Perspective: Morning Commentary for March 25

March 25 – Stock futures had a cautious tone overnight, while the commodity sector enjoyed a firmer tone as geopolitical risks continue to escalate, along with inflationary pressures. The VIX firmed to trade above 13 overnight, while the dollar index traded near 104.2. Yields on 10-year Treasuries traded near 4.24%, while yields on 2-year Treasuries traded near 4.62%. Crude oil prices were 1% higher overnight, while the bulk of the grain and oilseeds were modestly higher as well, as geopolitical risks continue to ramp up in both the Red Sea and the Black Sea. This will be a shortened trade week on Wall Street, with the markets closed Friday for the Easter Good Friday holiday. Even so, we’ll see key data released this week, including new home sales later this morning, durable goods orders and consumer confidence tomorrow, gross domestic product, consumer sentiment and pending home sales on Thursday, and personal income and outlays – including PCE inflation data – on Friday when the markets are closed.

Russia launched missiles in an attack on the Ukrainian capital Kyiv for the third time in five days today, injuring 10 according to initial reports. This coincides with a notable increase in attacks on Ukraine’s energy and export infrastructure in recent days as well. Russia is responding to escalated attacks by Ukraine – many of which have hit refineries deep inside of Russia, including another one over the weekend. Ukraine also reportedly hit two Russian warships and a communications center in Crimea yesterday. Ukraine’s attacks on Russian refinery capacity are slowly having an impact by reducing Russia’s ability to produce and to export product. That makes more crude oil available to the export market, although sanctions by the West are slowly increasing the challenges of exporting the crude as well. Furthermore, the attacks deep inside of Russia show that Ukraine has the capability to make more direct hits on Russia’s ability to export food and energy commodities, but it has thus far restrained itself from doing so. The same can be said of Russia, but that’s always been the case. The question remains, at what point will one side or the other become frustrated enough with the ongoing war that they take that step?

Foreign direct investment helped build China to what it is today. It’s a key component necessary for China to reach its goal of being the world’s superior economy and military – which it sees as being one and the same. It needs foreign investment in its economy to reach that goal, but FDI is becoming increasingly challenging as the West divests from China. FDI in January and February was at the third highest level of the past decade, although it was down 20% year-on-year. That’s the sharpest decline observed over the past decade during which the data has been published. The data isn’t all negative for China, as newly added invested enterprises totaled 7,160 in January and February, which was up 35% year-on-year. FDI investment in high tech was up 32% year-on-year, accounting for 33% of the total. In fact, the recent China Development Forum saw Chinese leaders reportedly meeting with a significant number of global CEOs, including those from Apple, Mercedes-Benz, and HSBC, while major US chip firms Qualcomm, Micron and AMD were also present. Yet, China is still handicapped by the loss of FDI overall, especially as Europe and the United States continue to source products from other countries.

USDA will release its quarterly grain stocks and planting intentions survey results on Thursday at Noon EDT. These reports are known for their surprises – especially the stocks reports. Even so, the reports tend to refocus the markets on the supply and demand fundamentals for the upcoming Northern Hemisphere growing season. Managed money continues to slowly transition away from its massive short positions in the grain and oilseed complex as we head into this period of elevated weather risks, along with rising risks of reinflation. The Federal Reserve painted a rosy picture of a no-landing scenario last week, suggesting increased demand for commodities, as well as elevated risks for reinflation.

Good rains continue to fall over Center-West Brazil winter corn producing areas this week, although forecasters continue to point to elevated risks of dry weather during next month’s pollination. We should very quickly know over the next few weeks whether we’re going to see another big corn crop in Brazil, a very short crop, or something in between. The focus will then shift to the U.S. Midwest growing season. Soil profiles remain deficient in moisture across much of the Midwest, but the current weather pattern should dramatically improve the outlook over the next couple of weeks. It will then come down to prospects for heat and dryness in the Midwest this summer. Those risks would appear to be elevated for the coming summer, although still below 50% odds. The key to watch will be sea surface temperatures in the Gulf of Alaska and the region stretching from the Baha of California to Hawaii. Abnormally cool conditions in those areas this summer would mimic conditions seen during some of our bigger Midwest droughts, while warmer temperatures in those regions historically argues for big yields in the Midwest. Normal yields this year would be expected to increase supplies, while short crops would be expected to necessitate some demand rationing. There’s still a lot of year ahead of us yet.