(Editor's note: This daily digest of the latest news and perspective is a must read for those in business who need to keep abreast of the newest developments in the marketplace, yet do not have time to scour all the media outlets. In less than 10 minutes you will be caught up and in the know on the current events impacting the marketplace.—Jim Wyckoff)
In Today's Digital Newspaper
Economists expect Western sanctions to drag on Russian growth in the coming years. But the West's failure to quickly bring the Russian economy to its knees for its invasion of Ukraine mirrors a larger stalemate on the battlefield there. Meanwhile, we have several updates on Ukraine grain and China's entanglement with Russia. More in Russia & Ukraine section.
To combat the use of food as a weapon, the U.S. is stepping forward to lead an international initiative supported by over 75 countries.
The Bank of England raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25% on Thursday, and gave a new warning that borrowing costs were likely to stay high for some time.
The homeowner vacancy rate in the U.S reached a record low at 0.7% in the second quarter.
A Wall Street Journal editorial comments on the "summer regulatory onslaught" under the Biden administration, indicating that these regulations could cost Americans hundreds of billions of dollars.
Have farm program payment yields kept up with actual crop yields? Dr. Joe Outlaw addresses this topic. See Policy section.
USDA began a financial aid program to support cotton merchandisers who have been negatively impacted by Covid and related supply chain disruptions. More in Policy section.
A potential summer surge in Covid-19 cases, although not as severe as those observed in previous summers, according to the latest data shared by the Centers for Disease Control and Prevention (CDC). More in Health section.
MARKET FOCUS
Equities today: Asian and European stock markets were mostly lower in overnight trading. U.S. Dow opened around 125 points lower. In Asia, Japan -1.6%. Hong Kong -0.7%. China +0.6%. India -0.8%. In Europe, at midday, London -0.6%. Paris -0.7%. Frankfurt -0.8%.
U.S. equities yesterday: All three major indices registered losses Wednesday after the Fitch downgrade of the U.S. credit rating. The Dow fell 348.16 points, 0.98%, at 35,282.52. The Nasdaq dropped 310.47 points, 2.17%, at 13,973.45. The S&P 500 declined 63.34 points, 1.38%, at 4,513.39.
Bunge lifts 2023 earnings view after Q2 profit beat. Bunge raised its full-year earnings outlook after improved processing margins helped the agri-trader post a second-quarter profit above Wall Street estimates.
Amazon and Apple both report earnings after the bell today. Shares of both companies have soared this year along with the broader tech space: Apple has climbed 48%, while Amazon has jumped 52%. Apple's push into financial services seems to be going well. Apple said its high-yield savings account, in partnership with Goldman Sachs, has reached $10 billion in deposits since its April launch.
As of Friday, 80% of companies have beaten earnings expectations so far, according to FactSet data. But those beats were met with an average stock price fall of 0.2% in the period two days either side of earnings.
Market quotes of note:
- The Bank of Japan acted for the second time this week to slow gains in benchmark sovereign bond yields, signaling its determination to curb sharp moves in rates even as it makes room for them to rise. The move weighed on the Japanese yen, and spurred speculation over the central bank's tolerance for the size of yield increases. "Two observations do not make a pattern, but for now five basis points increments could be the BOJ's tolerance for movements higher in the 10-year Japan government bond yield,” said David Forrester, a strategist at Credit Agricole in Singapore.
- Both Jamie Dimon and Warren Buffett aren't too concerned about the Fitch Ratings downgrade. The JPMorgan Chase CEO told CNBC the decision "doesn't really matter that much" because the market shapes borrowing costs. Meanwhile, Buffett told CNBC that his conglomerate Berkshire Hathaway is buying Treasurys. "There are some things people shouldn't worry about," Buffett said of the downgrade. "This is one."
- Billionaire investor Bill Ackman is betting against 30-year U.S. Treasuries, calling it a hedge on the impact of higher long-term rates on stocks as well as a "high probability" standalone bet. "There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times," he projected. Ackman also noted that if long-term inflation is 3% instead of 2%, the 30-year Treasury yield (US30Y) could reach 5.5% soon.
- Wheat trade rumor. Says grain trader and analyst Richard Crow: "A rumor in Europe, which started with an Indian newspaper, is India is working on buying 9 million tons of Russian wheat in a gov't-to-gov't trade. If true, world values will firm, but U.S. is still a way from working in the world trade.”
