September 25 – Stock futures are under modest pressure as we start the final week of September on follow-through selling from last week’s hawkish Federal Reserve meeting, with more negative news coming from China as well. The VIX is trading at more than a one-month high near 18 this morning as fears escalate on Wall Street, creating modest headwinds for both stocks and commodities, with the dollar index trading at a fresh six-month high near 105.8. Yields on 10-year Treasuries are trading at fresh 16-year highs near 4.52%, while yields on 2-year Treasuries are trading near 5.12%. Commodity prices are largely mixed to weaker in early trade as the dollar follows Treasury yields higher and as China faces more economic headwinds.
Chinese property developer Evergrande Group is second largest by sales in China, but it also faces massive debt problems, similar to several other large property companies there. Property ownership makes up roughly 20% of China’s gross domestic product, giving it a significant role in that country’s economy. Evergrande made headlines again today when it surprisingly cancelled meetings with foreign creditors scheduled for today and for tomorrow when its housing sales failed to meet expectations and creditor demands under a restructuring plan. The companies listed liabilities stand at $327 billion, according to the latest update in June. New home sales in China’s first-tier cities rose 4.2% month-on-month in August, responding to stimulus efforts by the government, but they were down 5.2% month-on-month in second-tier cities, suggesting that they may be even worse in more remote areas making up much of China.
The Ukrainian port city of Odessa suffered “significant” damage overnight, according to officials there, following a large-scale attack on the city by Russia. Russian missiles struck a hotel near the ports, while doing notable damage to other port facilities in the attack. Ukrainian officials believe that the attack was retaliation for their attack on the Russian Navy Headquarters in Sevastopol on the Crimea Peninsula on both Friday and Saturday. Odessa and other port facilities continue to be the target of Russian forces as they attempt to stifle Ukrainian grain exports. Two smaller ships have already loaded with grain and departed via the new “humanitarian channels” created by Ukraine in recent days, with three more heading to the ports to do the same. Russia has thus far resisted the temptation to directly strike at vessels carrying grain from Ukraine, but instead has focused on escalating the risk for them doing so by striking the ports.
The overnight strike provided modest support for grain and oilseed prices, particularly Chicago wheat. However, the markets pretty much take the Ukraine export challenges in stride as long as Russia continues to dump massive amounts of cheap wheat on the world market, and Brazil does the same with corn. The challenge would be if Ukraine were able to provide a legitimate threat to the movement of wheat and crude oil out of Russia. Thus far its strikes on Russia have only elevated risks for Russian commodities, but not sufficiently to curtail the volume of flow. The markets remains skeptical that Ukraine will be able to stem the tide of commodities out of Russia, but that risk slowly creeps higher each time the war escalates to a new level, which it continues to do. Are we close to that point yet? Probably not, but neither do we see the trend toward greater escalation changing any time soon either.
Weekend rains focused on dry areas of the western Midwest, bringing a temporary slowdown to early harvest progress, while perhaps providing a boost to some of the late-maturing crops. The weather pattern is certainly turning wetter than it was, which is largely too late to help this year’s crops, but farmers will welcome the moisture for fall fieldwork, replenishing moisture levels for the next growing season, and for hopefully boosting water levels on the Mississippi River for transporting grain toward the Gulf ports, while facilitating movement of fertilizer northward. We should see harvest activity pick up momentum this week, providing valuable yield data for the markets, while also increasing some movement of grain. USDA is scheduled to release its quarterly grain stocks report on Friday, which is known for its market-moving surprises. I look for USDA to also make modest reductions to the size of last year’s corn and soybean crops, but the primary focus beyond Friday will be the size of this year’s crops, sluggish export demand, and the start of the South American growing season.
Roughly 2% of Brazil’s soybean crop has been planted to this point, which is close to average for this time of year. Much of the highly productive Center-West region remains dry, waiting for the start of the monsoon rains. Last week’s forecast models began showing increased chances for 1 – 2” rains in the Center-West region about a week out. The weekend models pulled back a bit on that, but they’re still largely there this morning. Those rains are critical for getting soybean planting going in the region, but it’s also still early – think of it as late April in the Midwest. In other news, USDA announced the sale of 65.4 million bushels of corn to Mexico this morning, of which 550 million is for current-year delivery and the remainder is for the next marketing year. Meanwhile, China expects to import between 80 and 100 million bushels of Brazilian corn in September and October, reducing their need for U.S. corn.
