Perspective: Morning Commentary, 01/15/2016

Friday, January 15, 2016

January 15 – Crude oil is down nearly 6% this morning and well-below the benchmark $30 per barrel level. Selling came hard and fast overnight as global economic fears intensified, sending prices to a new 12-year low. Furthermore, traders fear that Iranian sanctions may be lifted as early as Monday, adding to the current oil glut. Global stocks tumbled and money flowed into government treasuries seeking a safe-haven. Futures trade suggests that ideas of a second Fed rate hike by its April meeting have gone out the window for now amid a weakening economic outlook.

A key trigger for the global sell-off again emerged from China. Its closely-watched Shanghai Composite Index fell another 3.6% overnight and is now down more than 20% from its December high and in bear territory. Losses followed a report that some banks in Shanghai stopped accepting shares of smaller listed companies as collateral for loans, elevating fears once again about the health of the economy and of China’s markets. A struggling Chinese economy has negative implications for East Asia and the rest of the global economy, meaning less demand for crude oil and other commodities.

It’s also earnings season on Wall Street, and thus far that’s done little to change market sentiment. Companies listed on the S&P 500 are expected to show a third consecutive quarter of declining profits as Wall Street braces for the poorest earnings season since 2009, with overseas corporate earnings expected to be even worse. Dow futures are down more than 400 points at this writing as fear spreads through the markets.

Again, fund managers see decreasing demand for commodities amid slowing economic output. That doesn’t necessarily hold true for the food-based commodities, but it’s often difficult to separate them out from the crowd when supplies remain ample with no immediate threats on the horizon.

The dollar is turning lower this morning amid ideas that a Fed rate hike has been pushed to the back burner. That could all change if we see a sharp devaluation of the yuan, which makes up more than 20% of the dollar index basket. Even so, strength in the dollar is waning, at least for now. The Russian ruble is trading near 77.5 per dollar this morning as it continues to sink. That combines with today’s sharp losses in crude oil prices to once again create concerns regarding Russia and what President Putin might do to bolster his popularity at home.

Tuesday’s “bullish” USDA crop report has largely been forgotten, as we anticipated at the time. The data showed that the fundamentals were less bearish than anticipated, but certainly did not provide the kind of numbers to stand up against the tide of selling in the other markets, particularly with crude oil sinking to new lows. The Ags are holding up relatively well to this point, but sustaining a rally in this environment would be expected to be difficult without a significant weather story in a major-producing area of the world.

We continue to monitor forecasts for key production areas in Brazil, focused around Mato Grosso. The previously dry area continues to experience a wet pattern that is expected to remain active through most of next week. In fact, some northern and eastern areas of the belt could see rainfall totals top 6” through the period. The question now is whether the wet pattern will linger to the point of delaying harvest, shipment of new-crop soybeans and planting of the safrinha corn crop? The models remain mixed for the late January period, with little agreement. However, the true critical period for the region will be 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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