Perspective: Morning Commentary, 01/11/2016

Monday, January 11, 2016

January 11 – China captures the headlines once again this morning, with its Shanghai Composite Index down 5.3% to extend last week’s 10% losses. The lack of circuit breakers probably kept the losses from being more significant, but that’s little solace for a market that appears that have lost confidence in the ability of the government to provide stability. China’s central bank again posted a firm peg for the yuan, which the markets interpret as negative for exports.

Actions that appeared to be intervention by the central bank last week soaked up offshore supplies of the yuan, leading to interbank lending rates in Hong Kong to hit record highs for short-term loans. The exchange rate surged to a four-month high on the tight supplies of yuan. There’s simply very little liquidity in Hong Kong right now. A gap in domestic versus foreign yuan exchange rates raised greater concerns last week, with authorities indicating that they wanted to converge the rates.

The gap raises concerns about the validity of the yuan as an international exchange currency as China prepares to enter the IMF Monetary Fund reserve basket in October. As such, the central bank was believed to have been an aggressive buyer of the yuan in Hong Kong last week to soak up supplies of the currency to prop it up. This type of irregularity raises concerns though as the currency seeks validity as a valid international currency.

The good news today however is that U.S. stock futures are pointing higher after experiencing their worst start to a new trading year in history. The Dow Jones Industrial Average closed Friday at 16,346, down 1,079 points or 6.2% from the previous week. Dow futures currently point toward a strong open, but caution is advised.

Even so, the commodities remain under pressure this morning. China is the world’s largest importer of raw commodities and its economy continues to struggle. As such, the Thomson Reuters CRB Index is at a new low once again, trading at its lowest levels since 2002. Crude oil continues to be the poster child for the broader commodity sector. The world has an abundant supply of crude oil, with Iran looking for opportunities to gain market share and Saudi Arabia doing what it can to hold onto its share. A weak global economy leads to weak demand in a time of surplus supplies.

The grain and oilseed markets saw renewed strength in the face of broader commodity weakness late last week. There were various fundamental reasons given for the strength, but it was largely short-covering ahead of tomorrow’s series of USDA releases. These January reports are known for their surprises and the market is currently leaning heavily to the short side, leading to some nervousness in the trade, even though sentiment remains quite bearish. Friday’s CFTC Commitment of Traders report showed the speculative hedge funds holding record large short positions in soybeans and Chicago wheat, while continuing to build large short positions in corn as well.

Rains continue to fall in previously dry areas of Brazil. In fact, frequent rains are expected to continue in these areas for much of the next two weeks. Last week’s outlook suggested that rains would shift south again by the end of the month, allowing early soybean harvest to advance to kick off the export season, while allowing the safrinha corn crop to be planted. However, the long-term CFS forecast model now projects the active rain pattern to continue wetter in Mato Grosso for early February, raising concerns. This will need to be monitored for creating possible delays in soybean shipments. It could also end up impacting the timing and area planted to safrinha corn if delays linger too deep into February.

Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

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