Perspective: Morning Commentary for February 7

February 7 – Stock futures had a firmer tone this morning just below recent record highs for the major indices, as traders weigh earnings reports and future interest rate direction expectations. The VIX dropped below 13 to trade at two-week lows, while the dollar index dipped back below 104.0. Yields on 10-year Treasuries are trading near 4.12%, while yields on 2-year Treasuries are trading near 4.42%. Crude oil prices are modestly higher in early trade, while the grain and oilseed sector is mostly lower, with corn prices posting fresh three-year lows.

Hamas offered an extended cease-fire agreement to Israel today, but some of the terms may be unacceptable to Israel. The proposed cease fire would extend for 135 days, during which a more complete end to the war would be negotiated, with a total withdrawal of Israeli forces from the Gaza Strip. All hostages taken in the October 7 invasion of Israel that started the war would be released after conclusion of that agreement. Hamas reportedly is seeking guarantees from Qatar, Egypt, and other nations that are friendly to it that it would be protected from further retribution from Israel once the hostages are free. On the other hand, Israel has stated that it will not remove its troops from the Gaza Strip until Hamas is totally eliminated to bring an end to the constant attacks from it.

The cease-fire offer comes as global commodity traders monitor the escalating risks of a more widespread war in the Middle East as Iran-backed groups continue attacks on U.S. military installations in the region, and while Houthi Rebels continue attacks on ships on the Red Sea – all allegedly in support of Hamas in the Gaza Strip. Political pressure is mounting on President Biden to strike at the source of support for these groups – Iran. Doing so could bring an end to the plethora of attacks on U.S. forces in the region, as well as on shipping interests in the Red Sea, or it could create a rapid escalation of the conflict into a regional war that negatively impacts the production and shipping of crude oil and other products. It’s doubtful that Israel will accept the current cease-fire terms offered by Hamas, but it may offer counter-terms that could lead to an end of the fighting in the Gaza Strip. Yet, it is yet unknown whether that would stop the attacks by other Iranian-backed groups outside of that region.

Chinese trade is hurt by the conflict more than any other trading nation, but it affects everyone. A large share of goods exported from China to Europe and to the U.S. East Coast normally pass through the Red Sea, along with a large quantity of commodities it purchases from Ukraine. Shipments through the Suez Canal are slashed in half from the normal pace, with ships increasingly choosing to avoid the region by going around the southern end of Africa. This adds 10 – 16 days to shipping times, tying up existing ships for longer, increasing the cost of transit while decreasing the supply of available ships, raising the costs for trade. Those increased costs will eventually make it to the consumer – impacting inflation rates in Europe first, followed by the United States. Many shippers are choosing to use air freight, resulting in a spike in air shipping rates as well. These inflationary pressures would be further escalated if we see disruption to crude oil and/or its products shipment due to the conflict in the Middle East. Is the Hamas proposal the first step toward unwinding these risks, or just another ebb and flow in an otherwise escalating conflict? For today, the market is reacting as if it is the latter.

USDA will update its domestic and global commodity balance sheets tomorrow in its monthly WASDE report. This report is traditionally one of the quieter ones of the year, but the details of this report should have significant longer-term implications for the markets. The U.S. grain and oilseed balance sheets will primarily be impacted by potential changes to Southern Hemisphere production estimates, so that’s where the focus begins. We’re still a couple of months away from notable harvest progress in Argentina, but 15% of Brazil’s soybean crop was harvested as of Friday, along with 16% of its summer corn crop. Both of those numbers are around the mid-point of progress seen over the past five years. While still early, this should provide USDA with a better perspective on how adverse weather through the growing season impacted production. The primary focus will be on Brazil’s soybean crop, where our customer survey revealed expectations last week that the crop will total 150.4 million metric tons, down from 152.8 mmt the previous month. USDA put the crop at 157 mmt in January. A 150 mmt crop would not be small enough to justify rationing U.S. demand with higher prices unless we see an unexpected failure of the Argentine crop. Instead, we could see USDA cut U.S. soybean exports by 25 – 50 million bushels, while bumping U.S. crush by another 20 million bushels. We’ll likely see few changes of significance for the corn or wheat balance sheets, although we could see a small downward adjustment to U.S. wheat exports.