Perspective: Morning Commentary for November 25

By: Arlan Suderman, Chief Commodities Economist

Fri, 25 Nov 2022, 14:43

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 25 – A limited number of traders return for what is expected to be a short, low-volume trading day today. Stock futures are mixed heading into the session that will end early to allow traders to resume their holiday festivities. The VIX is trading below 21 this morning, near its lowest level in three months, reflecting easing fears on Wall Street. The dollar index firmed this morning to trade near 106.4. Yields on 10-year Treasuries are trading near 3.73%, while yields on 2-year Treasuries are trading near 4.50%, putting the inversion at its widest level in more than two decades. That doesn’t cause a recession, but that it reflects the market’s expectation that there will be a recession over the coming year. Crude oil prices are modestly higher to start trade today, while the grain and oilseed markets opened steady to firm. The Chicago traded grain and oilseed markets will close at 12:05 p.m. Chicago time today.

Covid numbers continue to rise in China, resulting in broader restrictions and lockdowns that cover areas responsible for a fifth of China’s annual gross domestic product. The daily total of new infections rose to 32,695 cases, which now exceeds the peak of last spring’s outbreak that resulted in the lockdown of Beijing and Shanghai. The portion of new infections that are asymptomatic has been running at better than 90% of the cases, although there have been a few deaths. Authorities are trying to limit restrictions and lockdowns to specific areas where infections are occurring, but the areas impacted are quickly spreading to include many areas of mega cities including Guangzhou, Beijing, Shanghai, and Chongqing. China’s greatest fear is the massive population of older residents who largely have shunned China’s vaccine. China has an inverted age demographic with a large number of elderly people that are supported by a smaller number of young people. That creates challenges for its economy longer-term, but currently it presents greater challenges for managing Covid.

China has a challenge. Communism is built on central control and monitoring of everyone and everything. It believes that it can effectively control everything. The latest variants of Covid though have created a challenge for authorities. It spreads fast and undetectable among a large percentage of people who are asymptomatic. People in some areas are at their breaking point – tired of the continuous testing and restrictions. Video has leaked out of mass demonstrations of people attacking and destroying testing stations. We’ve previously written of a massive breakout from the Foxconn facilities where Apple iPhones are made, with people climbing fences to flee the factory fearing they’ll be forcibly quarantined there. iPhone production dropped, and Apple is reported to be shifting production to India and Vietnam to get away from these problems. Other companies are making similar moves. China’s dynamic-zero Covid policy will have long-term adverse impacts on its ability to support its economy amid an aging population. President Xi Jinping knows that he has a longer-term problem here that could threaten his dream of Chinese superiority. That is another reason why I believe his focus in the coming months and years will be to expand China’s area of influence via its Belt and Road program, and even militarily in Taiwan.

Winter is setting in over Ukraine, where half of Kyiv is dark tonight due to the latest round of Russian missile attacks on infrastructure across the country. It will be a long-hard winter as the war lingers – even intensifies. The war isn’t so much on the ground now, as it is in the air. Russia troops are losing the ground battles, but missile and drone attacks continue to destroy water and electricity infrastructure seeking to break the will of the Ukrainian people. Ukraine reports that most of the winter crops are planted, with area down by roughly 40% versus the previous year. Most summer crops are harvested, with the exception of corn. Roughly half the corn remains in the field as winter sets in. Authorities fear that corn not harvested will result in lower plantings in 2023 as well. The global markets are seeking to shift that production elsewhere, with the most obvious winner being Brazil. Current prices provide incentive for expansion of corn and soybean production in Brazil, which still has significant brushland that can be converted to cropping without touching the rainforests. Ukraine is still producing enough to feed its people – those who have stayed to this point. But exports are a large portion of its revenue. Production of crops fell by 40% in 2022, and that number will likely fall again in the coming year, even if the war soon ends, and that doesn’t look very likely. As such, the markets will focus increasingly on Brazil weather in the weeks ahead. It’s ability to produce will become a larger issue for traders and acreage shifts to the South American nation. Lingering drought remains a problem in Argentina, but the market is more focused on Brazil, where crops continue to look good overall. Today’s markets will close shortly after noon Chicago time, reopening Sunday night.

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