The Bank of England raised its interest rate by 25 basis points to a 15-year high of 5.25% on Thursday, aiming to control inflation. This marks the 14th consecutive hike, with the Monetary Policy Committee (MPC) voting 6-3 in favor. Two members advocated for a 50-basis point increase, while one voted to keep the rates unchanged. Markets were torn between the possibility of a 25-point hike and no change, leaning 60/40 for the quarter-point hike, based on Refinitiv data. The MPC vows to maintain restrictive banking rates until inflation returns to the 2% target, giving no indication that these policies will change soon.
The Bank has revised its inflation forecast and now expects a faster decline, down to 4.9% by the end of the year. In its last meeting in June, the Bank surprised markets with a 50-basis point hike due to the U.K.'s higher inflation rates compared to other advanced economies.
The MPC stated that it would continue to monitor the situation closely for signs of persistent inflation and overall economic resilience.
The homeowner vacancy rate in the U.S., which indicates the percentage of homes that are empty and up for sale, has reached a record low at 0.7% in the second quarter. This is the lowest it has been according to the Commerce Department's records which date back to 1956. The scarcity of available properties on the market has contributed to the maintenance of high prices, even in the face of increased mortgage rates and a decline in sales. This trend suggests a competitive housing market with fewer options for potential homebuyers.
Market perspectives:
• Outside markets: The U.S. dollar index was firmer, with most foreign currencies weaker against the greenback. The yield on the 10-year U.S. Treasury note was higher, trading around 4.13%, with a mostly higher tone in global government bond yields. Crude oil futures continued to firm, with U.S. crude around $79.65 per barrel and Brent around $83.30 per barrel. Gold and silver were under pressure ahead of economic reports, with gold around $1,969 per troy ounce and silver around $23.62 per troy ounce.
• Mosaic sees tight global potash supplies, restarts Canadian mine. Mosaic restarted a Canadian potash plant last month after idling it since December due to waning demand for the crop fertilizer, and said it sees tight supplies through 2023.
• India's parboiled rice export prices hit record high. India's parboiled rice prices hit a record this week as demand shifted toward the grade after New Delhi banned exports of non-basmati white rice two weeks ago. India's 5% broken parboiled variety was quoted at a record $450 to $455 per metric ton, up $5 from the previous week. There is no restriction on exports of non-basmati parboiled rice.
Of note: India says rice stocks at three times their target level. India had rice stocks at state warehouses totaling 37.6 million metric tons (MMT) as of August 1, including 24.6 MMT of rice and 13 MMT of unmilled husk varieties, sources told Reuters, telling the news service they are "comfortable” on rice supplies. State-run warehouses are required to have 13.5 MMT of rice, including strategic reserves of 2 MMT for the quarter starting July 1
• 15,032: Grain carloads carried by U.S. railroads in the week ending July 29, down 27% from the same week last year, leaving the agricultural volumes down 11.6% so far this year, according to the Association of American Railroads.
RUSSIA/UKRAINE
— Weeks after Russia invaded Ukraine last year, a White House official warned Moscow that a raft of U.S.-led sanctions could cut Russia's economy in half. Last week the International Monetary Fund gave some upbeat news for the Kremlin, forecasting that Russia's economy will grow 1.5% this year, supported by extensive state spending. Economists expect sanctions to cause Russia to stagnate in the years ahead. But, according to a Wall Street Journal article (link), the West's failure to quickly bring the Russian economy to its knees mirrors a larger stalemate on the battlefield in Ukraine, despite a raft of Western lethal aid to Kyiv and economic support for the Ukrainian cause.
Of note: Several of Russia's refined oil products are trading above the price cap imposed by Group of Seven nations, in another sign that the value of its barrels is rising in defiance of sanctions.
— The prolonged conflict in Ukraine, now in its 18th month, has sparked various concerns for China, according to the Wall Street Journal. The primary issues on China's radar involve food security, the potential use of nuclear weapons, and the stability of Russian President Vladimir Putin's position. Given that China has stood as a vital source of diplomatic and economic support for Putin, these escalating risks incentivize Beijing to propel peace negotiations between Moscow and Kyiv, the article says.
China's involvement is drawing close international scrutiny. With the expectation that their peace envoy will be present at an upcoming conference supported by Ukraine and intended to discuss terms for potential peace agreements, many will be observing for shifts in China's views concerning the conflict, as well as its eventual resolution.
