Perspective: Morning Commentary for April 23

April 23 – Stocks cautiously added to Monday’s gains overnight, with gains limited by rising Treasury yields and a measure of nervousness about what Friday’s PCE inflation data might indicate. The VIX is trading near 16 this morning, while the dollar index is trading near 106.0. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.99%, with both just below five-month highs. Crude oil prices are modestly lower at roughly four-week lows this morning as the market’s focus shifted a bit away from Middle East tensions toward rising supplies. The grain and oilseed sector was mixed to lower in early trade.

The dollar surged to fresh five-month highs when the European Central Bank essentially telegraphed that it would be cutting interest rates in June, whether the U.S. did so or not. The ECB’s dovish tone sent the dollar higher, with the Federal Reserve sounding the more hawkish of the major central banks. But the ECB seems to be walking back that tone a bit today, with comments that rate cuts will necessitate hard evidence that inflation will continue to move down to its target. That sounds a lot like rhetoric from the Federal Reserve, and there’s no doubt that they have been talking. U.S. Treasury yields are still pressing higher, with yields on 2-year Treasuries on the cusp of a possible break back above the psychological 5.0% level. Yet, the dollar eased back a bit overnight on the comments.

China’s yuan is trading near five-month lows versus the dollar, which is something that creates some reason for concern for China’s central bank as it trades just below its weakest level of the past 15 years. China wants the yuan to be seen as a strong alternative to the dollar in global trade, but its economic problems make that difficult. It has to hold the line on stimulus, because doing too much could further weaken the yuan relative to the dollar. As such, it has allowed its property sector to struggle, while focusing on targeted stimulus toward its technology sector – particularly New Energy Vehicles (NEVs). The problem is, domestic sales of NEVs fell 30% in the first quarter of this year, and both Europe and the United States are threatening sanctions to limit imports of the vehicles, claiming unfair state-subsidized competition. China fears that it will see more sanctions, limiting exports at a time when domestic demand is soft as well, despite these targeted stimulus measures. China is now cutting prices up to 5.7% on the vehicles, responding to a price cut by competitor Tesla.

U.S. Secretary of State Antony Blinken is scheduled to visit China Wednesday to Friday this week, and the above will no doubt be a topic of conversation, along with a plethora of other concerns as tensions between China and the West continue to escalate. The United States is believed to be drafting sanctions that could block some Chinese banks from the global financial system due to China’s support of Russia’s military production. Blinken criticized China’s support of Russia’s military on Friday, indicating that China is a key supporter of Russia’s war efforts in Ukraine. Additional stress comes from a foreign aid package passed by Congress that included military aid for Taiwan – something that is sure to anger the Chinese. China doesn’t need these stresses at a time when its economy is already struggling, but neither is it likely to back down on the Taiwan issue, while it is also committed to not allowing Russia to lose its war in Ukraine, which it views as a war against the West. In many ways, tensions between the United States and the Communist Party of China are at all-time highs, with no sign of easing any time soon. China is determined to “reunify” Taiwan to the Mainland at some point – likely in the next several years, which certainly won’t help its relationship with the West. The timing of when it acts will likely have a lot to do with how it interprets developments in the U.S. election cycle.

Tensions with China do little to help U.S. exports of corn and soybeans to the world’s largest importer of commodities, especially with Brazil rapidly becoming the world’s largest exporter of the same. As such, both corn and soybean prices came under modest pressure again overnight. Corn finds modest support from an early start to the dry season in Brazil’s winter (safrinha) corn growing regions, as well as ongoing reports of production problems in Argentina from a disease spread by leafhopper insects. But the farmer in both Brazil and the United States is under-sold, resulting in cash sales that challenge rallies when they occur. Wheat, on the other hand, lacks that farmer selling ahead of the North American harvest, leaving fewer sellers to offset fund short covering as weather risks increase in several key production areas of the world. U.S. Plains wheat ratings fell notably again on Monday afternoon, and it remains dry in eastern Ukraine and southern Russia as well. We’re not yet at the point of talking severe losses for either location, although locally that may be true. But the concerns are great enough to create concern among fund managers leaning heavily short. The resulting short covering begins to turn chart signals, causing the Algos to add buy orders as momentum turns higher. Previous rallies have been seen as opportunities for the funds to sell again, but that will likely be determined this time by when / if the rains return to southern Russia.