Perspective: Morning Commentary for January 23

January 23 – Stocks are off to a mixed to weaker start to the day as traders focus on earnings reports ahead of GDP and inflation data due out later this week. The VIX is trading near 13 this morning, while the dollar index is trading near 103.5. Yields on 10-year Treasuries are trading near 4.14%, while yields on 2-year Treasuries are trading near 4.41%. Crude oil prices are modestly lower after testing the upper side of their recent trading range on Monday, as traders weigh increased supplies from Libya and Norway against lingering geopolitical risks in the Middle East. The grain and oilseed market traded mostly higher overnight as value hunters again buy the sector due to its bargain prices, although fundamental support remains lacking.

China has all hands on deck trying to stem the tide of selling in its stock market, where major indices are trading near five-year lows due to waning confidence in the Chinese economy. China Premier Li Qiang has responsibility for overseeing China’s economic policy, and he’s urging forceful measures to calm investors and stabilize prices. Likely tactics include increasing the entry of medium and long-term funds to invest in companies listed on the stock market. Bloomberg cited sources familiar with the matter indicating that policymakers are considering mobilizing 2 trillion yuan ($278.53 billion), mainly from offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to purchase stock shares. Stocks in both China’s mainland and Hong Kong markets were among the worst performing in the world last year, with the three combined exchanges in Shanghai, Shenzhen and Hong Kong losing $1 trillion in value, according to media reports. Morgan Stanley estimates that global money managers sold $1.6 billion in Chinese equities already this year, after being major sellers last year.

Stabilizing the property markets is near the top of the list for restoring the confidence both Chinese consumers and investors. Property accounts for more than 40% of the average household assets. Market data shows that new home sales in 30 major Chinese cities fell by 38% year-on-year in the first three weeks of January, with financial brokerage CGS-CIMB estimating a roughly 10% year-on-year decline overall so far this year. The numbers thus far are worse than Fitch Rating’s forecast of another 5% decline. China implemented several policies over the past year to restore confidence to the property sector, but thus far consumers and investors see it as too little too late.

Crude oil prices pulled back overnight, after testing the top of the trading range that largely contained the market over the past six weeks or so. Geopolitical risks continue in the Middle East, with traders focused on risks to cargoes moving through the Red Sea, as well as risks that the escalating conflict could result in attacks on oil production and/or transportation infrastructure. But those risks were not yet considered enough to justify taking prices above their recent price range, especially with Libya reaching an agreement with protestors that allows output to increase again, and with Norway’s production rising as well. Some of Monday’s support came from a Ukrainian drone attack on Russia’s Novatek Ust-Luga Baltic fuel export terminal near St. Petersburg, but disruptions there are expected to be temporary. Nonetheless, it illustrates Ukraine’s expanded capability to disrupt the commodity markets, as well as their willingness and desire to do so. That has longer-term implications for the grain and oilseed markets as well, should Ukraine decide to take actions against Russian wheat and crude oil shipments and/or facilities utilizing the Sea of Azov.

USDA inspected 983 million bushels of soybeans for export shipment for the marketing year to date through January 18, down 276 million or 22% from the previous year’s pace as the prime U.S. shipping season comes to an end as Brazil begins harvest of its new crop. The sluggish U.S. shipment pace is largely due to lingering Brazilian shipments through the fourth quarter of the calendar year, which is our primary shipping season. China imported 5 million metric tons of soybeans from Brazil in December, compared to just 3.85 mmt coming from the United States. It imported 70 mmt of soybeans from Brazil in calendar year 2023 up 15.5 mmt on the year, while importing just 26.5 mmt from the United States, which is down 3 mmt from the previous year. Less than 30% of China’s 2023 soybean imports came from the United States. Brazilian soybeans are currently roughly $2 per bushel cheaper imported into China from Brazil versus supplies from the U.S. Gulf, once freight, taxes and currency exchange rates are factored into the price for soybeans being purchased for shipment in February, March and April. U.S. marketing year to date soybean export shipments to all destinations trail the seasonal pace needed to hit USDA’s current export target by 53 million bushels, and the above will make it difficult to close that gap without a change in those dynamics.