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After the market crash in the first half of March, the last two weeks have seen market consolidation and price recovery. A scenario often witnessed in the markets. As fears of further escalation of the banking crisis have temporarily subsided, all markets have reacted positively.
Last week, stock prices rose on global financial markets as fears of a banking crisis eased and investors hoped that the FED would soon end its cycle of interest rate hikes. All major indices rose between three and four percent on a weekly basis. Throughout the first quarter, the Dow Jones increased by 0.4 percent, and the S&P 500 by about 7 percent. The Nasdaq rose by 16.8 percent, marking its largest quarterly gain since the second quarter of 2020.
What do the general indicators show us at the beginning of the new week? The S&P 500 index remains above the level of 4,100 points, the fear index VIX is below 20, and the dollar index DXY is close to the level of 102 points. The EUR/USD exchange rate continues to trade within a range of 1.05 to 1.09. The Goldman Sachs Commodity Index (GSCI) starts the week above the level of 590 points, while the Bloomberg Commodity Index (BCI) has nearly reached 107 points.
The bipolarization of the world and the creation of an alternative bloc continues. The global order as we know it is changing rapidly, and this will not be without consequences for the West, particularly Europe. Since the beginning of the war in Ukraine, BRICS countries have refused to participate in sanctions against Russia and continue to distance themselves from the West. Russia, Brazil, India, China, and South Africa have confirmed that they are developing a new currency, an alternative to the dollar.
Saudi Arabia has partnered with China to build a Chinese oil refinery for $12.2 billion and has also agreed to purchase 10 percent of the Chinese oil refinery for $3.6 billion. Moreover, Saudi Arabia has agreed to join the Shanghai Cooperation Council as a “dialogue partner.” China and Brazil have agreed to trade in their own currencies, abandoning the US dollar. Already, the Chinese yuan has surpassed the euro and become the second most important currency in Brazil’s foreign exchange reserves.
France and China have also signed their first LNG contract in yuan, again abandoning the dollar. This development disrupts the current “petrodollar system” that emerged after the collapse of the Bretton Woods system in 1973. When countries receive dollars for the oil they sell, it benefits the US as those dollars then flow into American investments, ensuring liquidity in financial markets and maintaining low rates.
Countries like Saudi Arabia, the world’s largest exporter of crude oil, have been using the petrodollar system since the 1970s. Until now, all crude oil exports have been paid for only in dollars. If several countries, along with Saudi Arabia, begin to shift from dollars to alternative currencies, it reduces the overall demand for dollars and increases borrowing costs for consumers and businesses.
Over the past 12 months, Saudi Arabia, China, Russia, India, and others have rapidly consolidated relations and trade. Saudi Arabia has stated that it is open to joining BRICS this year, along with Turkey and Egypt. These countries, along with members of the Shanghai Cooperation Organization (SCO), have expressed intentions to create a plan for gradually increasing the share of national currencies in mutual trade, as well as agreements to enhance coordination in research and energy policy, primarily in oil, natural gas, and nuclear energy. This sets the stage for a commodity-backed reserve currency that will compete with the US dollar.
Four trillion dollars in financial products
Further banking turmoil in the US, economic downturn, loss of the FED’s focus on inflation, and financial collapse are among the dangers concerning economists today. Roubini believes we are entering a recession and financial instability and that we cannot achieve price stability, maintain economic growth, and have financial stability at the same time, so we will ultimately experience economic and financial collapse. The banking system, since 1971 and accelerating since 2008, has “created” four trillion dollars in financial products. Once again: four trillion dollars. Kiyosaki expects that the increase in interest rates will cause a collapse of stocks, bonds, real estate, and the US dollar. After that, the derivatives market (futures, options), with a capitalization of one quadrillion dollars, will collapse. A quadrillion is a thousand trillion. Essentially, a lot of zeros.
Since last July, at the beginning of each quarter, funds have always been bearish. A bet that has proven successful and led to a steep decline in grain prices. Will they continue on this path, or have prices already been sufficiently lowered? Will the banking crisis cause a transfer of liquidity from stocks/bonds to energy and agricultural products? The first half of April will give us guidance. Will investors in the markets continue shorting, or is it time to take long positions in grains after nine months of market decline, considering the fragility of fundamentals, timing, and geopolitics?
Cargill, a leader in agricultural commodity trading, will cease exports from Russia. Viterra will follow Cargill and has confirmed its plans to reduce its presence in the Russian market. The Russian government has stated that these decisions are not expected to affect overall exports from the country. Russian crops are not under sanctions, but trade is complicated by restrictions placed on Russian banks and state-owned companies. International grain traders have also faced increasing pressure from some Russian officials and the local industry to leave.
