Perspective: Morning Commentary, 12/28/2015

Monday, December 28, 2015

December 28 – It’s another short trading week this week ahead of the New Year holiday. The markets are open to handle any news that needs to be traded, but there’s very little economic data expected to be released; either here or overseas. As such, many traders have simply extended their holiday, leading to thin trade. That likely means quiet markets this week, unless unanticipated market-moving news develops. In that event, we could anticipate volatile action due to the relatively thin market volume.

The overall tone is modestly negative this morning, with the outside markets taking their lead from China. European stocks came under pressure, with U.S. stock futures pointing lower as well, after data showed that industrial profits fell in China, providing a drag for the emerging markets and the commodity sector. China is the world’s largest importer of commodities, so any slowdown in its economy is seen as a negative for the commodity complex.

China’s Shanghai Composite Index fell nearly 2.6% overnight, providing its worst trading day in a month amid fresh signs of slowing economic growth. Shares plummeted six months ago as confidence in China’s markets broke sharply. China banned sales by shareholders owning 5% or more in companies in an attempt to stabilize the markets. That six-month ban is now coming to an end, raising fears that we could see another wave of selling emerge as the ban comes to an end. This comes as reforms to China’s IPO system results in a flood of new listings diluting demand for existing stocks.
Crude oil rallied to three-week highs ahead of the holiday as traders covered short positions before heading home, choosing to pocket their profits rather than leave them on the trading room floor through the period. Unfortunately, there’s little fundamental news to support sustaining the move. Domestic supplies remain near 80-year highs for this time of year, Iran is ratcheting up production and Iraq appears to have regained control of some critical oil fields. Crude oil is down more than a dollar at this writing after West Texas Intermediate failed to hold a move above $38 earlier this morning, failing to test Thursday’s high in the process. As such, crude oil provides a drag for much of the rest of the commodity complex, including limiting gains in the grains.

Market bulls hoping for a weather story this week have thus far failed to get one. Dry areas of Brazil’s northern crop belt largely remain dry as expected, but forecast models continue to show relief for later this week. Rains are expected to scatter across dry areas, with significant moisture arriving next weekend. The pattern then remains active through next week. Forecasters expect the rains to go a long ways toward allowing crops in the region to finish with decent yield potential.

We could see some moisture stress begin to build over 25% of Argentina’s belt, but not to the degree of being yield reducing yet at this point. Elsewhere, snowfall is expected to increase over the Former Soviet Union wheat belt over the next 10 days to provide moisture and protection for the crop, although the Volga Valley could still be vulnerable.
China’s Dalian corn futures extended losses from their recent rally to nearly four-month highs as top leaders concluded a meeting mapping out rural development plans for 2016. Reports from the meetings that ended Friday suggested that the government will aggressively move toward free-market reforms to reduce its record stockpiles of corn. Prices overnight dropped to $7.27 per bushel, accounting for currency exchange rates, down more than 5% over the past four trading sessions. The government indicated that it will cut domestic corn acreage in 2016, with some indications that it may begin offering reserve corn below market prices after the Chinese New Year holiday in early February. Its reserves are believed to total nearly 8 billion bushels.

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