Perspective: Morning Commentary, 11/16/2015

Monday, November 16, 2015

The markets do not like uncertainty, but that’s what terrorism provides. Friday’s brutal terrorist attack on Paris created more uncertainty in the world. Yet, France’s quick and decisive response put at least a bit of certainty back into the world. Global traders had a weekend for France to respond and for emotions to ease a bit. As a result, we didn’t see the scope of losses in global stocks that might otherwise have been the case. Significant events such as those seen in Paris on Friday night often a near-term low come a couple weeks or so later, but the response thus far has been measured.

The dollar is modestly higher this morning, with the euro weaker. Yet, neither has seen a major move yet, as one would have anticipated. Perhaps that is because many investors are already long the dollar and short the euro, with the dollar near seven-month highs. We actually saw the euro trading a bit higher at times overnight, which may have been new shorts trying to get out due to the uncertainty, while the European Central Bank may also have been stepping in to provide stability. Asian stocks posted losses on the open last night, but European stocks are mixed and U.S. stock futures are posting modest gains.

Japan is officially back in recession status; the second of the past several years. Gross domestic product fell 0.8% in the third quarter, falling short of estimates for a 0.2% decline and the second consecutive quarter of contraction. The largest driver was shrinking inventories, reflecting a lack of confidence in consumer buying. Japan’s economic woes simply add to the list of concerns for the global economy that continue to weigh on the broader commodity sector.
It now appears likely that the International Monetary Fund will include the yuan in its reserve currency basket when it meets November 30. IMF staff stated Friday that they are recommending inclusion of the yuan, which was a significant victory for China. However, the move should also continue to push policy toward loosening capital controls.

Weather is generally favorable around the globe as we begin the new week. The Black Sea region will continue to be an area of concern, but showers provided much-needed relief last week with warm temperatures allowing the crop to take advantage of the moisture. The showers will help, but not alleviate the problems in the region, with some trade sources anticipating Ukraine exports to fall by as many as 13 million metric tons in the 2016-17 marketing year. These numbers are all speculation at this point, as winter and spring weather will have a big impact. As such, the trade typically is reluctant to sustain a rally in November based on problems in the region, particularly amid ample global supplies. Yet, this could become more of a story down the road.

An active rain pattern is expected across much of Brazil’s primary crop-producing region the remainder of the month, providing much-needed moisture for northern areas that had been on the dry side. Good showers are anticipated for Argentina as well. Overall, South America looks good through the remainder of the month.

The Thomson Reuters CRB index fell to its lowest level since 2002 on Friday’s commodity selling. It initially tried to bounce early today, but is again under pressure. Commodities have value in this area, but thus far the market lacks an incentive to extend ownership, with the above series of global developments continuing to create a bearish environment. End users are content to allow prices to come to them, while speculators remain reluctant observers. The near-term exception is in the U.S. cash corn and soybean markets, where tight-fisted farmers continue to hang on tight to supplies, forcing end users to push basis levels to acquire needed stocks until such time that farm cash needs force movement.

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