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Perspective: Morning Commentary for July 8

By: Arlan Suderman, Chief Commodities Economist

July 8 – President Trump declared the ceasefire effectively over late Tuesday, sending stock futures lower, while food and energy commodity prices rose, along with Treasury yields. Stock futures remain notably lower this morning, while the VIX is trading near 17 and the dollar index trades near 101.2. Yields on 10-year Treasuries are trading near 4.57%, while yields on 2-year Treasuries are trading near 4.20%. WTI crude oil prices are currently trading near $74 per barrel, while Brent trades near $78 per barrel. The grain and oilseed markets also pushed higher overnight, although corn prices encountered enough selling of the rally to keep a lid on gains.

The United States military launched a wave of strikes against Iran late Tuesday, while also revoking its waiver that allowed Iran to sell oil on the world market. Shortly thereafter, President Trump told reporters at the NATO conference in Turkey that the ceasefire was effectively over. The actions and comments were a response to three Iranian strikes on ships in the Strait of Hormuz over the previous 24 hours. Iran had “poked the bear” one too many times. But again, this fits within Iran’s strategy. It would like to see President Trump lose Congress and therefore his authorization for utilizing troops in the Middle East – in their eyes – due to high gas prices. The intent of the Revolutionary Guard was likely to create enough disruption to send energy prices higher without going so far as to unleash the full wrath of the U.S. military, knowing that President Trump wanted to keep gas prices lower ahead of the midterm elections. The problem for Iran is that their disruptive strikes were not moving the needle on energy prices. Instead, gas prices were trending lower, with crude oil prices already at pre-war levels. Larger strikes were needed to re-energize the energy markets, but that also triggered a larger response from the U.S. military than Iran wanted or probably expected. The question now is, how will Iran respond?

President Trump stated that he will allow the negotiations to continue, although he indicated that he thought that “they’re wasting their time” doing so. Nonetheless, I expect Iran to make statements to indicate that they want to negotiate, and that this problem is all the fault of the United States. First, I believe that Iran fully believes that it is the fault of the United States, and second, it wants to impact public opinion. It wants to impact the opinion of world leaders, and it wants to impact the opinion of U.S. voters that can impact the midterm elections in November. President Trump on the other hand will be making statements for similar reasons. The markets will be focused on the resulting impact on commerce. My check of the monitor this morning indicated that ships are still moving through the Strait of Hormuz, albeit at a slower pace. Nonetheless, the market reaction will remain somewhat limited if the United States is able to make ships feel secure enough to pass through the Strait. That is yet to be seen, although there are some indications this morning that some level of commerce will continue to move through the Strait.

Greenland was back in the news as well on Tuesday, as President Trump renewed calls for U.S. control of Greenland for strategic defense purposes. He pointed to increased Russian and Chinese activity in the Arctic region, but that hits close to home for some European NATO members. First, Denmark resents comments that it is incapable of defending Greenland, and second, Germany is participating with China in some of its research missions in the Arctic circle. Greenland is considered to be strategic for defending both the United States and Europe from intercontinental ballistic missile attacks by China and/or Russia. The U.S. already has a strategically significant Pituffik Space Base in northwestern Greenland for space surveillance and missile warnings. We’ve also began construction on the first of the U.S. Coast Guard’s new Arctic Security Cutters in Finland after Congress approved a fleet of 11 Arctic Security Cutters as the United States rushes to catch up with current Chinese and Russian activity in the Arctic.

USDA confirmed this morning that China purchased 17.3 million bushels of U.S. soybeans this week, which fits well within the cash market reports that it had purchased 5 to 10 cargoes. Of the total, 5 million bushels of the purchase was for delivery in the current marketing year, which was a bit surprising, while the remainder is for delivery in the new marketing year that begins on September 1. There are also rumors that China bought a few more cargoes overnight that may not be included in the above. These purchases are not a surprise to us. China committed to buying 25 mmt (919 million bushels) of U.S. soybeans in the next marketing year. I don’t expect them to import the entire total, but the rumor inside of China is that it will import 15 mmt by December 31, when it will know the results of the midterm elections. As such, it should be making regular purchases going forward toward that end. That will make soybean bears nervous, especially if weather threats emerge. The European weather model continues to raise heat risks, while Commodity Weather Group discounts that risk. Yet, traders will remain nervous until we see how the weather pattern in this El Nino year actually plays out.     

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