Perspective: Morning Commentary for November 26

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

October 26 – Stock futures traded mixed to higher overnight, despite a resurgence of Trump tariff headlines that hit the market late on Monday. The VIX is trading near 14 this morning, reflecting a relative calm on Wall Street, with the tariff concerns eased somewhat by Trump’s selection of Scott Bessent as Treasury Secretary. The dollar index is trading near 106.9 this morning, after pulling back from last week’s two-year highs. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices are modestly higher on expectations that OPEC+ will delay output increases again, while the grain and oilseed markets are mixed in early trade.

President-Elect Donald Trump stated late Monday that he would impose a 25% tariff on all goods coming across the border from Canada and Mexico until they clamp down on drugs and migrants coming across the border into our country, while putting an additional 10% tariff on anything coming from China. Trump is expected to take this action on January 20^th after he is sworn into office. The China tariffs were expected, but less so for the tariffs on Canada and Mexico. U.S. wheat and soyoil prices rallied on the news, on the assumption that we would see less used cooking oil coming from China and canola oil coming from Canada to compete with soyoil as a feedstock for the production of the green diesels, and wheat would benefit from less Canadian wheat crossing the border. Corn prices saw modest losses on the fear that Mexico might buy less of the feed grain from the United States, although its options are more limited.

Monday’s announcement shows that securing the border is one of Trump’s top priorities when he takes office, keeping a promise that he made during the campaign. The markets are assuming that the tariffs will immediately be inflationary for the U.S. consumer, and that is a possibility. But that position also assumes that the tariffs will immediately trigger a trade war when the opposite is also possible. The U.S. is the largest consumer market in the world. Trump is betting that Canada, China and Mexico will not want to lose the U.S. market, and that they will take the desired actions to avoid a trade war. For Canada and Mexico, that means closing the borders again against drugs and migrants coming into the United States. For China, that means stopping fentanyl from flowing toward the United States, while agreeing to a trade agreement. President Xi Jinping in particular is not in a strong economic position at this point to enter a trade war with China, and to some extent, the same is true with the leaders of Canada and Mexico. Border security was one of the top issues mentioned by voters earlier this month, suggesting to Trump that they will support his efforts to act. The incoming Trump Administration sees the tariffs as a leverage, or negotiating tool, that can be used to get foreign leaders to alter their position. The tariff therefore has to be painful enough to get the desired reaction. If Trump is correct in his bet, the 25% tariff won’t last long. If he’s wrong, then the predictions of inflation and a sluggish economy will be correct – at least regarding Canada and Mexico.

China’s yuan fell to a four-month low of 7.26 yuan to the dollar following Trump’s tariff comments. A weaker yuan weakens China’s buying power, while making its products cheaper overseas, partially offsetting the above tariffs. But the weaker yuan also works against China’s goal of offering a strong currency alternative to the dollar in global trade as a part of displacing the dollar. China is moving back to cyclical controls to restrict the yuan’s movement in the market to – as it says – protect it against unnecessary speculative movement. But countries doing business in various currencies want a free-floating currency that they can know its true value, and hedge that in the currency markets. This is another reason that we might see China move toward a trade agreement to appease Trump. We’ve already seen Iranian crude oil exports drop by nearly 470K barrels per day following the Trump election as Chinese buyers fear anticipated sanction enforcement from his incoming administration. China’s recently announced stimulus measures have helped its position a bit, with home sales in more than 25 Chinese cities rising 11.75% week-on-week and 6.26% year-on-year. Home sales in Shanghai surged by more than 50% week-on-week, while they more than doubled in Guangzhou and Shenzhen, with sales in four first-tier cities rising by more than 32% year-on-year. Of course, that’s an increase from a very low level. However, this is the first response of the market of those most urgent sales. Sustaining this movement to eliminate the massive housing inventory will take sustained improvement in market / consumer expectations.

Chinese buyers stepped up soybean purchases on last week’s price decline, buying 35 - 38 cargoes in the week. The proposed Trump tariffs would not take effect prior to January 20^th, and by that time buyers will have access to Brazilian soybeans that are cheaper on the global market due to Brazil’s cheap currency. Yet, U.S. soybeans found support from the benefit that soyoil would be expected to see from the tariffs, supporting domestic demand.

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Perspective: Morning Commentary for November 26

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