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We are facing a very volatile week for commodities and markets, especially for agricultural products. This Thursday, we will see critical quarterly USDA reports on stocks and planting intentions of American farmers for the new season. This is a very important report every year that somehow directs trade in the coming weeks and months and gives the market the first concrete insight into producers’ intentions for the new season. For several days now, funds, as well as all others participating in the market, have been adjusting their positions ahead of this report, as the report has often been surprising in the past.
American stock markets have pushed to new heights following the actions of the FED. The FED maintains its hawkish stance, much less reckless than in the past, but still holds to its three rate cuts in 2024 despite the elections in the U.S. Despite the market’s hope for rate cuts, sticky inflation currently remains with no signs of easing. However, if we take a closer look at the data, all of them from CPI, PPI, housing data, and employment still suggest that the U.S. economy remains resilient to the previous rate hikes, so much so that some now believe we will not see a rate cut this year, but that the first considerations will not be before the beginning of 2025.
In the currency markets, the value of the dollar rose last week, with the dollar index (DXY) back above 104 points. The American currency strengthened against the European one, and at the beginning of the new week, the price of the euro is at 1.083 dollars. Last week, investors were pleasantly surprised by the Swiss central bank, which unexpectedly cut interest rates by 0.25 percentage points to 1.5 percent. This is the first major central bank to cut rates after a prolonged cycle of tightening monetary policy, which is seen in the market as the first signal that the fight against inflation in Western countries is nearly won. Therefore, this week, investors will focus on new inflation data from the U.S., the region, and European countries, which could hint at when central banks will start cutting interest rates.
Beijing Prioritizes Gold Production
Gold prices reached a new all-time high last week and still have room for growth as several countries are engaged in large purchases. It is speculated that gold prices could rise to $2,300/t.oz. Central banks, which have purchased historic levels of gold in the last two years, will continue to be strong buyers in 2024. China, the world’s largest producer and consumer of gold, prioritizes increasing production. Beijing is acquiring assets worldwide to achieve this goal. At the same time, it is reducing exposure to the dollar, the main fiat currency on the planet. A substitute commodity for exchange and stores of value, in relation to fiat currencies.
In Brussels, a delicate dossier on funding for Ukraine that could be obtained from the Union’s budget is being discussed. The issue of allocations for defense deeply divides EU countries. While Dutch Prime Minister Rutte is against it, German Chancellor Scholz supports the allocation of frozen Russian assets to Kyiv, a possibility also supported by Belgium, which would immediately provoke retaliation from Moscow. It is estimated that frozen Russian assets could yield three billion annually. However, this action would most likely lead to the withdrawal of all “non-Western” capital currently deposited in the eurozone. Could this be the end of the euro?
Here is another way geopolitics can affect trade and commodities. Namely, the construction of an alternative canal to the Suez Canal, the so-called Ben Gurion Canal, has been agreed upon for some time. Why? Simply because the Suez Canal gives Egypt too much power. Egypt could bring global trade to its knees by closing the Suez Canal and dictate terms to the entire West as well as to Iran, India, and China. The alternative canal would connect the Israeli city of Eilat in the Arabian Gulf and the Mediterranean Sea in northern Gaza. The construction of the alternative canal has been agreed upon for years between London, Washington, and Jerusalem, and the canal itself would give this triad control over the main transit route for global trade. The construction of the canal faces two immediate obstacles: Gaza and Egypt, but certainly, neither China nor Russia will remain on the sidelines.
Stable Oil Prices
In global markets, it is finally a calm week regarding oil. Prices have not changed much on a weekly basis, and traders have been weighing supply and demand estimates in the weeks and months ahead. The price of Brent crude oil remains in the range of $85 to $86/bbl, while the price of WTI crude oil hovers around $81/bbl. Midway through last week, prices fell as the market was disappointed by the estimate that due to elevated inflation, the U.S. FED might only lower interest rates in the second half of the year, whereas it was expected to do so in June. This means that the growth of the world’s largest economy could further slow down before the FED begins to support it, which could lead to weakened demand for oil.
