September 24 – Positive money flow continued to support gains overnight in both stock futures and in the broader commodity sector, spurred by ongoing optimism about the Federal Reserve’s monetary policy pivot, and now by a major stimulus announcement from China. The VIX is trading below 16 again this morning, while the dollar index is trading near 100.7. Yields on 10-year Treasuries are trading near 3.80%, after posting fresh 20-day highs this morning, while yields on 2-year Treasuries are trading near 3.60%. Crude oil prices are nearly 3% higher on the above, as well as escalating Middle East tensions and expectations for another Gulf hurricane to develop this week. The grain and oilseed sector was mostly higher as well.
Israel continued to attack Hezbollah military targets inside of Lebanon today, hitting dozens of targets where it said that the Iranian-backed organization had key leaders and military resources for use against Israel. The sustained attacks on Hezbollah come after a nearly year long war with Hamas in Gaza after Hamas raided Israeli territory last October. Numerous attempts to negotiate a peace agreement have failed over the past year. Rather, the conflict continues to slowly spread to other Iranian-backed areas, raising fears that it will eventually become a war directly with Iran that could draw other countries into the conflict as well. The potential human toll is the greatest concern, but the market concern would be a broader war that would begin to impact energy production and export infrastructure in the region. The conflict is already the most intense of the past 50 years for the region, and it continues to escalate. The latest escalation occurred last week when thousands of pagers and other communication devices used by members of Hezbollah simultaneously exploded, killing and maiming dozens while severely crippling Hezbollah’s ability to strategically communicate.
The People’s Bank of China unveiled a massive stimulus program today, in coordination with China’s Securities Regulatory Commission and the National Financial Regulatory Administration. The package cuts bank reserve requirements by 50 basis points, which is expected to inject 1 trillion yuan ($147 billion) into China’s economy. More interest rate cuts are to be announced later. Furthermore, the PBoC cut mortgage rates by 50 basis points, while also cutting the home purchasing downpayment requirement to 15%. Additional financial aid measures to ease pressures on the real estate market were also promised. In addition, a state-backed stabilization fund is being “considered” to shore up confidence in China’s equity markets “if necessary.”
There’s still debate within China over whether its economic stimulus measures were enough to help it reach its 5.0% GDP growth goals for the current year, or whether the measures were “too little too late” for turning around consumer sentiment, particularly with tensions continuing to escalate with China’s largest trading partners in the West. The Biden Administration announced yesterday that it is considering banning hardware and software made in China for automated driving systems. This could in effect ban the import of any Chinese made cars into the United States. This comes on top of 100% import tariffs already announced for electric vehicles manufactured in China, with Europe and Canada doing the same. Furthermore, a summit was held over the weekend with leaders from Australia, India, Japan, and the United States, with China on the top of the agenda. The summit discussed Coast Guard cooperation in the Indo-Pacific as tensions build in both the South and East China Seas. U.S. President Biden told summit attenders that, “China continues to behave aggressively, testing us all across the region” on several fronts, “including on economic and technology issues.” This has most recently been demonstrated in rising tensions between Chinese and Philippine vessels, raising the possibility of an “accidental” war in the region.
Fund short covering continued to support the grain and oilseed complex overnight, with chart-driven Algos adding buying support as well. Fundamentally, the focus is on Chinese stimulus and adverse weather. I’ve learned over the past four plus decades in this industry that it is worth paying more attention to what China does, than to what it says. What it has done is build reserves of soybeans from alternative sources, while buying hand-to-mouth the minimum of what it needs from the United States. That includes corn, soybeans and wheat. China still has plenty of buying power if it would choose to do so, with very little coverage in place for November to January soybean delivery. Yet, it continues to buy soybeans at a very slow pace. That puts USDA’s aggressive soybean export target in question, because we only have the next four months for doing the bulk of that business. Otherwise, today’s forecast models continue to push rains further back into mid-October for key production areas of Center-West Brazil. Developing La Nina years tend to see normal to above-normal rainfall eventually develop in these key production areas as we head deeper into the growing season, but the delayed start to this year’s monsoon’s raise risks that the rains might disappoint, leading to a short crop. That said, local production estimates continue to call for a “normal” crop.
