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Market meltdown in March. How else to succinctly describe what is happening today in financial and commodity markets than this way. The generally bearish trend continues, and currently, the leading sector is energy. Neither agricultural commodities nor metals are lagging behind, although we have exceptions in certain commodities.
The absolutely main theme worldwide is the crisis of confidence shaking the banking sector, which began with the bankruptcy of SVB bank and continued with the major crisis of Credit Suisse, which was ultimately acquired by UBS. What’s next? In such external circumstances, it is not surprising that the S&P500 index remains below the four thousand points level, but I am somewhat surprised that the fear index VIX is below 30 points, while it is expected that the dollar index DXY is below 104 points. The EUR/USD ratio is moving in the range of 1.06 to 1.07.
Will commodity exchanges (all or just some of them) be a safe haven for investors or a product to liquidate in such an environment? The Goldman Sachs Commodity Index (GSCI) has fallen below 540 points, while the Bloomberg Commodity Index (BCI) has fallen below 103 points, and considering the opening of exchanges at the beginning of the new week, where all commodities except gold are falling, further declines in the two indices mentioned are to be expected. In fact, except for Bitcoin, gold, and the VIX index, everything else is falling at the beginning of this week. This sufficiently describes the state of the markets and the mood among investors.
Is this crisis of confidence in the banking sector nearing its end, or are we just at the beginning? Unfortunately, the latter is more likely. After the intervention of central banks to support struggling banks, the US dollar is losing its appeal as a safe haven for investments. The question arises whether this is what is best in the long term? If all deposits are backed by the state, what prevents unethical managers from being irresponsible in managing the bank by directing funds into risky strategies or perhaps directing funds into unscrupulous directions, knowing that the government will replace the funds?
This is very slippery ground. One thing is to guarantee properly secured deposits. Another is to guarantee all deposits. To put the whole situation in the context of commodity exchanges, at the end of the day, it all boiled down to poor duration management, so banks like SVB acted like someone who wants to protect stocks of old wheat in a new crop for better premiums, i.e., selling call options amid rising bullish fundamentals in the new crop market… the disparity remains until it breaks you.
On Sunday, a major acquisition of Credit Suisse by the largest Swiss bank UBS was agreed upon, which has the assistance/protection of the Swiss government in all of this. To put Credit Suisse in context, it is a top 10 global investment bank classified as a “systemically important financial institution” according to international banking rules that emerged after the collapse of Lehman Brothers.
And in the week ahead, we can expect news related to this banking crisis to be in focus; however, besides that, the market’s focus will partially be directed towards the US FED. It will be very interesting to see how the FED will position itself in the new circumstances. Until about ten days ago, it was almost certain that the FED would raise interest rates by an additional 50 basis points, but now it is questionable whether it will raise them at all. In any case, the decision on interest rate hikes will be in the range of 0 to 50 basis points. For comparison, the ECB raised interest rates by 50 basis points last week, but no additional information was provided regarding future steps.
China as the Leader of the New World
On the geopolitical front, a three-day meeting between Chinese Premier Xi and Putin is underway. Will Xi try to negotiate a peace agreement to increase his power/reputation on the international stage? Some rumors speak of a proposal that would include ending the war on the condition that Russia retains occupied territory, but it is hard to believe that Ukraine would agree to such a thing at this moment. If China were to militarily assist/support Russia, which is what Putin hopes for, sanctions against China from the US and Western countries are to be expected, which would not only call global trade into question but would also pose a serious threat to further escalation of the conflict and a step towards world war.
All in all, China continues to expand its influence in the world, after mediating a peace initiative between Iran and Saudi Arabia. China has taken significant strategic steps over the past month to be considered a leader in peace mediation and to take on a leading role in global politics. Iraq recently announced that it will accept yuan as payment for oil, which will open the door for other Arab countries to do the same. The Saudi Arabian central bank has just issued its first loan based on yuan as part of the Chinese Belt and Road initiative, which is expected to prompt other Arab countries to do the same. All these are steps to allow the world to see China as a leader in the world, and the US as the “former world,” while the yuan gradually approaches becoming a global currency.
Brent crude oil futures prices have fallen below $72/bbl at the beginning of the new week, after falling more than 10 percent last week. These are levels not seen since the end of 2021, and prices are under pressure as banking turmoil, fears of recession, and signs of resilient Russian supply continue to burden the market. The largest French refinery began shutting down over the weekend due to strikes, and gas and oil production in the UK could be halted after workers voted for a strike.