All of this increases confusion regarding the timeline for the duration of the export corridor from the Black Sea, which could be a strong bullish factor for the markets in the future. EU member states have approved a financial aid package for farmers in Poland, Bulgaria, and Romania, whose businesses have been negatively affected by duty-free imports from Ukraine. The aid will amount to €56.3 million, of which €29.5 million will go to Poland, €16.75 million to Bulgaria, and €10.05 million to Romania.
An important quarterly report in the agri sector is the one on stock levels and planned new sowing in the US. The report was generally slightly bearish for wheat, neutral for corn, and bullish for soybeans. In summary, an increase in wheat acreage in the US is expected compared to last year by nine percent! However, due to adverse weather conditions, spring sowing will be slightly delayed. When it comes to soybeans, this year soybeans will be sown on the third-largest area in history, slightly larger than last year, but still less than expected. Corn will also be sown on a larger area than last year, but also on a larger area than the market expected.
Are we at a turning point regarding prices? Did we see the lowest prices in the markets for this year in March, or will we only see that in the summer? At the beginning of the week, on the CBOT, the price of wheat is above $7/bu, the price of corn is above $6.6/bu, while the price of soybeans is above $15/bu. The price of wheat on the CBOT fell by 12.6 percent in the first quarter, while the price of corn fell by 2.7 percent in the same period. Although the price of soybeans is currently the highest in the last three weeks, on a quarterly basis, its price has fallen by 1.2 percent. On MATIF, there is also a price recovery, and currently, wheat and corn are trading at levels above €260/t. While the situation in the US is in focus before the start of sowing due to adverse weather conditions affecting sowing, in Europe, favorable weather conditions are currently present ahead of the upcoming sowing.
OPEC+ Complicates Inflation and Interest Rate Outlook
Futures prices for Brent crude oil jumped at the beginning of the week to a level of $85/bbl, completely nullifying the price drop from early March. The reason for this increase in oil prices is the announcement by OPEC+ of a reduction in oil production, starting in May until the end of 2023, by 1.16 million barrels per day. A reduction of half a million barrels will be made by Saudi Arabia. The rest will come from member countries such as Kuwait, the United Arab Emirates, and Algeria, while Russia has announced that the reduction it announced from March to June will be extended throughout 2023. It is estimated that OPEC+ is trying to set a floor for prices, around $80/bbl for Brent and $75/bbl for WTI.
This move complicates the outlook for inflation and interest rates, as investors had bet that easing price pressures would give central banks room to pause the current tightening cycle. Meanwhile, an initial agreement has been reached to resume oil exports via Ceyhan this week, after a dispute involving Kurdish authorities halted exports of about 400,000 barrels per day from the Ceyhan port in Turkey. Regarding demand, investors remain optimistic about China’s recovery, and PetroChina and Cnooc recently stated that the recovery of the domestic economy could help mitigate the impact of slower global growth.
Gas has been out of focus for investors and the public for weeks after gas prices fell to relatively acceptable levels. Futures prices for gas TTF, the European reference gas value, start the week with an increase to a level of €48/MWh, after two consecutive weeks of decline. Weather forecasts indicate another short cold period this week, and some maintenance work is expected in Norway, the largest European supplier. However, with the end of the heating season, storage facilities have started to fill up, led by Italy and Germany. At the same time, LNG imports have remained strong.
Futures prices for copper have remained at a level of $4.05/lbs. What supports prices in the short term is the ongoing fear of limited supply. Strong usage in China amid its economic reopening has led to a decline in stocks on the Shanghai exchange by more than one-third since prices peaked in February. At the same time, production from the largest producer in Chile fell by 3.7 percent in February, putting additional pressure on a market already facing reduced supplies from Peru due to political turmoil.
The reduction of stocks worldwide has prompted key commodity trader Trafigura to forecast record-high copper prices this year. Meanwhile, the imbalance of supply and demand has led Goldman Sachs to project a global shortage of visible copper stocks by September. Demand estimates have varied as reduced concerns about banking turmoil have increased the likelihood of tighter FED policy.
Futures prices for steel rebar have fallen to 4,070 CNY/t, the lowest level since mid-February, amid hopes for cheaper input materials as investors continued to monitor the outlook for Chinese demand. Data from private research showed that factory activities in China stalled in March, while fears grew that authorities might issue another warning to curb iron ore prices. The Chinese National Development and Reform Commission issued several warnings about the accumulation of iron ore and speculative activities in the past month due to rising prices. Nevertheless, lower steel production has limited losses.
Reports indicate that China is considering a 2.5 percent reduction in crude steel production this year, marking the third consecutive year of production cuts as the economy aims to peak carbon emissions by 2030. The production cut aligns with projections of strong demand, as the PBoC has injected more liquidity and reduced its reserve requirement ratio to support fragile loans from the debt-laden construction sector. Futures contracts for aluminum traded at around $2,300/t.
