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By: Arlan Suderman, Chief Commodities Economist
May 22 – Investors are looking at a three-day holiday weekend as they approach today’s markets, which will be closed for the Memorial Day holiday on Monday. That presents its own set of risks as headlines out of the Middle East continue through the weekend at a time when the markets will be closed. As such, we’ll see some position squaring today with an eye to that risk. That said, we enter into today’s trade with Dow futures reflecting expectations for a record high ahead of the weekend, with the S&P and the Nasdaq not far behind amid a flurry of positive economic data in recent weeks, along with strong earnings reports. The VIX is trading below 17 this morning, while the dollar index trades near 99.3. Yields on 10-year Treasuries are trading near 4.53%, while yields on 2-year Treasuries are trading near 4.06%. WTI crude oil is trading near $96 per barrel, while Brent trades near $103 per barrel. Wheat prices posted modest losses as Black Sea wheat prices itself into Western Hemisphere markets, while corn and soybean prices post modest gains ahead of the holiday weekend.
A peace agreement is near before it falls apart, only to be revived again in the next headline. Equity traders are developing headline fatigue, while those same headlines seem to still be driving Algo trading activity in the commodity sector – especially for the energy and food-based commodities. The latest headline is that the Pakastani Army Chief is on his way to Tehran with a worked-out peace treaty proposal, after he previously cancelled another planned trip just days ago as talks seemed to fall apart. Part of this is due to questions of leadership in Iran – we don’t know if the stated leader in Iran is even alive, leaving questions over who is calling the shots there. Part of this is due to the tremendous distrust between the two sides. But there’s also the strategy of Strategic Delay.
We don’t know who specifically is calling the shots in Iran, but it is clear that the Revolutionary Guard is running the country and running the war effort. The Revolutionary Guard is not up for election, and it controls the messaging both within and what flows out of Iran. On the other hand, democracy allows open expression by all sides. Leaders face regular election risks, along with criticism by their opponents throughout the election cycle. Ultimately, an elected leader is accountable to the people, whether the President of the United States, a member of Congress, or even a locally elected official. Our press is allowed to report the good, the bad, and all the criticisms expressed. That’s the ugly part of democracy that we fight to defend. Iranian leaders monitor that press and the opposition here in the United States, along with reported public sentiment regarding the current situation.
The Revolutionary Guard believes that it can out-last President Trump if it can delay things long enough. As such, they approach the negotiations with a strategy of giving the appearance of wanting to negotiate a deal, even allowing progress toward a deal from time to time to keep people thinking that they’re serious about it. Then they pull the rug out from under the negotiations at the last minute to keep the process going. That keeps pressure on President Trump not to attack Iran again, because that would “undermine the negotiations,” while strategically keeping the delay in place. The Revolutionary Guard’s goal is to delay things long enough to see President Trump’s power undermined so that he has to withdraw our military forces, allowing the Revolutionary Guard to survive. That allows it then to frame a message that it was able to stand up to the United States and “win,” supporting its global recruiting efforts. Even if it agrees to a peace agreement to buy more time, I do not expect it to live by the agreement, since its commitment to destroy Israel and the United States is at the level of a religious conviction.
It is my sense that this decades-long conflict is at a pivotal decision point. There are only two options facing the West at this point. We either go forward with the understanding that Iran will be a nuclear power, with all that implies, or we must be willing to pay the price of removing that option as a possibility. That would likely necessitate the use of ground troops. Iran understands the above as well. It is betting that the West does not have the intestinal fortitude to pay that price. And that is why it believes that its best strategy is one of Strategic Delay. And that means that we will not likely see the Strait of Hormuz open for free-flowing commerce any time soon, which will continue to build up longer-term deficits of energy and fertilizer.
The markets priced in the immediate fear of energy and fertilizer shortages, but the next phase is the realization that things “aren’t as bad as feared,” yet. The current sense of relief in the energy markets is largely due to the fact that we’ve been living off of floating storage and strategic reserves, along with some demand rationing. But the real shortages will eventually come. From the start, we said that the bigger fertilizer story will be with the global 2027 food crops, since the war started after much of the needed inventories were in place for Northern Hemisphere crops. We’re likely seeing some reduced application this year, but next year will be the bigger test, if this continues.
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