Head of Commodity Strategy
The global grain market has increasingly been turning its attention away from the potential negative impact of trade wars and raised tariffs to the outlook for a tightening market. Dry weather conditions across several key growing regions, especially outside the US, continues to drive down forecasts for the 2018 world harvest.
According to NOAA, the US scientific agency that monitors weather and atmospheric conditions, 2017 was the third hottest year on record globally, only exceeded by 2015 and 2016. The current outlook for 2018 could indicate that records might be broken again with several monthly records having been recorded so far this year. These developments helped provide US-traded grains and soybeans futures to a strong start off of the year before trade wars and tariffs helped send the sector, led by soybeans, sharply lower.
A recovery now seems to be underway, led by wheat, with multiple important growing regions from Europe and the Black Sea region to Australia all reporting challenging conditions due to drought. In Denmark, where we are located, the last major rainfall occurred back in April and since then bone dry conditions have created the worst conditions for farmers in decades. The lack of rain across Europe has turned normal green grazing fields into something that resembles sandy beaches. As a result of this farmers have been forced to dig into their winter feed stocks in order to keep their livestock alive and this development is currently driving wheat prices higher with buyers looking to cover/hedge their winter requirements.
The European wheat market, represented in the charts below by the September Paris milling wheat future, trades above €200/MT for the first time in three years. It has been supported by the mentioned buying, together with the fundamental support from further crop downgrades within Europe and now also talk that Russia may introduce export curbs to prevent domestic bread prices from rising. The London feed wheat contract, meanwhile, reached a fresh five-year high after rallying by 9% during the past week.
In Chicago the soft red winter wheat caught a bid on the developing panic in Europe. The contract for September delivery (ZWU8) at one stage yesterday rose by the maximum allowed by the exchange for the session when it hit $5.4525/bushel before ending up 6.2% at $5.42/bushel.
The rise in wheat also helped support Chicago corn futures with the most-traded December contract edging towards resistance at $3.8050/bushel, a level which represents the 38.2% retracement of the May to July sell-off.
Soybeans, which lost 22% between May 29 and July 16 after getting caught up in the trade war between the US and China, failed to join the rally yesterday. This happened despite Trump announcing a $12 billion aid package to US farmers. The market interpreted this as a sign that the current trade dispute could last for a prolonged period of time with the US in no mood to seek a deal with the Chinese. However, the jump overnight occurred after a meeting between President Trump and EU’s Jean-Claude Juncker resulted in Europe agreeing to lower trade barriers for US-produced soybeans. The extra amount that Europe can buy, however, is dwarfed by the impact of lower demand from China after the country in a retaliatory measure imposed an additional 25% tariff on American soy imports.
Hedge funds, just like most other traders, have been left frustrated by the volatility seen across the grain and soybean markets so far this year. A troubled beginning to the year supported a record buying spree of nearly 900,000 lots between January and March with corn and soybeans seeing most of the demand. The emerging trade war reversed the direction of the market and forced speculative traders out of their recently established longs.
In the week to July 17 funds held a neutral position in wheat (4k lots) while maintaining net-short positions in corn (-129k lots) and soybeans (-58k lots).
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
