Perspective: Morning Commentary, 01/25/2016

Monday, January 25, 2016

January 25 – Washington, D.C. is shut down today after much of the surrounding region received 20 to 30” of snow over the weekend. As such, data from USDA and other agencies will be lacking, leaving traders looking elsewhere for direction.

Crude oil prices are down more than 3% this morning after Iraq announced record high production. The increase in Iraqi production comes as Iran ramps up its own production following the lifting of sanctions. Furthermore, Saudi Arabia voiced its commitment to maintaining investments in energy products and diesel consumption dropped for the fourth consecutive month in China. Global oil supplies are large, with U.S. domestic supplies near 80-year highs. Yet, demand continues to struggle amid a slumping global economy. Crude oil posted an impressive reversal last week as bottom-pickers emerged on the break to its lowest level since 2003, but any sustained recovery still faces significant headwinds from these rising supplies amid tepid demand.

The major commodity indices posted impressive reversals last week as well, energized by the bounce in crude oil. The move raised questions about the ability of the broader commodity sector to benefit from money flowing out of stocks. There’s been a strong inverse relationship between stocks and commodities as central bank activity pumped liquidity into the equities while also pushing the dollar higher to hurt the commodities. That possibility must be respected, but the dollar continues to trend higher and the global economy to struggle, leaving the commodity sector at large searching for fundamental support for a sustained rally.

Global traders should have a plethora of data to provide direction this week, with earnings season in high gear and central banks back in the headlines. The European Central Bank’s Mario Draghi is expected to speak today about the possibility of expanding stimulus for the Eurozone. Furthermore, the U.S. Federal Reserve will be meeting on Tuesday and Wednesday, releasing an updated statement of monetary policy Wednesday afternoon. The Bank of Japan is expected to release a statement this week as well. Finally, the initial reading for U.S. fourth-quarter GDP growth is expected to come in at just 0.9% when released on Friday.

Russia’s ruble is trading back below 80 per dollar this morning, but it still remains at historically high levels amid sinking oil revenues for the beleaguered economy. As such, Russian President Putin faces increases risks at home, with some discussion of hyper-inflation. Rumors emerged out of Russia late last week that it might consider export limitations on grain in order to contain the possibility of hyper-inflation. Russia’s Ministry of Agriculture continues to keep the door open to such restrictions this morning following meetings with that country’s livestock industry leaders. Suddenly the dryness issues in India following last year’s poor monsoon rains and the expectations of a short wheat crop there take on added meaning if Black Sea wheat is limited, although U.S. supplies remain large amid ample supplies in Europe as well.

We continue to see forces within China’s government push toward free-market reforms that could have significant longer-term implications for the Ags. China has already taken steps to dramatically reduce subsidies, particularly for the over-supplied corn sector. A senior official stated today that China may move toward allowing the market to determine domestic corn prices at some point this year, which could shut off imports of U.S. grain sorghum, while keeping the door closed for U.S. corn imports. The timing of such a move is important in regards to planting decisions being made by producers for their 2016 cropping mix.

Rains continue in northern areas of Brazil’s crop belt, but they are expected to shift back to drier southern areas as we turn the calendar. Good rains fell in Argentina over the weekend, although a quarter of its grain belt is seeing mounting crop stress.

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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