On Thursday, however, prices stabilized as it was reported that U.S. inventories fell in the previous week, alleviating fears of weak demand. It seems that the mantra of those speculating on rising prices still dominates, given the new unexpected drop in U.S. crude oil inventories last week. The market simultaneously incorporates the risk of new supply disruptions into prices. Ukrainian drone attacks on Russian refineries could potentially limit supply. According to some estimates, they have blocked seven percent of Russian refining capacity or about 370,000 barrels per day so far. If these attacks continue, Russian producers may be forced to reduce supply due to export issues and limited storage capacities.
European natural gas futures prices TTF are currently slightly below the level of €29/MWh, which is the highest level since early February, after the attack on a concert hall near Moscow heightened regional tensions and concerns over supply. Recent attacks on energy facilities in Russia and Ukraine have also raised prices. At the same time, Freeport LNG stated that its liquefaction unit Laine 3 has returned to production, but Laine 2 is closed, and Laine 1 will soon be shut down for inspections and repairs expected to be completed by May.
It is also expected that demand will rise amid forecasts of low temperatures before a renewed increase in April. Despite this, prices are expected to regain downward momentum as Europe exits the heating season. This change, combined with stable production in Norway, the growing influence of solar energy, and European gas stocks remaining stable at around 59 percent of storage capacity, should contribute to reducing price pressures.
The European Commission proposed increasing tariffs on imports of grains, oilseeds, and grain products into the EU from Russia and Belarus. Depending on the product, tariffs will increase by €95/t or a 50 percent tariff. Furthermore, Russia and Belarus will no longer have access to any WTO quotas for grains for the EU, which offered better customs treatment for some products. In 2022/23, imports of soft wheat and sunflower flour into the EU from these two countries reached 2.7 million tons. More importantly, tariffs on Ukrainian corn would have a significantly greater impact on prices if what was proposed last week is ratified. Tariffs would include the import surplus compared to the average of the last three campaigns. The average is 9.83 million tons. In 2022/23, the EU imported 14.9 million tons of corn from Ukraine.
Copper Prices Fall
Last week at CBOT, wheat rose nearly five percent, and it seems that the short-term goal is to break the level of $5.6/bu. At the same time, corn is trading around the level of $4.3/bu; however, geopolitics and weather conditions in the U.S. will be the most important for future price movements. The same can be said for soybeans, whose price is around $11.9/bu. The European wheat market was dominated by a sharp rise in prices on Friday. The May 2024 contract rose by €7.5/t to €207.25/t, marking the largest daily increase in the MATIF contract since July 2023 and the suspension of Russian participation in the Ukrainian export corridor established a year earlier by the UN and Turkey.
Unconfirmed rumors that one of the main Russian grain exporters has been blocked have caused turmoil in the market. Traders are also concerned about renewed tensions around Ukrainian infrastructure. Last but not least, funds that are particularly short are protecting their positions in a market that is becoming increasingly uncertain. Corn, the June 2024 contract, also rose to €193.50/t, mainly on the wave of rising wheat prices.
Copper futures prices have sunk towards the $4/lbs mark after nearly reaching the highest value in the last year in mid-March. Prices fell after concerns about the strength of the Chinese economy and its heavily indebted real estate sector refocused investors’ attention following surprising growth in macroeconomic reports and decisions by smelters to ease production.
Despite the unexpected acceleration of Chinese industrial production in February, concerns about the fragility of demand for industrial goods and new homes have tempered expectations regarding commodity purchases in the country. This was reflected in a 20 percent increase in Chinese deliverable copper stocks in the week ending March 15, increasing seasonal stock replenishment and in line with the recent drop in copper premiums in Yanghsan. Nevertheless, copper futures prices remain five percent higher on a monthly basis, supported by smelters’ decisions to reduce production at facilities that have been unprofitable due to a lack of raw materials.
