June 6 – Stock futures came under modest pressure overnight as traders braced for next week’s meeting of the Federal Open Market Committee that will revisit its monetary policy for the U.S. economy. Yet, the VIX continued to trade below 15 this morning, reflecting little in the way of fear on Wall Street. The dollar index is trading firmer near 104.3 this morning as Treasury yields rise. Yields on 10-year Treasuries are trading near 3.71%, while yields on 2-year Treasuries are trading near 4.51%. Crude oil prices are down by 2% this morning, after the market removed all of the premium originally put into the market following the OPEC+ announcement this weekend of more cuts to output. Grain and oilseed prices traded higher overnight on increased Black Sea risks and lower U.S. crop ratings.
Economic challenges continue to build for China. Tech giant Alibaba reportedly cut worker pay last week, garnering a lot of attention from the public that raised fears about additional problems for the economy. China’s top financial firm CITIC Securities is believed to have lowered the base salary of workers at its investment bank division by 10-15%. This comes following reports earlier this year about large Chinese financial firms sharply cutting annual bonuses by 30-50%. Rising concerns among the public tends to limit consumer spending, adding to problems for China’s economy. I’ve previously reported widespread rumors of local governments facing revenue problems due to the poor property market in China, which is a major source of their revenue. Some local governments are said to have trouble paying debt obligations, although the central government continues to say that it will back the local governments. Default is less likely, but the financial difficulties reduce the odds that we’ll see fiscal stimulus.
Observers believe that sprout damage may have claimed 10 million metric tons of China’s wheat harvest this year, with the damaged wheat flooding the feed grain market displacing corn in rations, while also displacing some soymeal. Earlier reports suggested that 20 mmt of wheat may have been damaged, but the price increase for milling wheat came to a halt today after rallying to $393 per mt, suggesting that perhaps the overall severity of the problem may not be as bad as once feared.
A catastrophic breach of a dam occurred in southern Ukraine hours ago that sent a surge of water downstream threatening villages in the flood plain below. The dam stood 30 meters tall, while being 3.2 kilometers in length. The reservoir served to provide water to Zaporizhzhia - Europe’s largest nuclear facility – currently under Russian control, while it also provided a controlled source of water to the Russian-occupied Crimean Peninsula. Russia blamed Ukraine for the breach, while Ukraine blamed Russia, although it’s entirely possible that the Soviet-era dam simply failed under pressure of rising waters following recent persistent rains. The dam’s loss creates yet another humanitarian disaster in the war-torn country, while also changing the front lines of the battle as Ukraine finally unleashes its long-awaited counteroffensive designed to drive Russian troops from its territory. Russia took control of the dam early in the war, although Ukrainian forces had recaptured the north side of the river last year. Both sides have repeatedly accused the other of planning to destroy it. U.N. nuclear observers indicate that they believe the Zaporizhzhia power plant should still have enough water to cool its reactors for “some months” by utilizing a separate pond located above the reservoir.
Inspections of ships passing through the “safe corridor” to and from Ukraine ports has resumed, but at a slow dysfunctional pace. Russian inspectors are required to inspect ships in the order that they come, but the first ships that they inspected reportedly had just shown up, Yet, they were pushed ahead of the 56 ships that had been waiting for some days and weeks. Yesterday’s inspection plan monitored by the Joint Coordination Center called for nine inspections, with three ships destined for the approved Ukraine ports and six departing. Yet, just half of the ships were inspected. The average daily inspection rate for May was just three ships per day, with the backlog of ships now standing at 67, with 58 of those wanting to enter Ukraine ports for loading, while the other nine are already loaded and wanting to depart for their final destination. Russia also continues to block any ships from entering the Port of Pivdenny, the largest of the three approved Ukrainian ports, which is a direct violation of the agreement. Russia previously informed the United Nations that it would not allow any ships to take grain from the Port of Pivdenny until Ukraine allows Russian ammonia to flow through pipelines that pass through its territory to ports for export.
U.S. corn and soybean crop ratings came in below expectations Monday afternoon, supporting prices overnight, with wheat also garnering support from a smaller expected Australian crop and increased geopolitical risks in the Black Sea. But gains continue to be capped by farmer selling in both Brazil and the United States, with additional pressure coming from the forecasts that continue to advance the anticipated pivot in the weather pattern. We will not likely see a sudden shift to ample moisture, but the favorable change in rainfall chances continues to develop for the coming week.
