Perspective: Morning Commentary for April 19

April 19 – Geopolitical tensions dominated trade talk overnight, following an apparent Israeli strike on Iran. However, the strike was limited in nature, at least thus far, and Iran downplayed it, indicating that no further action was currently needed on its part. The markets calmed again, although anxiety remains elevated. The VIX is drifting back down below 19 this morning, after spiking to a six-month high above 21 overnight. The dollar index is trading near 106.0 once again, after pushing modestly higher overnight in a safe-haven trade. Yields on 10-year Treasuries initially dipped briefly below 4.50%, but they have now recovered to trade near 4.61%. Yields on 2-year Treasuries are trading back near 4.98%, after dipping below 4.88% on the initial strike reports. Crude oil prices surged above $86 on the strike reports overnight, but they have since fallen back to trade near $82 per barrel. The grain and oilseed markets also spiked on the elevated geopolitical risks. They remained modestly in the green at this morning’s pause, but most are trading well off their session highs as geopolitical tensions ease.

Explosions could be heard overnight across Isfahan, a city relatively deep into western Iran. Initial reports suggest that three drones from Israel struck a military base near Isfahan. It appeared to be the retaliation the world had braced for, as Israel responded to last weekends barrage of several hundred missiles and drones that came from Iran. Global traders feared that last night’s strike would further escalate the Middle East conflict into a broader regional war that could disrupt global economic activity, result in damage to oil production and export infrastructure, and trigger another round of geopolitical driven inflation.

But market tensions eased back again when Iran downplayed the incident, failing to even mention that Israel was behind the strike in its news reports. Instead, Iran reported that infiltrators had attempted an attack, but that they had been rebuffed by Iranian forces. They made it sound like an internal affair, and it indicated that no further action was needed at this point. Israel remained relatively quiet about the strike, other than a single word post on X by its national security minister: “Feeble.” One Israeli reporter likened the attack to ancient King David’s stealth move to cut the corner off then-king Saul’s robe in the dark of a cave, which showed Saul that David had the power and ability to take his life, but that he had chosen not to do so. For its part, Iran doesn’t want a direct war with Israel that it might not be able to win, especially if it draws the United States into the conflict. Iran can inflict far more pain and disruption via its proxy groups than it can in a direct conflict. As such, the Middle East remains very much in a state of tension this morning. But the fear is less of a direct war between Iran and Israel, and more of a continuing escalation between Israel and the proxy groups that Iran supports financially, with the wealth that comes from its oil sales. The United States has thus far said that it will not tighten sanctions on those sales, as that would add to inflationary pressures in an election year. Thus, the expectation is that the war will continue to present risks to the markets, although commodities will continue to find ways to flow until / unless the status quo changes.

China has a stated goal of being the #1 economic and military power in the world. It sees those two as inseparable. It believes that one of the factors that helped the United States reach that status was the dollar becoming the global currency after World War II. Therefore, a piece of its strategy for achieving its goal is to displace the dollar’s dominance with the yuan. It’s done so by working with the BRICS coalition to establish a separate clearing bank from the SWIFT system, which would facilitate clearing global trade via the yuan. It then ramped up its Belt and Road Initiative, spurring economic activity in Asia, Europe, Africa, and South America that would encourage use of the yuan. Use of the yuan in global payments reached a record high 4.69% in March, up from 4% in February. That compares to the U.S. dollar’s share of 47%, followed by the euro at 22%. China is playing the long game. It wants the world to see the yuan as a strong alternative to the dollar, which is why it is reluctant to stimulate its economy before the Federal Reserve cuts rates, as that would be expected to further weaken the yuan versus the dollar. As such, the current strong dollar presents challenges for China’s economy, although it also makes it more difficult for U.S. commodities to compete on the global market.

Rising stress due to adverse weather in the central Plains provides support for the hard red wheat markets, while ongoing cheap sales out of the Black Sea cap gains in the wheat market for now. Brazil and U.S. farmer selling continue to be a problem for corn and soybean prices as well, while the current weather pattern is largely seen as beneficial for the 2024 Midwest crops. Drought risks are elevated for the Midwest this summer, particularly from the Plains into the western Midwest later in the summer, but there’s little consensus currently on the final impact on crops. Nutrien climatologist Eric Snodgrass points out to me that current sea surface temperature patterns appear to be closest to what they were at this same time in 2020, making it a possible analog year. Corn yields ended up modestly below trend that year, while soybean yields were modestly above trend levels.