Perspective: Morning Commentary, 12/14/2015

Monday, December 14, 2015

December 14 – U.S. stock futures are pointing lower this morning, with crude oil lower and the dollar stronger. Crude oil prices slipped to a new low this morning, with West Texas Intermediate dropping as low as $34.53 per barrel, its lowest level since early 2009. Weakness comes from reports that Iranian output reached a new six month high, with ideas that it will continue to rise in a low demand global environment.

Sinking crude oil prices are a proxy for deflationary pressures in the eyes of Wall Street. The day will come when the market will see cheap energy prices as an economic stimulus, but that’s not reflective of the current sentiment. Rather, corporations fear that deflation will chip away at their earnings, and thus the pressure on stocks this morning.
All of this takes place ahead of this week’s Federal Reserve meeting to discuss monetary policy. The Fed will meet on Tuesday and Wednesday; releasing a policy statement at 1 p.m. CST Wednesday, with Chair Janet Yellen taking questions from the press 30 minutes later. U.S. economic activity appears to have peaked in the first quarter of this year, with activity in decline since that point. Yet, the Fed appears to have painted itself in the corner, necessitating a rate hike coming out of this week’s meeting.

Ironically, Fed Chair Janet Yellen has already commented that the Fed may need to cut rates again in 2016. As such, Wall Street will listen closely to her comments in the press conference following the statement release Wednesday. We could see considerable volatility in the markets this week, depending on how global traders interpret the Fed’s actions, combined with her press conference comments.

All of this takes place in a thinning holiday trade environment, which can amplify market moves. This is the final full week of trade for 2015, with each of the next two weeks shortened by holidays. Some traders prefer to take the time off, leading to the thinner trade volume. Some of those traders will also want to square their positions before they take their break, reducing their exposure to potential terrorist actions, market collapses, etc. News reports indicate that a kindergarten teacher was stabbed in a terrorist attack on the outskirts of Paris this morning.

Pictures of drought-stressed soybeans in Mato Grosso were posted on the social media over the weekend, highlighting problems brought about by this year’s El Nino pattern. Yet, agronomists in the region that I talked to over the weekend indicated that areas of stress are likely less than 15% of Brazil’s total crop, with rains still timely enough to maintain good yield potential in most northern areas. In fact, southern areas favored by El Nino rains have already seen up to four fungicide treatments to control rust. Even so, Brazil’s soybean crop should be near 100 million metric tons if the pattern holds.

The greater concern may be the safrinha corn crop in Brazil. The safrinha crop is more concentrated in the northern areas that tend to see drier conditions in an El Nino pattern. Late planting of soybeans due to dryness is also expected to delay second-crop corn planting. Similar delays raised concerns last year, but timely rains provided a big crop nonetheless. Even so, this is something we need to watch in the February to May period, even as U.S. producers look to possible problems in the Midwest next summer. For today, the commodities are under pressure led by crude oil, even as the Ags find some strength on short-covering.

Argentina’s newly-elected President Macri reports that he will sign orders today to eliminate corn and wheat export taxes, while cutting 5 points off the soybean tax. This could produce a bump in competitive supplies on the global market.

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