— Ukraine considers insuring ships going through ‘grain corridor.' Ukraine is considering the possibility of insuring ships going through the "grain corridor,” news agency Interfax-Ukraine reported, citing Prime Minister Denys Shmyhal. "Now we are discussing in the government and, I am sure, we will make a decision on insurance of ships and relevant companies that will go via the ‘grain corridor,'” Shmyhal was quoted as telling a conference of Ukrainian ambassadors.
— Exporters union raises Ukraine crop forecast. Ukrainian grain traders union UGA increased its 2023 combined grain and oilseed crop forecast for Ukraine by almost 8 MMT to 76.8 MMT. UGA says production will likely include 26.9 MMT of corn, 20.2 MMT of wheat, 5.2 MMT of barley, 13.9 MMT of sunflower seeds, 3.9 MMT of rapeseed and 4.8 MMT of soybeans. UGA attributed the rise to "favorable weather conditions and better-than-expected crop yields.” UGA expects Ukraine to export 48 MMT of grains and oilseeds in 2023-24, down from 58 MMT in 2022-23. Wheat exports could total 15 MMT, down from 16.8 MMT in 2022-23, while corn shipments could fall to 22 MMT from 29.5 MMT.
— Major Ukrainian farm companies are curbing winter crop plantings after Russia blocked the main Black Sea export route, hitting world food supplies for the next two years. Link for details via Bloomberg.
— Update on Russia's strategic targeting of Ukrainian grain ports. On Wednesday, Moscow disrupted global food supplies significantly by attacking Ukraine's Izmail port on the Danube River, resulting in damage to nearly 40,000 metric tons of grain destined for Africa, China, and Israel. The attack caused widespread fires across the port's facilities, leading to an indefinite suspension of operations; no casualties were reported.
This targeted assault is seen as part of Russia's broader maneuver to strike critical facilities that underpin Ukraine's economy and international food security. Before Russia's withdrawal from the Black Sea Grain Deal, a global agreement ensuring safe grain transportation for both Russian and Ukrainian exports via critical waterways, Danube River ports, like Izmail, were responsible for about a quarter of Ukrainian grain exports. Since exiting the agreement on July 17, Russia has destroyed 26 Ukrainian port facilities, five civilian vessels, and 180,000 metric tons of grain.
Minister of Infrastructure of Ukraine, Oleksandr Kubrakov, argued that these attacks bear global implications, labeling them "a threat to the world.” Further, the strikes' closeness to Romania, a boat trip across the river, has drawn international criticism. The assault on Izmail marks one of Russia's nearest strikes to a NATO territory since the invasion began. These attacks, targeting grain storage and ships, are challenging the international community's ability to ensure safe shipping and freedom of navigation in the region.
During a call with Russian President Vladimir Putin, Turkish President Recep Tayyip Erdogan advocated for Russia to reconvene the Black Sea Grain Deal and cease attacks on food and fertilizer facilities. However, Putin insisted on amendments to the deal, particularly improved protections for Russian grain exports, before considering rejoining the agreement.
Moscow stated the Izmail port was targeted because it supposedly contained foreign mercenaries and military equipment. However, these claims remain unverified. Putin also suggested that the attack was a retaliatory move for Ukrainian assaults on a crucial supply bridge linking the Kherson Oblast to Russian-occupied Crimea, resulting in two fatalities, which he labeled as a "terrorist attack."
Bottom line: The Russian strikes have not entirely halted grain loading along the Danube, but current port capacities put constraints on fully shifting to this waterway. To address the problem, the ports have increased their capacity to handle 2.5 million tons of agricultural goods per month following investments.
POLICY UPDATE
— A Wall Street Journal editorial notes out what it termed as the "summer regulatory onslaught" under the Biden administration, indicating that these regulations could cost Americans hundreds of billions of dollars. As Congress departed Washington for the August recess, numerous regulations were issued. One example cited is the new Corporate Average Fuel Economy (CAFE) standards proposal from the Department of Transportation. This proposal, according to the WSJ, would effectively require all new cars to be electric by 2032, forcing automakers to drastically increase production of electric vehicles (EVs) to meet rising miles-per-gallon (mpg) standards.
The editorial also noted controversial moves from the Department of Energy, which it says is proposing a significant reduction in the mpg equivalent for EVs. This change would put additional pressure on automakers to produce more EVs to meet the standards, with penalties if they fall short. General Motors has estimated these penalties to amount to around $300 billion, or approximately $4,300 per vehicle from 2027 to 2031.
