television earlier in the week, stating that all is well with the Chinese economy, and promising to do whatever was necessary to make sure that remains the case. Yet, investors are not happy with the year-end performance of consumer related indicators. The market is pushing Xi toward even greater stimulus measures, which are pushing the yuan to its preset limits of weakness versus the dollar, raising questions about whether authorities will be forced to allow the yuan to weaken further.
It’s not a good week for President Xi Jinping. The markets responded negatively to his national address, resulting in even more consumer anxiety. Year-end economic data suggests that the massive stimulus done thus far – at the expense of expanding government debt – has only scratched the surface at turning around the economy. The yuan is weakening at a time when he wants it to be seen as a strong alternative to the dollar. Government debt is growing, and he’s only seeing limited results from the investment. And in a few weeks, President-Elect Donald Trump is expected to put more tariffs on Chinese consumer goods being shipped to the United States. He knows that negotiations will need to occur. He’d like to be negotiating from a position of strength, but right now the opposite is true. And so, he finds himself needing to accumulate some bargaining chips. Today China announced fresh export bans on 28 American companies, including Raytheon, Boeing, and Lockheed Martin, while it also tightened export controls on battery technology. That though was followed by President Joe Biden proposing a ban targeting Chinese produced drones, which account for a large portion of the drones sold in the United States.
China’s yuan hit a fresh 14-month low versus the dollar today amid worries about its economic problems and expectations for more rate cuts to stimulate the economy. China is expected to allow local governments to increase issuance of special bonds to 4.7 trillion yuan this year, up from 3.9 trillion in 2024, which could push the overall budget deficit to 13 trillion yuan, or 9 – 10% of gross domestic product. Xi also gave government workers who are loyal to him a surprise pay increase this week, seeking to lock down that loyalty while also stimulating consumer spending. Yet that also increases the money supply, which is also bearish the yuan. China’s central bank indicated that it is likely to cut interest rates from the current level of 1.5% “at an appropriate time” later this year, according to the Financial Times. China’s central bank controls a band within which the yuan can trade. The band currently allows the yuan to trade as low as 7.3316 to the dollar. It is currently trading at 7.3190 to the dollar, versus 7.2994 yesterday. A weaker yuan makes imports of U.S. commodities more expensive, but it also helps offset the costs of potential tariffs that might be imposed by Trump on goods coming from China to the United States.
Today is also a big day for the incoming Trump Administration. The U.S. House of Representatives will vote on whether to keep Mike Johnson as Speaker of the House. He cannot lose another vote, or it could turn into another weeks-long battle to secure a new leader. That could delay certification of the 2024 election, while also delay work on the U.S. debt ceiling issue, as well as delay the start of work on the aggressive Trump agenda. As such, Trump is campaigning to get all Republican votes behind Johnson, but it is yet unclear whether he has the votes.
Grain and oilseed prices pulled back overnight in active farmer selling – on both sides of the equator. The strong dollar adds additional headwinds for these commodities, although crude oil continues to push higher. A surge of Arctic air into the heart of America over the coming days will increase heating demand, while ice and snow snarl transportation. Livestock performance will decline, while near-term movement of grain will likely decline as well. Argentina and southern Brazil continue to dry out, although good rains prior to this dry stretch are carrying crops for the time being. Nonetheless, traders are taking notice of the expanding dryness.
