October 15 – Stocks consolidated near yesterday’s record highs overnight as earnings reports continue to come in. In all, we should get earnings reports from 41% of S&P 500 companies this week, providing a much better picture of the economies health. Some support comes promises of massive stimulus for the Chinese economy, although details continue to be lacking. Traders are also cognizant that we are just three weeks away from election day in America, with much at stake for the U.S. business community regarding the anticipated expiration of tax cuts next year, as well as potential regulatory changes. The VIX slipped below 20 this morning, while the dollar index is trading near 103.1. Yields on 10-year Treasuries are trading 4.05%, while yields on 2-year Treasuries are trading near 3.93%. Crude oil prices are down by more than 4% this morning, testing the $70 level again, on reports that Israel will focus retaliatory attacks on Iran’s military sites rather than energy related sites. The grain and oilseed sector was again mostly in the red overnight as well.
China promises to raise funds through special treasury bonds over the next three years to stimulate its beleaguered economy. Finance Minister Lan Foan stated Saturday that Beijing will “significantly increase” debt to fund the program, although he failed to give any details. There’s been a lot of speculation in China over the potential size of the program, and whether it will be sufficiently large to fix what ails the country. China’s export-based economy is hurting as the West deleverages from it, sourcing its imports from other countries. China attempted to shift to a more consumer-based economy, but consumer sentiment is near record low levels, reducing spending there as well. Caixin Global reported overnight that the special bond program will total 6 trillion yuan ($850 billion) over three years to jumpstart China’s economy. That’s close to what the market has already priced in, so anything less than that would likely prove disappointing to the market.
Caixin reports that the funds, amounting to 5% of China’s economic output, would partly be used to help local governments deal with their off-the-books debts. China funds many of its economic stimulus programs through local government budgets, which are already strained. The International Monetary Fund estimates that China’s central government debt is just 24% of gross domestic product, while its overall debt through these local entities amounts to $16 trillion, or 116% of GDP. The plan is to use this new special bond program to ease the debt load at the local level to free up these government units to provide additional support for local economic growth. M2 money supply rose 6.8% year-on-year in China in September, while M1 money supply – indicating what is readily available to the consumer – fell by 7.4% year-on-year, marking the sixth consecutive month for contraction. The M1 & M2 money supply growth spread fell 14.2% year-on-year, indicating very poor incentive for consumers to spend currently.
WTI crude oil prices spiked above $78 per barrel a week ago on fears that Israel would retaliate against Iran’s energy infrastructure for its recent direct attacks on Israel. It’s those energy sales that have been helping to finance the war on Israel by Iran and its proxy groups. However, Iran has reportedly been secretly threatening other countries in the region, stating that they would become subjects of its attacks on their energy infrastructure if Iran’s energy infrastructure is attacked by Israel via use of these other country’s airspace. Those country’s have been pressuring the United States to pressure Israel to avoid attacks on Iran’s energy infrastructure. That strategy has apparently worked, based on a report late Monday that Israeli Prime Minister communicated to the United States that Israel is willing to strike military targets in Iran, rather than energy targets. That would appear to reduce risk that we will see reduced energy supplies related to the war anytime soon. As such, it refocuses the market on weak global demand, which is largely a product of China’s ailing economy. Thus the removal of the war premium in crude oil prices this morning.
CONAB pegs the upcoming soybean crop at 166 million metric tons, versus USDA at 169 mmt and StoneX Brazil at 165 mmt. Other private estimates are as high as 172 mmt, versus last year’s crop that USDA put at 153 mmt. For all the planting delays caused by a late arrival of the monsoon rains, the locals are still expecting a big soybean crop, with the risks being for a troubled winter (safrinha) corn crop. The U.S. is harvesting big corn and soybean crops that are struggling to find sufficient storage. That’s applying seasonal pressure currently, amid a lack of a South American weather story. Wheat prices are pulling back on modest rains falling in dry areas of Russia, although those rains will not end the drought problems. Some rains are also expected for dry areas of the U.S. Southern Plains. Wheat traders will continue to monitor signs of Russia dialing back exports as drought continues to plague its winter wheat belt. Corn and soybean traders are focused on the harvest. Once those crops find a spot in storage, the focus will shift to longer-term demand, which currently looks a bit better for corn than for soybeans.
