Perspective: Morning Commentary for January 8

January 8 – A weaker tone was again seen in stock futures overnight, as interest rates trend higher and as China’s economic woes continue. The VIX is again trading near 14 to start the week, while the dollar index is trading near 102.3. Yields on 10-year Treasuries are trading near 4.05%, while yields on 2-year Treasures are trading near 4.39%. Crude oil prices are nearly 4% lower this morning following actions by Saudi Arabia to slash prices to its top Asian customers to 27-month lows, while the grain and oilseed sector was mostly lower as well in general weakness for the broader commodity sector.

Zhongzhi, one of China’s largest wealth management firms, declared bankruptcy on Friday. Rumors have been circulating about the firm, which controlled more than 1 trillion yuan ($140 billion), since August of last year. The company said in November that it was unable to meet its liabilities totaling as much as 460 billion yuan ($64 billion) due to its large exposure to the Chinese real estate sector. Zhongzhi’s bankruptcy is one of the largest among Chinese financial institutions in recent years, reflecting the deep risks of China’s property sector to its financial system. Analysts estimate that Zhongzhi was short as much as 260 billion yuan ($36 billion) of meeting its obligations to investors. Soft property prices and sluggish sales are expected to persistently intensify cracks in China’s financial system in the months ahead as they erode Chinese household wealth. As such, we’re going to need to see a turn in the property sector before we can expect to see a change in China’s economic well being.

China’s foreign exchange reserves rose to $3.238 trillion in December, rising by $110.29 billion over the past calendar year to a two-year high. This is a positive sign for China’s economy, as large foreign reserves enable it to be somewhat resilient to economic challenges, giving it a solid base to use in defending a stable yuan on the global currency market. China’s gold reserves reached 71.87 million ounces at the end of December, marking the 14th consecutive month of gains. Growth in its gold reserves provides further evidence that China is taking proactive steps to diversify its foreign reserves by trimming its holding of U.S. Treasury certificates with alternative assets. China currently holds $769.6 billion in U.S. Treasury bonds as of the latest data in October, down nearly a quarter from the $1.028 trillion held in February 22 when Russia invaded Ukraine.

The demise of El Nino has begun – or at least that’s what the models are saying, and that’s what the data seems to be showing at this time. The current El Nino is still borderline strong, and it may still have some surprises for us, but the expectation is that it has peaked and that it will decline into the spring. The ENSO cycle that tells us whether we’re in a neutral, El Nino, or La Nina weather pattern is the most talked about weather driver in the commodity sector – perhaps because it is the most understood, although there are many things about it that we do not yet understand. Yet, it is just the background driver of weather patterns, with many other drivers frequently at work that may be stronger than what it is at any particular time. Nonetheless, the speed at which this El Nino weakens, and the extent to which we see whether it flips into a La Nina, or merely goes neutral, is expected to have a significant impact on global weather patterns in the coming months. It will impact the size of the Brazilian winter corn crop, and it will influence the size of the upcoming U.S. corn and soybean crops, in addition to many other factors. We do not yet know these impacts, but I can assure you that someone will find a way to “prove” that a major weather problem is coming in a key production area, because that is what happens each and every year.

The rains continue to fall in previously dry areas of Center-West and northeast Brazil. We expected the pattern to shift drier again for these regions this week, but the drier pattern now looks to delay into at least the 6- to 15-day period. The recent pattern shift left areas of Brazil’s central soybean belt drying out, but some relief is seen for those areas in the 6- to 15-day period. Harvest is slowly gaining momentum, with nearly 3% of Mato Grosso soybeans harvested to this point. The bottom line is that the bulls currently lack a story line for soybeans, allowing them to give way to the broader commodity deflation mantra that’s been in place for much of the past year and a half. That story line may return if harvest results add fresh fodder at some point, but for now, that’s not the case. Rather, traders are focused on Friday’s big USDA data dump, when it releases the results of its latest quarterly grain stocks survey, small grains seedings survey, final 2023 production report, and updated domestic and global balance sheets. The focus will then shift to Brazil’s winter corn crop, and to discussions about the 2024 acreage for the U.S. growing season.