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- Inflation in the eurozone has fallen to 4.3 percent, the lowest since October 2021.
- The number of bankruptcy filings is rising. Such periods have historically preceded significant stock market declines.
- OPEC+ aims to maintain increased oil prices through production cuts, given that demand is weakening due to the slowing growth of the world’s largest economies.
- Copper is in short supply, and without it, achieving a green transition is impossible.
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Over the weekend, a deal was reached, literally at the last minute for the U.S. government budget for temporary spending, which will help stabilize macro sentiment and support commodity prices in the market. Therefore, there will be no (yet) fourth temporary and partial government shutdown in a decade, at least until mid-November when this topic comes back to the table.
Looking into the new week, on Friday we will see the non-farm payroll data for September and unemployment data in the U.S. This unemployment report is the first important data point for October that will change the FED’s expectations regarding interest rates ahead of the key meeting on further monetary policy scheduled for November 1. Commodity traders are also monitoring the harvest weather in the U.S., the early planting season in Brazil, grain flows in the Black Sea, and China’s import purchases.
Dollar Growth
The dollar continues to push towards new annual highs for 2023, which consequently impacts commodity markets. In China, the Evergrande crisis and new defaults have supported the dollar, which is considered a safe haven. Currently, it seems that the dollar has the potential to get even closer to parity with the euro. Such a dollar is, in any case, good news for European producers. Chinese economic indicators seem to slowly see light at the end of the tunnel, with visible improvements in some sectors, but there is still a long way to go. The central bank has once again hinted that it needs to do whatever it takes to support the economy. Inflation in the eurozone has fallen to 4.3 percent, the lowest since October 2021 – all of this is good to see and indeed feeds hopes that the ECB will pivot in monetary policy and begin to lower interest rates.
Bankruptcy Growth
According to WhaleWire, the increase in bankruptcy filings, which have reached levels similar to those during past economic crises such as the Great Recession of 2008 and the pandemic of 2020, raises concerns for the economy. Such periods have historically preceded significant stock market declines. The amount of debt held by governments, corporations, households, and individuals has increased by $10 trillion in the first half of this year to a record $307 trillion, reported the Institute of International Finance (IIF). The Chinese Ministry of Foreign Affairs, after Putin, states that the U.S. is a true empire of lies. Words, from both sides, are beginning to carry more weight. Everything will most likely end in a war between China and the U.S. A clash that will mark the end of the American empire in favor of the Chinese one. Similar events have occurred in history, when the dominance of the Dutch empire ceased, and that of the British empire began. History almost always repeats itself, especially when the ‘actors’ are always the same. However, if we view what is happening through the lens of repeating the last century, then it is not yet time for a remake of World War II. Currently, we are in a repetition of World War I (Ukraine) and the Spanish flu (Covid), and then according to the scenario, the reproduction of the 1929 crisis should come first, and only then World War II.
Oil Prices Rise
On global markets, oil prices rose again last week, again due to production cuts by OPEC+ countries, but also expectations that fuel demand in China will strengthen during the seven-day holidays that began on Friday. The entire previous quarter was marked by recovery/growth in energy prices, primarily oil. Thus, on a quarterly basis, Brent oil rose by 27, and WTI by 29 percent. The trend in crude oil is very impressive, raising the question of when this will again spark concerns about inflation? The goal of OPEC+ countries is to maintain increased oil prices through production cuts, given that demand is weakening due to the slowing growth of the world’s largest economies. As it is expected that due to high inflation, interest rates in the U.S. and eurozone will remain elevated for a longer period than previously estimated, further slowing of growth in these economies is expected, and thus demand for oil.
The only hope on the demand side remains China and the acceleration of growth in the Chinese economy. Natural gas prices in Europe have been volatile ahead of the winter season, with TTF futures trading around €40/MWh, reflecting a sense of unease in the market. This volatility is expected to persist due to limited global gas supply. European gas storage is currently at 95 percent capacity, providing short-term relief as the winter gas season begins on October 1. However, gas storage alone cannot meet all of Europe’s winter gas needs. The winter season lasts from October to March, and while storage can cover about one-third of gas needs during the heating season in the EU, severe cold could deplete it. The market also faces risks such as outages in the U.S., extreme weather conditions, and disruptions in Russian gas exports. The ongoing conflict in Ukraine has resulted in reduced gas flows from Russia, and recent prolonged outages in Norway, such as the closure of the Skarv field from October 2 to 8, have contributed to price spikes, highlighting the fragility of the market.
Agricultural Market Volatile
This has been a very volatile and unstable quarter for agricultural commodities and markets. The main price drivers during this period were: hot and dry weather in the U.S., higher energy prices, the hawkish FED, exports of goods from the Black Sea, weak export demand, a strong U.S. dollar, and more optimistic production estimates. In the end, we have a situation where hedge funds have net sold agricultural futures in 8 of the last 10 weeks. Non-commercial traders are now net short across the entire agricultural complex for the first time in three years. The dollar, oil, and exchange rates are three market drivers. High interest rates compress consumption. Current bearish factors are high rates and competition from the Black Sea. On the other hand, current bullish factors are supply retention, reduced pressure from EU harvests, increased shipping and land transport costs, and oil at medium-high prices with significant growth potential.
On Friday, the U.S. inventory report surprised the market quite a bit. Specifically, the data shows higher-than-expected soybean stocks and lower corn stocks. The market expected the opposite. A larger wheat harvest is also expected. Exchanges reacted strongly, and almost everything sank on the exchanges on Friday. The new week begins with wheat and corn on the CBOT starting in the green, while soybeans on the CBOT, as well as wheat, corn, and rapeseed on MATIF, start the week as they ended the last – in the red.
EU wheat exports continue to significantly lag behind last year (-27 percent), as does corn imports (-41 percent). In Europe, the EC estimates the wheat harvest at 126.3 million tons (0.3 percent less vs last year), durum wheat at 7.1 million tons (2 percent less vs last year; the lowest since 2011), corn at 60.1 million tons (15 percent more vs last year), barley at 48.9 million tons (6 percent less vs last year), rapeseed at 19.6 million tons (at last year’s level), sunflower at 10.45 million tons (14 percent more vs last year), and soybeans at 2.92 million tons (20 percent more vs last year).
Fossil Fuels’ Key Role
The gradual phasing out of fossil fuels is unrealistic as oil, natural gas, and coal will continue to play a key role in global energy supply and energy security, and it is unrealistic to completely eliminate fossil fuel energy, says a special Chinese climate envoy. Whether one agrees with him or not, we have a Himalayan task ahead of us on this issue. What emerges as a big question mark, how to secure the necessary metals and minerals for the implementation of such a global green transition. It is interesting to look at who the top 10 copper producers are: 1. Chile 2. Peru 3. DR Congo 4. China 5. USA 6. Russia 7. Indonesia 8. Australia 9. Zambia 10. Mexico. The list does not inspire much confidence. What is crucial is that without copper, it is impossible to achieve a green transition as it is estimated that electrification will increase annual copper demand to 36.6 million tons by 2031, while supply is expected to reach 30.1 million. A deficit of ‘only’ 6.5 million tons at the beginning of the next decade. Meanwhile, copper futures prices have risen to $3.7/lbs amid bets on a recovery in short-term demand and long-standing concerns about low supply. New PMI results from China show that the country’s manufacturing sector avoided contraction in September, raising expectations that economic support from Beijing may have prevented a sharper decline for the world’s largest copper consumer.
