Perspective: Morning Commentary for March 13

By: Arlan Suderman, Chief Commodities Economist

Mon, 13 Mar 2023, 13:39

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 13 – It was a busy weekend in the banking sector as regulators rushed to find solutions to the problems first exposed at Silicon Valley Bank late last week to avoid the contagion risks to the rest of the sector. Their actions initially calmed the markets, but the fears started to emerge again early this morning to pull stocks lower once again, led by selling in Europe, with the VIX pushing higher as well. The VIX – Wall Street’s unofficial fear index – rose to trade at a four-month high just below the pivotal 30 level this morning, and it is currently trading near 29. I’ve observed over the past several decades that it’s difficult for assets to sustain a rally when the VIX is above 30 unless that asset has a strong story – fear levels are simply too high to do otherwise. It’s rare for the VIX to trade above 50, but it has approached 90 a couple of times. The dollar index is trading lower near 103.8 at this hour, after dipping to a four-week low below 103.7 earlier in the session. Yields on 10-year Treasuries are currently trading near 3.47%, after hitting a low near 3.42% - a five-week low. Today’s move represents more than a 50-basis point drop from its recent high of 3.99% on March 2^nd. However, yields on 2-year Treasuries are trading near 4.11%, after falling near 100 basis points in the past several sessions. Commodity prices are also generally under pressure as fear levels rise on Wall Street. We initially saw buying in the crude oil and in the grain and oilseeds when last night’s trading started, but both sectors came under pressure this morning as fear levels increased. In some cases, price movement is thought to have come from liquidating positions in one asset to cover losses in another.

Global banking shares came under pressure this morning after moves made by U.S. regulators and policymakers failed to reassure investors that other banks are financially sound. The focus is primarily on smaller bank risks, but there’s a sense of contagion affecting the banking sector. Fear is a powerful force that can create self-fulfilling risks to the sector. Regulators and policymakers are well aware of this, and they are doing all that they can to reassure investors. Thus far they’ve had limited success. It’s going to be essential to calm investor worries around the world in the days ahead, but the plethora of key economic data coming out this week makes that an even greater challenge. We are scheduled to get the consumer price index data on Tuesday, along with producer price index and retail sales data on Wednesday, followed by a plethora of other reports to end the week. These data points could add calm to the markets, or they could amplify fears. Keep your eyes on the VIX for an indication of fear levels.

Money tends to move to the sideline during times of fear. In some cases, we could see liquidation of positions in commodities in order to pay for losses in other markets. Those liquidated positions might be long or short positions, depending on the specific commodity. In either case, it leads to more volatility in the commodities than what we would anticipate from just supply and demand fundamentals.

Fundamentally, there are factors to monitor that we would expect the markets to trade at some point. Near-term, there continues to be a focus on the grain initiative that allows grain to flow from three Ukrainian ports. The current agreement is set to expire this weekend. Russia says that it has not been involved in any negotiations until today. Turkey, Ukraine, and the United Nations continue to be optimistic that the initiative will be extended. Russia’s language has been much less positive, but then again that’s also a position of negotiation. The markets have removed essentially all of the war risk premium from the grain markets, even though the risks are essentially higher today than they were a year ago. Planting of the 2023 crops will be even more challenging than they were a year ago, with a local industry source stating that Ukraine farmers only have 35% of the crop chemicals they need for putting out crops, let alone the fertilizer, fuel, etc. needed. The world seems to have forgotten its dependence on Ukraine for these food commodities.

Other concerns to keep your eyes on include very late safrinha corn planting in Mato Grosso do Sul and Parana in Brazil that increase production risks, along with still-plummeting corn and soybean production estimates in Argentina. I’ve had questions this morning about a comment in another advisory service newsletter noting that any soybeans bought to refill China’s reserves must come from either Argentina or the United States. That is true. Sinograin believes that higher protein beans store worse than low protein beans, and it believes that soybeans sourced from Argentina and the U.S. Pacific Northwest are lower in protein. That’s truer for Argentine beans than for U.S. soybeans. Nonetheless, perception is reality. Local experts in China have been encouraging Sinograin to buy Brazilian soybeans for its reserves, but thus far it does not appear that they have done so. Here in the States, persistent wetness in the Mid-South may also reduce corn acres in the region, while the same can be said for the Northern Plains due to heavy snowpack in that region. Neither of those issues though will be apparent in the March 31 planting intentions survey results, due to the earliness of the survey. Again, other than the grain initiative, I think most of the focus this week will be on the headline risks created by the current banking sector fears combined with this week’s economic data.

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