Outside Markets as of 6:50am: Dollar Index up 0.3180 at 88.2740; Euro down 0.00420 at 1.24370; Russian Ruble down 3.42% at 53.3902; S&P’s are up 5.75 at 2056.50; S&P’s are up 57.00 at 17,812.00; 10-yr futures are down 0.14%; The Nikkei closed up 0.42% at 17,663.22; The DAX is down 0.10% at 9,953.97; The IBEX-35 is up 0.42% at 10,717.70; Gold is down $23.10 at $1195.00; Copper is down $4.45 at $285.35; Crude Oil is down $1.09 at $67.91; Heating Oil is down $0.0286 at $2.1838; Paris Milling Wheat is up €3.50 at €191.75/MT.
Equities are on the slide this morning after the Russian government for the first time acknowledged that the country will fall into recession next year, battered by the combination of Western sanctions and a plunge in the price of the oil it exports. The economic development ministry revised its GDP forecast for 2015 from growth of 1.2% to a drop of 0.8%. The Russian Ruble seems to confirm this dire outlook, pushing to 53.3902 this morning, just off the record lows set yesterday. The Ruble is down 40% so far this year. According to the Associated Press, Russia has a solid balance sheet with low sovereign debt and sizable forex reserves, but the dependence on oil as a revenue stream has put it at the mercy of international market. In the US today, November total vehicle sales are expected to edge higher to 16.55 million units from 16.35 million units in October.
Not much to report in the US this morning. Later this week, precip will move into the southern plains and US-SE, but the majority of the Midwest is expected to remain quiet the next 7-days. Extended maps keep this trend in place with the central Midwest and US-SE seeing normal to above precip during the 6-10, while the WCB and Northern Plains remain below normal on precip. A warmup is seen coming during the 6-10 for the entire continuous US with above normal temps seen throughout. Above normal precip slowly pushes west during the 8-14 with above normal temps holding.
While much quieter today than the way we ended yesterday, traders are still trying to get to the bottom of the wheat rally which caught almost everyone off guard. The 25-30c gains witnessed by the close now marks $1.24 since the lows seen in September, and has March Chicago wheat trading at the highest level since early August. The difficult thing in the wheat market is sorting out fact from fiction, and there was certainly a lot of fiction flying around yesterday. The surging wheat market seemed to lift soybeans and corn, when they didn’t really have a lot of reason to do so. The soft soymeal market on the close yesterday seemed to highlight this better than anything. Nonetheless, our markets will continue to be especially sensitive to crude oil and overall investment demand for commodities. The huge index fund selling witnessed during the last week is a major caution flag.
Helping boost the wheat market yesterday were several headlines related to Russian exports, and potential bans or restrictions cutting available supply from the Black Sea. Prompting the concern over exports is the free fall in the Russian Ruble which has driven up the price of domestic wheat, flour and bread. Combined with the economic unrest related to the Western sanctions, there is obviously a lot of concern from a political standpoint in Russia. One thing is worth pointing out at the outset: Russia cannot ban exports in 2014 the way they did in 2010 as they are now a full WTO member, and would face fines for doing so. Having said that, qualified sources suggest measures being enacted in Russia to slow or complicate Russian wheat exports range from only allowing Russian flagged vessels to execute in the Azov Sea, to implementing increased phytosanitary restrictions in an effort to maintain ‘quality,’ to requiring more documentation at each leg of the transportation system domestically. Essentially, Russia doesn’t want to deal with rising inflation via bread and wheat prices due to a plunging Ruble, whether the fears are real or not. By enacting all of these logistical hurdles, Russia could potentially slow the record export program they have in place. As of last count, Russia still had 8MMT of outstanding wheat sales on the books, which could be put at risk depending on how serious political leaders are about slowing domestic prices. As always, watching basis will yield more results than anything.
Before turning to the US, there are several other global nuggets to address. Australia’s USDA, ABARE, released their December crop outlook last evening, cutting their 14/15 wheat crop to 23.2MMT, down 14% y/y. The cut would compare with the USDA still at 24MMT, but is still above many private estimates in the 22.0-22.5MMT range. Exports according to the USDA are estimated at 17.5MMT, but this has obviously been reduced by other analysts given the smaller crop size. Australian basis has actually been weak from its very strong levels witnessed heading into harvest, thanks to an upturn in selling by both the Aussie farmer and exporter. Wheat paid to the farmer is the highest it has been in quite some time, and Australia has also turned very competitive into SE-Asia. Given their range of quality in this year’s harvest, Australia could be in the driver’s seat on exports this year, especially with an Aussie Dollar trading at multi-year lows.
Lastly on the world front, the news hedge fund Brevan Howard Asset Management was shutting its commodity fund also seemed to put commodity markets on edge. The fund had around $630 million under management, and was down 4.3% on the year at the time of the writing, after being down 10.3% in September before a recovery. The Bloomberg Commodity Index of 22 raw materials has tumbled 10% this year through November amid expanding global supplies. While having the ability to point exactly to this fund liquidating is difficult to explain price action in any one market, the overall effect on the sector can be negative depending on positions. This is a good segue into the Commitments of Traders Data which showed considerable selling by index funds over the last week. As an aggregate position, selling across C,S,W,KW,MW,SM,BO,LH,LC,FC,CT,SB,KC, and CC totaled 68,123 contracts, the second largest week of combined selling going back to 1/2/2007. While there might not be any direct correlation to the Brevan Howard news, it is a bit concerning. The data suggests customer redemptions after crude oil fell to the lowest levels in years. This is a negative for investment in our sector.
Elsewhere in the COT data, there was small buying by non-commercials in corn (+4229), small selling in soybeans (-1041) and small selling in Chicago wheat (-2322). As is usually the case, the COT data is outdated and doesn’t reflect the surge in wheat and the selling in row crops witnessed Friday which could alter the aforementioned positions quite a bit more. The net short in Chicago wheat by non-commercials totals -36,798 contracts as of 11/25, although this is likely much smaller sitting here today. Otherwise, I do believe the index fund selling needs to be monitored to see if it is a trend or mirage. A big upturn in index fund selling and customer redemptions isn’t something our markets want to see by long-only investment vehicles.
As mentioned yesterday, the biggest thing to undermine the wheat market could be the row crop markets which don’t have the headlines or fundamentals wheat does at the moment. Specifically, it will be worth keeping track of the wheat/corn spreads as they ascent to multi-month highs. WH/CH is currently sitting at +214.00c, the highest trade since August 7th, while KWH/CH is trading at +271.75c, the highest since September. Feed demand wasn’t really a driver in the wheat market anyway, but wheat can’t afford to push away any ancillary demand. Seasonally, wheat tends to decline vs. corn through year end and into the beginning of the year.
Only other thing of note would be the state crop progress reports released yesterday by some of the states with significant harvest left to complete. Michigan reported corn harvest at 77% complete, up just 8% on the week, while WI was pegged at 78% complete and OH at 93%. These aren’t market moving statistics, but need to be kept in context when we round the corner to the January WASDE reports. Hard to believe maximum yield potential is still being achieved at this date given the weather experienced.
Bottom Line: A little bit of back and fill today as we consolidate yesterday’s rally. While headlines grab attention, basis and spreads will tell the ultimate tale in regards to commercial activity. Corn and soybeans still have a precarious head and shoulders pattern in place, while wheat charts look much better. Keep downside technical objectives in view the next several sessions.
Good Luck Today.
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