Perspective: Morning Commentary, 01/12/2016

Tuesday, January 12, 2016

January 12 – China effectively closed the gap between offshore and onshore yuan exchange rates. It did so by apparently encouraging state banks to buy up yuan in Hong Kong, which in turn drove up the overnight deposit rate fixing to 66.8%. However, the question remains, is this sustainable? China’s central bank put another firm fix on the yuan overnight attempting to restore some stability to the currency and to its markets. At the very least, its actions should make investors wary of being short the yuan short-term.
The central bank appears to have won this round, but it’s doubtful it will win in the end. Weakness in the yuan in offshore trade likely reflected panic among China’s wealthy. They fear for the future of the nation’s economy and are likely looking for ways to move their wealth off-shore to preserve it. China managed to strong-arm the market into submission near-term, but that doesn’t ease the fears of China’s wealthy, who now likely feel even more trapped. If so, they will continue to seek other ways to move their wealth overseas.
Global stocks were relatively stable overnight, taking a breather after one of the poorest first weeks for a new trading year on record. In fact, the Nasdaq Composite Index has been lower for eight consecutive days – its longest losing streak since January 2008. Stocks received a boost from firmer crude oil prices after West Texas Intermediate fell to a 12-year low on Monday. Both WTI and Brent crude oil fell below $31 per barrel in early trading today, before recovering modestly. Some traders were content to take profits on a portion of their short positions just above $30 per barrel, while OPEC indicated that it might move its next meeting up to March in order to respond to falling energy prices.
The Thomson Reuters CRB Index initially fell lower on the early weakness in crude oil prices, but then firmed as oil rallied back into positive territory. The index held above Monday’s lows on the dip. Monday’s break of the index to its lowest level since 2002 keeps the commodity sector in a bearish mode to start 2016, with investors worried about the health of the global economy.
I’ve said little of the Russian Ruble in these comments, but raise the concern for your attention going forward. The Ruble is currently trading near 76.50 per dollar, as it continues to tumble amid Russia’s slowing economy. President Putin enjoys a great deal of popularity at home, but the declining Ruble could test that popularity. Russia’s economy is heavily dependent on revenue from crude oil, which is rapidly dropping in value – now to 12-year lows.
Why should this matter to us? Putin’s history would suggest that he engages in military action whenever necessary to boost his popularity at home. Doing so in the Middle East could boost that popularity while also creating the type of instability that could increase crude oil prices as well, providing a double-benefit, with implications for the rest of the markets as well. This isn’t a specific prediction so much as it is a word of caution based on analysis of history as revenues fall in Russia, along with the Ruble.
Today’s focus will primarily be on USDA’s basket of January reports, which are known for their surprises. In this case, we take the risk of surprises into a market leaning hard to the short side. The reports will include the results of USDA’s winter seedings survey, quarterly grain stocks, final 2015 production estimates and updated domestic and global supply and demand balance sheets. The place I will look first for a possible surprise will be in the December 1 quarterly corn stocks estimate, followed by soybeans. These numbers have implications for domestic use, but also for the accuracy or lack thereof of USDA’s production estimates.

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