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Perspective: Morning Commentary for June 16

By: Arlan Suderman, Chief Commodities Economist

Today's Perspective Video: Iran Peace Deal Sends Commodities Initially Lower. Is the Market Missing the Real Risk?

June 16 – Stock futures traded quietly mixed overnight as investors focus on this week’s meeting of the Federal Open Market Committee – the first to be chaired by Kevin Warsh – and as traders monitor the anticipated move toward peace in the Middle East. The VIX is again trading near 16 this morning, while the dollar index trades near 99.6. Yields on 10-year Treasuries are trading near 4.45%, while yields on 2-year Treasuries are trading near 4.06%. Energy prices continued their slide on the move toward an anticipated reopening of the Strait of Hormuz, with WTI crude oil trading below $78 this morning, while Brent trades near $80 per barrel. The grain and oilseed sector was generally weaker as well, with the exception of a bounce in Chicago wheat prices due to adverse weather impacting production in Europe.  

Call it a peace deal, memorandum of understanding, interim deal, or whatever – Wall Street sees the current development as an end to hostilities and a reopening of the Strait of Hormuz. Investors care little about what it is – only that it results in the resumption in the movement in crude oil and other energy products on which the global economy runs. Energy prices are coming down, and with that inflation fears are easing, and the economy is humming. It’s not that simple, but we live in a world where billions of dollars slosh around based on these big picture views. Eventually, each market will do its job of managing supply and demand based on that market’s specific fundamentals within the context of this big picture. But for now, the markets are going through a fundamental shift in money flow dynamics based on an assumption that the news cycle will be shifting its emphasis in the days ahead. That’s currently pulling money from the commodities, with increased emphasis on the equities and a current focus on SpaceX.

The active part of this war with Iran comes to an end with Iran’s formal navy and air force in ruins, but without defeating the combatants within a martyr culture that prefers to strike soft targets via terrorism. It’s nuclear program has likely been set back for decades, but the seeds of contempt are still there. This is not a defeat of an ideology such as we saw when Japan fell in World War II, but rather a setback in a war that had its beginnings several thousand years ago. The ideology lives on. Yet, the war has fundamentally reshaped global priorities, with many countries looking to see how they can reduce their dependency on products moving through the Strait of Hormuz in the future. For now, tankers are starting to move out of the Persian Gulf, and other tankers and freight carriers are starting to line up to enter the region. The lingering effects of the war will be felt on the global energy and fertilizer balance sheets for several years. The risk of the war reigniting will be continually with us, for that’s been the nature of this conflict through the centuries. But for now, Wall Street money flow is moving on to the next story.

China’s retail sales fell more than expected in May, contracting 0.6% versus the previous year and marking the first decline in retail sales since the post-pandemic reopening in 2022. The drop in sales intensified across most major consumer categories, with major big-ticket items suffering double-digit losses. Auto sales dropped 16.1% year-on-year in May, after dropping 15.3% in April. Home appliance sales contracted by 15.6% year-on-year in May, while furniture sales dropped 8.7%. Electronic sales grew by 0.7% on the year, but that’s down from 6.2% growth previously. That is an area that had previously been supported by 15 – 20% government subsidies. Catering revenue grew at 0.6% on the year in May, but that was down from 2.2% growth in April. This slow down in retail sales comes despite a moderate increase in inflation, which may require the government to increase stimulus efforts even more to keep China’s economy propped up. Meanwhile, China’s property sector, which is where the typical consumer has his/her wealth, continues to suffer. New home sales dropped by another 10.8%. The bright spot has been industrial output, up 4.5% on the year in May, as export demand for things like electric cars surged amid the recent global energy crisis.

The above-mentioned money flow rotation comes at a time when the grain and oilseeds seasonally tend to see fund managers build short positions in the sector in the absence of a Midwest weather problem. Emerging concerns of heat and drought in France and parts of Germany helped provide a lift for Chicago soft red winter wheat prices overnight, but the grain and oilseed sector otherwise came under pressure overnight. Value buyers entered the market during Monday’s session to buy the recent price break. Since then we received USDA’s weekly crop ratings, showing general improvement for corn, soybean and wheat crop ratings, with a generally favorable weather forecast going forward. Fund managers lack a story near-term to build ownership again. End users have incentive to take advantage of the recent price break, but they thus far lack incentive to chase the market higher, particularly for corn and soybeans. This is a pivotal week to determine whether prices can build a base of support here.       

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Perspective: Morning Commentary for June 16

June 16 – Stock futures traded quietly mixed overnight as investors focus on this week’s meeting of the Federal Open Market Committee – the first to be chaired by Kevin Warsh – and as traders monitor the anticipated move toward peace in the Middle East. The VIX is again trading near 16 this morning, while the dollar index trades near 99.6. Yields on 10-year Treasuries are trading near 4.45%, while yields on 2-year Treasuries are trading near 4.06%. Energy prices continued their slide on the move toward an anticipated reopening of the Strait of Hormuz, with WTI crude oil trading below $78 this morning, while Brent trades near $80 per barrel. The grain and oilseed sector was generally weaker as well, with the exception of a bounce in Chicago wheat prices due to adverse weather impacting production in Europe.

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Arlan Suderman
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  • Coffee
  • Cotton
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  • Meats & Livestock
  • Forest Products

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