October 25 – Stock futures were generally under pressure overnight, but they firmed into mixed territory early this morning as world leaders seek a pause in the Middle East war to allow humanitarian aid to get into Gaza, with additional support coming from a Chinese stimulus plan. Yet, gains were limited by high interest rates and ongoing concerns about the potential for the war in Gaza to spread regionally. The VIX is trading near 19 this morning, while the dollar index is trading near 106.4. Yields on 10-year Treasuries are trading near 4.88%, while yields on 2-year Treasuries are trading near 5.08%. Crude oil prices are mixed, while the grain and oilseed sector traded mostly lower in early trade this morning.
China offered 1 trillion yuan in sovereign bonds (approximately $137 billion) to stimulate its economy today, in a surprise move to amend the budget outside the regular legislative session for the first time in a decade. Perhaps that provides indication of the seriousness of China’s current economic problems, that it felt like it had to step outside the normal budgeting process to initiate the action. The bonds are aimed at infrastructure development following recent natural disasters, and they will be allocated evenly from now through the first half of next year. This marks a significant shift in strategy for China, which expected local governments to be responsible for financing infrastructure in the past, but it is widely believed that local governments face mounting debt problems. The last time that China stepped outside the normal budget process for such a program was in 2008 following the Sichuan earthquake, at which time a varied pool of resources funded a spending plan of similar size to finance the rebuilding program. Today’s announced funding program amounts to 1% of China’s gross domestic product and is one-fourth the size of a stimulus package implemented later in 2008 in response to the global Great Recession. This suggests to analysts that there remains more room for additional stimulus.
China signed a framework deal to purchase large quantities of agricultural products from the United States in a ceremony hosted in Iowa on Tuesday, but the deal is non-binding and lacking in specifics – largely ceremonial in nature. One could say that the deal is similar to some of the deals signed at last week’s Brick and Road Initiative conference in China, which many observers believe were designed to create headlines, with questionable follow-through. On a related note, the European Union is preparing to host its inaugural Global Gateway forum on Wednesday and Thursday as an alternative to China’s BRI. European Commission President Ursula von der Leyen committed to challenge China’s global infrastructure drive at the conference attended by heads of state and prime ministers from many countries in Europe, Africa and the Middle East. It should be noted that representatives from the BRICS nations, including Brazil, India and South Africa, have opted out of the event. Perhaps the top takeaway from all of this is the growing chasm between nations lining up behind China and Russia versus those lining up behind Europe and the United States that is altering trade routes while increasing economic, financial, military and philosophical divisions.
This is being tested in the Middle East as countries one by one start to side with either Hamas or Israel in the conflict. There have been many conflicts between the two represented people groups in the Middle East over the past 6,000 years, but this is the first time in recorded history that China and Russia have had the level of influence in the region that they currently have during one of these conflicts. That adds a totally different potential risk to the conflict. Thus far, China and Russia have kept their influence below the surface, so to speak, but the risk of deeper involvement remains. Russia largely has its hands full in Ukraine, while the Middle East conflict may offer a nice diversion for China from its economic problems. As a rule, China seeks to gain change without direct military conflict, but it has significant influence with many of the key players surrounding Israel and Gaza.
Soymeal prices surged to their highest level since early August overnight, before reversing lower. The recent rise in prices reflects solid domestic demand combined with strong exports following a short soybean crop in Argentina this year. But rising soymeal prices also start to draw more dried distillers grains and solubles (DDGS) into feed rations, supporting ethanol margins while softening demand for meal. This comes as new soybean crush capacity comes online, increasing the supply of meal. Soybean traders are also keeping their eyes on much-needed rains expected to reach dry areas of Center-West Brazil over the next several days that could have a significant impact on the longer-term projections for Brazil’s crops going forward, if they verify this time, impacting U.S. export demand.