Furthermore, proposed revisions to the National Environmental Policy Act (NEPA) also drew attention. These propose that federal agencies consider factors like climate change and "environmental justice" when reviewing projects, influencing the scope and nature of future developments.
Lastly, the Wall Street Journal noted changes related to legal settlements with environmental groups, essentially enabling the administration to bypass judicial reviews of environmental regulations.
Upshot: Overall, these policy changes highlight a marked shift toward environmental considerations under the Biden administration, but with significant economic implications.
CHINA UPDATE
— The Chinese government is increasing scrutiny on certain commodity transactions, suspecting that trades are being manipulated for cheap financing or government subsidies, instead of serving the real economy. These alleged practices are viewed as providing little to no economic contribution. This information comes from traders and officials who are aware of the ongoing investigations. Bloomberg News, through interviews conducted with approximately 20 traders, warehouse managers, and smelter executives since April, revealed that these investigations are causing hesitancy among some Chinese businesses. Firms are increasingly reluctant to establish new contracts in the metals, chemicals, and coal markets. Furthermore, it's been reported that some existing supply contracts have even been terminated because of the scrutiny.
TRADE POLICY
— The Indian government has put new regulations in place that mandate importers of laptops, tablets, and desktop computers to obtain a license. Previously, this wasn't a requirement. This move falls in line with their aim to bolster domestic manufacturing of these high-value electronics. During the second quarter of 2023 alone, the country had imported electronic goods worth $19.7 billion. Despite this, the government has a long-term goal of increasing home-grown production of electronic products. By 2026, they aspire to reach an annual production value of $300 billion. The idea behind this move is to reduce India's dependency on imported electronic goods and foster self-reliance through boosting local manufacturing capacities.
— In a move to combat the use of food as a weapon, the U.S. is stepping forward to lead an international initiative supported by over 75 countries. This coalition is expected to back a U.S.-drafted communique, aiming to combat the weaponization of food and the strategic targeting of civilians through starvation tactics in conflicted countries. Antony Blinken, the U.S. Secretary of State, will chair a U.N. Security Council meeting discussing famine and food insecurity exacerbated by warfare.
While the communique is generally regarded as a reaction to Russia's activities in the ongoing Ukraine conflict, it doesn't single out any specific nations. American officials have emphasized the importance of acknowledging that the issue surpasses the actions of any single country, and have underlined the desire of their global partners, particularly those in the global south, for a focus on constructive solutions rather than blame allocation.
Blinken will also declare a new funding allocation of $362 million intended to address root causes of food insecurity and bolster resilience in nearly a dozen African countries, as well as Haiti. The strategy takes a proactive stance on tackling food insecurity by addressing its primary causes and improving the resilience and self-sufficiency of these nations in order to alleviate current and future food crises.
HEALTH UPDATE
— A potential summer surge in Covid-19 cases, although not as severe as those observed in previous summers, according to the latest data shared by the Centers for Disease Control and Prevention (CDC). The increase in infections is evident in a rise in test positivity, increase in emergency room visits, and a higher number of hospital admissions. Last week, 8,000 people were hospitalized due to Covid-19 in the U.S., marking a 12% rise from the week prior, according to the CDC. Federal health officials are already planning a response, with news of a new Covid-19 booster vaccine due for release around late September or early October. This booster is specifically designed to target the XBB strain, which is currently the most dominant virus strain. Despite the resurgence, experts believe a return to universal masking is unlikely due to the upcoming vaccine. The once-essential Covid-19 vaccine card has become less crucial with the changes in situation, but CDC officials still advise keeping it as part of your medical history.
OTHER ITEMS OF NOTE
— Lula: 'World must help' Brazil protect Amazon rainforest. Brazil President Luiz Inácio Lula da Silva, commonly known as Lula, said it is imperative for the world to collaborate to help Brazil with the conservation of the Amazon rainforest. This is particularly relevant with an upcoming summit scheduled for next week, which will focus on this vast, climate-regulating rainforest. Lula, along with leaders from other nations that share the Amazonian territory, will gather in Belem, a city in Brazil, to deliberate on policies aimed at protecting this ecologically significant region. The necessity of such policies arises from the critical damage inflicted on the rainforest due to rampant deforestation.
