October 25 – Stock futures pushed modestly higher overnight as traders prepare to go into the weekend with election, economic and geopolitical uncertainty still at elevated levels. The VIX is trading near 19, while the dollar index pulled back to trade near 104.0. Yields on 10-year Treasuries are trading near 4.19% as they consolidate just below their recent 12-week highs, while yields on 2-year Treasuries are trading near 4.05%. Crude oil prices are roughly 1% higher as we approach the weekend, while the grain and oilseed markets were mostly lower overnight.
Durable goods orders fell 0.8% month-on-month in September, coming in worse than the 0.5% decline anticipated by analysts. Furthermore, the August number was revised to minus 0.8% as well, after initially being reported as flat. However, much of the negativity in the data was in the transportation sector. Durable goods orders excluding transportation rose 0.4% month-on-month in September. That beat analyst expectations of a 0.1% contraction, but it is down from an upwardly revised 0.6% gain in August. Furthermore, core capital goods orders, which reflect business optimism, rose 0.5% month-on-month in September, up from 0.3% the previous month. As such, the headline number for durable goods orders was negative, but a deeper dive into the data finds some reasons to be optimistic regarding durable goods demand.
Crude steel consumption in China posted double-digit declines in both August and September, reflecting the degree to which China’s economy was hurting prior to the stimulus packages announced at the end of September. Consumption fell 13.5% in August, followed by an 11% decline in September. Crude steel consumption was down by 6% for the first three quarters of the year, so the above data suggests an acceleration in the decline due to ongoing problems in China’s property sector. As a result, China’s steel exports increased by 21.2% year-on-year in the first three quarters as it dumped its excess capacity onto the world market. The question now is, can the recently announced stimulus packages be sufficient to turn around China’s ailing property sector to restore steel demand?
The landmark BRICS Summit that met this week in Russia ended without a landmark policy announcement. In fact, one can argue that it was a failure, without any significant progress on its primary objectives. Russian President Vladimir Putin stated that the BRICS countries “have not and are not” creating an alternative to the Swift banking system in their pursuit of financial cooperation. That’s a big shift from previous statements made in recent months. Russia had been pushing for a new BRICS settlement infrastructure, largely expected to be based on the yuan, that would allow countries to bypass Swift and use of the dollar. However, China President Xi Jinping failed to say anything of substance about such an alternative structure when he spoke. Instead, both Xi and India’s Prime Minister Narendra Modi spoke of a broader vision to forge financial integration and cooperation among member countries, without specifying the roadmap and timeline to reach such a goal. Furthermore, there is no apparent evidence of continuing efforts to develop a separate BRICS payment system in the future, although BRICS members will likely increase cross-border payments utilizing their own currencies instead of the dollar. We must assume that this summit that brought together leaders of more than 30 countries simply could not find the support that they sought to develop an alternative to the Swift banking system that is largely based on the dollar.
The energy markets continue to monitor geopolitical risks in the Middle East, balanced against soft demand and over-supply concerns. Analysts remain unimpressed by China’s economic turnaround prospects in the near-term, despite recent stimulus announcements, fearing that may result in continued soft global demand. Meanwhile, little has been done to enforce sanctions against Libya or Venezuela, Libyan production is returning and OPEC+ has plenty of capacity that it can bring back online if/when it so chooses to do so. But it might be limited in its ability to bring that production back online if the Middle East war were to spread to other nations – impacting their production and/or shipment infrastructure. That’s the concern of traders that keeps support beneath the markets as traders wait to see what Israel will do to retaliate against Iran for its strikes on Israel. Iran has reportedly threatened oil infrastructure of other Middle East countries if they allow Israel to use their airspace to attack Iran’s energy infrastructure that is being used to pay for its proxy war on Israel. Wire service stories reported last week that Israel would focus more on Iran’s military targets, but we won’t know until it happens, thus keeping the energy markets on edge.
The corn and soybean buying spree continues as end users – foreign and domestic – seek to take advantage of the seasonal harvest low in prices to extend coverage. The farmer doesn’t like current prices, so he’s a reluctant seller. In the background of all of this is the fund manager reluctant to be short the commodities due to a sense that we may be on the cusp of another reinflation period. Supplies are big, keeping a lid on gains, but generally not currently being offered to the market. Demand is currently good, providing support. As such, the markets are identifying a broad trading range until things get better sorted out.