On the other hand, signs of strong demand from the largest crude oil importer, China, have emerged, with Unipec purchasing two million barrels of crude oil from the North Sea, marking Asia’s first purchase in three months. The IEA recently stated that China is expected to drive a two million barrel per day increase in global oil demand this year. Goldman Sachs has lowered its 12-month outlook for Brent oil prices from $100/bbl to $94/bbl, reflecting lower demand and moderately higher supply outside of OPEC.
TTF gas futures prices, the European reference for gas, have fallen below €40/MWh, the lowest since August 2021, after a 19 percent drop in the previous week. Weather forecasts for this week indicate above-normal temperatures across Northwestern Europe as spring approaches and the heating season comes to an end. European gas storage is 56 percent full, significantly above the average for this time of year. Additionally, LNG arrivals are higher than usual for this time of year despite strikes that previously disrupted energy facilities in France. Furthermore, one of four French LNG terminals continued operations last week, and Electricite de France SA maintained its unchanged nuclear power production forecast for 2023, alleviating some supply concerns.
Agricultural Commodities Face a Maze Full of Traps
The impact of bank bankruptcies is not yet measurable on agricultural commodities. The world will not stop, and people will continue to eat. However, at a time when inflation remains high, oil production is limited, and central banks are ready to raise interest rates, knowing that financial firms are vulnerable, agricultural commodities are facing a maze full of traps in 2023.
The main news is the extension of the export corridor from the Black Sea for at least another 60 days. Russia has informed all parties in the Black Sea grain agreement that it has been extended for 60 days and demands the lifting of Western sanctions, especially on bank transfers and insurance costs, and reiterated that it will not consider a new extension if these demands are not met. Turkey and the UN have said that the agreement is being extended, but did not specify for how long. A Ukrainian government minister stated that it will last 120 days.
In any case, exports continue, and the corridor is currently being extended at least until May 18. At the level of the past week, CBOT wheat rose by 4.6 percent, and corn by 2.75 percent, while soybeans fell by 2 percent. However, all three crops open the week in the red. The same is true on MATIF. On CBOT, wheat prices are around $7/bu, corn around $6.3/bu, while soybean prices are around $14.7/bu.
On MATIF, both wheat and corn are around the level of €260/t. China purchased another 191k tons of US corn on Friday, bringing the total amount to 2.11 million tons in 4 days, all due to delayed harvests in Brazil, logistical challenges, and slower sales from local traders/exporters. Despite this purchase, total corn imports into China for the current season are expected to be 18 million tons compared to 22 million tons in the previous marketing year. Brazil is expected to increase its biodiesel usage share to 12 percent from the current 10 percent. Despite this, the vegetable oil market continues to trend downward, further burdening canola prices. Canola has also fallen to its lowest level in nearly 21 months.
As of today, EU wheat exports amount to 21.54 million tons, compared to 19.84 million tons last year. Barley exports have decreased to 4.28 million tons from 6.03 million tons at the same time last year. Corn deliveries to the EU have sharply increased to 18.99 million tons from 11.84 million tons last year. Rapeseed imports currently stand at 5.76 million tons, compared to 3.67 million tons last year.
Regarding weather conditions in Europe, they are currently satisfactory, so the state of autumn crops is generally very good, but we are now entering a crucial period for plant growth that will require a good combination of sunny days and rainfall. In the US, the focus will be on the USDA report on March 31, which will provide the first estimates of areas planted with corn and soybeans, with an expected figure of around 92 million acres for corn and 88 million acres for soybeans. The IGC has released an initial estimate of the world wheat crop for 2023/2024 of 787 million tons compared to 801 million tons in 2022. Global corn production is expected to increase to 1.202 billion tons from 1.150 billion tons last year.
Neither metals are exempt from external factors prevailing in the market. Copper futures prices have fallen to $3.9/lbs, the lowest since early January, as fears of banking instability have disrupted expectations for higher demand from key consumers. Moreover, industrial production in China has missed projections for the first two months of this year, undermining the impact of the country’s reopening on economic activity. Nevertheless, limited supplies have constrained the decline in copper prices. Mining exports from major producer Peru fell nearly 20 percent year-on-year in January due to widespread protests that halted activity.
Additionally, inventories on the Shanghai Futures Exchange have fallen for the second week to the lowest level since January. Futures prices for steel rebar have fallen to the border of 4,250 CNY/t due to reduced investor risk appetite at this time. Although industrial production growth was below estimates for January and February, investors have been optimistic about strong levels of investment and new liquidity injections in the infrastructure and construction sectors by the PBoC (The People’s Bank of China). Support for prices has also been maintained by weaker supply. China has stated that it will reduce its annual steel production this year. The same goes for aluminum. Aluminum futures contracts were traded at around $2,300/t, significantly below the seven-month peak of $2,660/t reached in mid-January.
