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As we enter the last week of August, a week in which the market will monitor several important factors that will influence the movement of commodity prices in the days ahead. This includes tracking extended weather forecasts, grain flows from the Black Sea region, water levels of key rivers, sentiment in the Chinese market, and the eagerly awaited report on non-farm payrolls to be released this Friday.
However, the main market movers remain macroeconomics and geopolitics. Commodity prices are under pressure as weak production data from major economies overshadow optimism. Regarding some general indicators, the dollar index DXY is above 104 points (at its highest level in the last two months, and the recovery of the dollar against the euro is significant and supports European agricultural products), the S&P 500 index is above the level of 4,400 points, and the fear index VIX has fallen to 15. The Goldman Sachs Commodity Index (GSCI) is above 585 points in the new week, while the Bloomberg Commodity Index (BCI) is above 105 points.
Corporate bankruptcies are rising in 2023 in the U.S. and have the fastest growth since 2010, excluding the pandemic year. The reason for this increase can be found in inflated balance sheets and a total of 11 interest rate hikes that began last year. Specifically, industrial sectors have experienced the highest number of bankruptcies due to their historically high levels of debt.
On the other side of the Atlantic, according to Eurostat data, business failures in the Eurozone increased by 8.4 percent in April, May, and June. This is primarily due to economic stagnation and the end of pandemic-era support. At the same time, registrations of new companies fell by 0.6 percent, partly due to U.S. incentives for the “green economy” that attracted capital from Europe to the U.S. The rise in bankruptcies has affected all economic sectors, but restaurants, hotels, and transportation companies have been hit the hardest.
The highest number of bankruptcies has been recorded in the Baltic states of Estonia, Latvia, and Lithuania, whose economies were closely linked to those of Ukraine and Russia, and the war has thrown them into crisis. In continental Europe, Hungary has recorded a 41 percent increase in bankruptcies compared to the previous year, the highest in the region. Germany has seen a 24 percent increase.
Starting in 2024, six countries will join the BRICS group, whose summit concluded last week in Johannesburg. These are Saudi Arabia, Argentina, Egypt, the United Arab Emirates, Ethiopia, and Iran, and with their entry, BRICS would globally represent 36 percent of the world’s GDP and 47 percent of the population.
The Chinese government continues to talk a lot about stimulating the economy, aware that the current situation is not favorable for them, but so far little of this has been implemented. Will China make some changes in its narrative to shift the focus of citizens elsewhere? Because of all this, the demand for crude oil in China and India remains uncertain.
Traders and the market want a FED pivot
The U.S. FED and monetary policy remain hot topics in the macroeconomic world, with the main question being when we will see a pivot? Traders and the market wanted to see this over the past year, but they were completely wrong. Inflation remains stubborn, and FED Chairman Jerome Powell continues to maintain a hard stance that much work remains to be done.
The current view of the FED’s situation may best be described by the stance that they would rather err on the side of keeping interest rates too high for too long than to reduce rates too early. Therefore, the goal is inflation below two percent at all costs. Any rise in commodity prices, especially oil and energy, can only intensify inflationary pressure, thereby affecting central bank policy in the short term.
On global markets, oil prices slightly fell last week for the second consecutive week as the growth of the largest economies slows, which weakens demand for black gold. On the London market, the price of a barrel slipped 0.4 percent last week, to below $85/bbl, while on the U.S. market, a barrel decreased by 1.8 percent, to below $80/bbl. Additionally, the strengthening of the U.S. dollar makes oil more expensive for buyers in other currencies, thus reducing demand.
On the other hand, support for prices comes from a reduction in oil supply in the global market. The decline in oil stocks and reduced supply from OPEC+ member countries have also maintained support for the market. On the other hand, prospects for easing sanctions on Iran and Venezuela have raised hopes that additional crude oil supplies could reach the market.
Morgan Stanley expects crude oil supply to decline for the remainder of the year, but they predict slower demand for 2024, which will result in oversupply at the beginning of next year. Because of all this, oil prices seem likely to continue moving within a very narrow range.
European natural gas futures prices at the beginning of the new week have crossed the threshold of €35/MWh, erasing losses from last week amid renewed concerns about lower supply. Planned maintenance at the Norwegian Troll field has brought daily flows from the country to the lowest level in a year, while work of uncertain duration will need to be carried out on fields connecting gas to Great Britain.
Additionally, workers at Chevron’s LNG facilities Gorgon and Wheatstone in Australia have voted for strikes led by unions if deemed necessary, despite ongoing negotiations to avoid disruptions. Although Europe does not import significant quantities of LNG from Australia, the price increase reflects heightened competition with Asian countries for LNG supply.
On the other hand, Woodside Energy Group has reached a preliminary agreement with its workers. Also limiting the decline, European gas storage is currently over 90 percent full, the highest recorded for this time of year, allowing TTF futures to remain below the highest level in the last four months of €43/MWh achieved on August 22.
In grains, the biggest factor is geopolitics
Grain futures on the CBOT fell last week, corn by 1.22 percent, and wheat by 2.97 percent, while soybeans rose by 2.48 percent. Currently, December wheat contracts are trading at $6.2/bu, and corn at around $5/bu, while November soybean contracts are trading at around $14/bu. On MATIF, December wheat is around €240/t, and November corn is €215/t. In grains, the most important factor is geopolitics, while for soybeans, it is the weather in the U.S.
Given that there are no new negative news from the Black Sea and the presence of the aircraft carrier USS Gerald Ford near the Anatolian coast, which potentially guarantees safe maritime traffic, it is not surprising that the price of wheat, which has generally yielded well in Europe, has fallen, while yield estimates in Ukraine and Russia are higher than initially expected. The exception is high-protein wheat, where poor European harvest creates additional demand.
In corn, as a very good harvest is expected across the entire northern hemisphere, significantly larger than last year’s, prices are also under pressure. However, it takes very little for the situation to change (if due to attacks on Ukrainian/Russian export ports there is a blockade of exports from the Black Sea), and therefore geopolitics plays a significant role in grains.
Overall, in grains, the potential for further price declines is significantly lower than the potential for increases. In soybeans, extreme heat affecting crops in the delicate flowering phase raises fears of reduced yields in the U.S. It is estimated that the weather in the U.S. will be hot and dry until the end of next week, so it is not surprising that the price of soybeans is currently rising on the exchange.
If we look only at the EU, MARS estimates the yields for the 2023 wheat crop at 5.78 t/ha, and corn at 7.45 t/ha. The total wheat harvest estimate is around 126.1 million tons, and corn 61.7 million tons. Regarding the weather, cold and wet prospects for September could slow down activities around harvesting and planting crops.
Gold stabilized at around $1,915/t.oz at the beginning of the week as investors continued to weigh FED Chairman Powell’s speech in Jackson Hole, while awaiting more U.S. economic data this week that will guide FED policy in the short term.
Copper futures prices rose above the threshold of $3.75/lbs driven by political measures aimed at supporting China’s wavering economic recovery, along with signs of increasing demand from the Chinese market.
Beijing’s approval for 12 provinces and regions to issue 1.5 trillion yuan in bonds for special financing is ready to increase funding for construction and infrastructure projects. Moreover, the interest rate cuts orchestrated by the People’s Bank of China, along with the gradual revival of domestic demand, have also provided some support.
