October 24 – Stock futures struck a positive tone overnight, although gains remain limited by the ongoing conflict in the Middle East, combined with lingering global economic concerns. The VIX dropped back below 20 this morning, following yesterday’s surge to a seven-month high above 23. The dollar index dropped to a one-month low below 105.4 overnight on weaker Treasury notes, before bouncing to trade above 106.0 currently as the euro pulls back on disappointing economic data that also coincided with a rebound in Treasury yields this morning. Yields on 10-year Treasuries are trading near 4.88% at this hour, while yields on 2-year Treasuries are trading near 5.10%. Crude oil prices are mixed in early trade, while the grain and oilseed complex is mixed to lower.
Israel continues to strike at the leadership of Hamas, stating that it killed dozens more Hamas fighters in Gaza overnight, but it also stated that destroying Hamas will take time. We see no signs of a cease fire in the region, sustaining the risk that the war could spread regionally, but thus far it has not. The markets hang onto hope that the war will remain contained to Gaza with each day that it doesn’t spread, although traders know that we are always just one headline away from that sentiment turning. Israeli tanks and troops continue to wait on the border with Gaza, anticipating the start of the ground invasion that will be difficult for many neighboring nations to watch, especially Iran. The current war is merely a symptom of a conflict between people groups that has been in place for thousands of years, fueling very deep-seeded mistrust and bitterness. Unfortunately, that doesn’t change with a cease fire arranged by politicians. As such, the markets will continue to face headline risk as this war plays out.
Business activity took a surprise turn lower this month in the Euro zone as demand softened in the region, according to data released today. The results of the latest purchasing managers survey creates more challenges for the European Central Bank, which faces lingering sticky inflation with a slowing economy – stagflation. Today’s PMI dropped to 46.5, down from 47.2 and the survey’s lowest reading outside of Covid in more than 10 years. A reading below 50 indicates contraction. The euro dropped on the data release, providing strength for the dollar index, which had fell below chart support to fresh one-month lows earlier in the session. Money tends to flow toward the currency with the more hawkish monetary policy. Europe’s sticky inflation had been supporting the euro, allowing the dollar to soften in recent days. However, today’s data creates challenges for the ECB attempts to get inflation under control, suggesting that it may need to take a more dovish approach. Lingering inflation in Europe has ties to wage inflation in this region where wages are largely tied to inflation readings, creating a perpetual cycle feeding on itself. Meanwhile, U.S. markets reacted to positive earnings reports from both Coca-Cola and GE, showing the resiliency of the U.S. economy that supported a rebound in Treasury yields following yesterday’s collapse.
Symbolism matters greatly in the Chinese culture, so President Xi Jinping’s first visit to the People’s Bank of China in his 10-year tenure as president speaks volumes. Xi’s visit to the foreign exchange regulator indicates a direct interest in managing China’s substantial currency reserves at a time when the value of the yuan is at its lowest level in nearly 16 years. That works contrary to Xi’s goal of having a currency that the world would see as a strong alternative to the dollar in global trade. He believes that much of the power that the United States has in the world comes from it having the dominant global currency, and he’s working to change that. There’s been a significant shift in countries using the yuan for trade over the past year or two, although the yuan still makes up just 3% of global trade, so he has a lot of work to do to change that. Meanwhile, U.S. and Chinese officials also held a two-hour virtual session to discuss macroeconomic trends and mutual concerns ahead of the anticipated Biden-Xi summit coming up in San Francisco. The two world leaders are expected to meet on the sidelines of next month’s Asia-Pacific Economic Cooperation summit, although that is not yet a certainty.
Soybean prices rebounded overnight, as the oilseed responds to a recent rebound in export demand, amid growing domestic crush demand. However, gains continue to be limited by forecasts for rain in Brazil’s Center-West region that could help it produce another robust harvest in less than three months. Meanwhile, corn and wheat prices faced modest pressure overnight from ample supplies continuing to flow from Brazil and Russia respectively. The broader money flow for the grain and oilseed sector continues to be within a backdrop of a strong dollar and expectations of stagnated demand, while the energy sector maintains a modest war premium, which it balances against those same concerns of stagnated demand due to global economic concerns.
