October 16 – Stock futures moved cautiously higher overnight as optimism about earnings season is countered by a growing uneasiness about rising tensions in the Middle East. The VIX is trading near 18 this morning, after spiking to nearly 21 on Friday, reflecting nerves on edge on Wall Street. The dollar index pulled back modestly to trade near 106.4 this morning. Yields on 10-year Treasuries are trading near 4.69% at this hour, while yields on 2-year Treasuries are trading near 5.07%. Crude oil prices are modestly higher at their highest level since October 4th, while the grain and oilseed sector is mixed in early trade.
Israel’s Prime Minister vowed yesterday to “demolish Hamas” following the previous weekend’s tragic terrorist attack on its soil, while ground troops continue preparation for an expected invasion of Gaza to seek out the Hamas terrorists responsible for the attack. Wall Street trading isn’t significantly impacted as long as the conflict remains contained to Gaza, but traders continue to worry that it will spread into a more regional conflict. There are concerns that Hezbollah to the north of Israel could attack Israel while it is preoccupied with fighting Hamas in the Gaza Strip, which would bring Syria, and possibly Lebanon, into play. Iran has also threatened Israel to beware if it moves into the Gaza Strip. Saudi Arabia and Iran are talking at the highest level for the first time in years, following efforts by China earlier this year to broker a better relationship between the two historical enemies. The commodity most at risk in the region is crude oil, should the conflict spread beyond the borders of Israel and Gaza. It currently appears that we will see a massive ground invasion of the Gaza Strip by Israel. The question then will be whether that invokes a response by some of Israel’s above-mentioned neighbors that broadens the conflict.
China’s CSI 300 stock index is nearly 40% off its 2021 high as investors fret about that country’s economic problems. Growth is expected to come in near 4% this year, which is pretty slow for China’s economy. Its property sector is of greatest concerns, with few buyers wanting to commit to making long-term purchases at a time when the nation’s economy is struggling. Several major property firms face massive debt payments over the next several months that they’re struggling to find a way to pay. Consumer confidence is poor, leading to reduced spending on big-ticket items, all of which is reflected in China’s stock market. Bloomberg reports that policymakers are considering setting up a state-backed stabilization fund for the equity markets that would increase ownership of shares of up to hundreds of billions of yuan to offset selling pressure. Unfortunately, these efforts to artificially prop up a market tend to decrease confidence in a freely traded market, while also increasing debt obligations for the government, which has its own debt problems. On a positive note, electricity consumption rose 9.9% year-on-year in September, with the service sector leading the way. However, even manufacturing use of electricity saw a 5% rise, suggesting some improvement in activity in recent months. I noted last week that China’s population decline is contributing to its longer-term economic problems. Recently released data showed that marriage licenses totaled just 6.8 million last year, the lowest on record since 1986, and down 53% since 2013, contributing to the rapidly declining birth rate in China.
StoneX Brazil reports that 18% of its soybean crop has been planted as of Friday, down roughly five points from each of the past two years, but twice the pace seen three years ago. That includes 30% of the soybeans planted in Mato Grosso, Brazil’s biggest production state, down from 38% a year ago. A lot of soybeans typically get planted over the next several weeks and rains remain spotty. The crop is doing well in some areas of Center-West Brazil, while other areas face replanting due to dryness. The next 10 days lean dry for Mato Grosso and points to the east, according to this morning’s European model run. Brazil’s been in this position before and still produced a good crop, but it does open the door for a late harvest, and we still cannot rule out the possibility of a short crop. I don’t expect a short crop, but that possibility still exists. Expectations for the well-being of Brazil’s crop are expected to have a significant impact on the scope of purchases of U.S. soybeans that China makes for December, January, and February shipment.
This week’s focus in the grain and oilseed markets will be on harvest results following several days of high winds that increased lodging in corn in central and western portions of the Midwest, along with the ongoing focus on weak export sales and shipments. I think that we’ll gradually see a shift to more focus on Brazil’s Center-West weather as well, although that’s not yet a threat to the actual size of its soybean crop – just the timing of its harvest.
