Perspective: Morning Commentary, 01/19/2016

Tuesday, January 19, 2016


January 19 – Crude oil continued to slide on the global market this week, with traders worried both about a slumping global economy led by China, as well as by increased production from Iran, now that the sanctions have been lifted. The lifting of sanctions received a lot of play in the marketplace, but that was well known and factored into the market already. Rather, the market simply lacked anything of substance to stop the downward roll of momentum.

China’s GDP growth slowed to 6.8% in the fourth quarter, with overall 2015 growth at 6.9%. Market bears point to the fact that last year’s growth was the slowest since 1990. Market bulls point to the fact that fourth quarter growth was only slightly below the previous quarter’s 6.9% pace, suggesting that authorities are now managing the problem and slowing the decline.


Chinese authorities didn’t wait for the debate to play out in the markets. They quickly announced that they will inject 600 billion yuan into their financial markets to improve liquidity. Global traders were encouraged by the action, believing that it will provide stability in a volatile environment. WTI crude oil dipped to a new low of $28.36 early in the overnight session, but then firmed back above $30 following China’s announcement. Unfortunately, it’s been unable to hold that $30 handle though as the reality of large supplies versus slumping demand re-emerged. Even so, Dow Jones futures are pointing toward triple-digit gains when the bell rings, following the lead of stocks elsewhere that reacted positively to China’s stimulus efforts overnight.


I reported Friday that the yuan makes up 21% of the U.S. dollar index. My lack of clarity proved to be misleading. China’s yuan captures the heaviest weighting of the Federal Reserve’s weighted dollar index at 21.6%, but that is different from the dollar index traded in the currency markets, where the euro is the largest component at 57.6%. Together, the yuan and the euro area currency comprise 38.2% of the Fed’s weighted index. The index is weighted by the amount of trade that we do with various countries. It shows how important China and Europe are to U.S. trade. The Fed index is considered a better assessment of the dollar’s true worth in the global marketplace. As such, a sharp devaluation of the yuan could have a significant impact on the Fed weighted index, pushing it sharply higher as the trade imbalance potentially escalates between China and the United States.


Russia’s ruble is trading at 78.4 per dollar this morning, continuing to weaken as oil revenues trend lower. In fact, the ruble is down 6% versus the dollar since the turn of the calendar. A cheaper ruble means cheaper wheat prices from the Black Sea, where Russian wheat is being offered at the Black Sea near $4.94 per bushel FOB. That continues to set the pace for U.S. and global wheat prices, particularly with Argentina becoming increasingly competitive as well due to free-market reforms and a sharply weaker peso. Meanwhile, a strong dollar continues to hamper U.S. competitiveness. In fact, currency exchange rates are currently facilitating cheap Argentine feed wheat moving into the United States in a rare move, despite our cheap feed prices.


That adds even more significance then to the rally in U.S. grain prices that gained momentum last week. Fundamentally, U.S. corn and wheat struggles to compete on the global market. Soybeans continue to garner support from wet weather slowing harvest progress in Brazil, although the models suggest that those delays will ease significantly two weeks out. Even so, it is a futures market. Traders leaning heavily to the short side are starting to shift their focus more toward potential weather risks going forward as we shift from a record strong El Nino toward a La Nina pattern later this year. That transition increases the risks for production losses in the coming year, although that risk still remains below 50%. In fact, the analog years still favor a trend- or above-trend safrinha corn crop in Brazil and a warm wet Midwest summer at this point, so caution is advised.


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