Staying with emissions, the cost of EU carbon allowances, the world’s biggest cap-and-trade program, rose by 7% to reach a record high at €42.6/tons. Apart from the relentless rise in crude oil, the latest part of the 31% year-to-date rally was driven by gas outages in Norway raising demand from power generators for more polluting alternatives which in turn requires more carbon allowances.
Grains & oilseeds: In China, a resurgence in African swine fever has sent local corn prices down to the lowest level this year and if not contained, the price weakness may spread to overseas markets, most noticeably to Chicago grain and oilseed futures. The combination of this, and less tightness being projected by the US Government in corn and soybeans, helped send the Bloomberg Grains Index lower on the week. While the losses, led by corn, were relatively small, a potential slowdown from China could leave the sector vulnerable to demand downgrades and with that the risk of selling from funds holding an elevated exposure in both corn and soybean futures. The weakness in wheat prices were primarily weather-related after beneficial rains fell on the US Plains.
With US grain prices having recently touched multi-year highs and the UN FAO Global Food Price index rising at the fastest pace since 2014, the market will soon turn its attention to the Northern Hemisphere planting and growing season. What allocation US farmers chose to use between corn, wheat and soybeans could become a major catalyst for price action over the coming months. With that in mind, grain traders will look towards the March 31 Prospective Planting Report from the US Department of Agriculture for guidance.
Gold (XAUUSD) and silver (XAGUSD) remained under pressure as the direction continued to be dictated by developments in the dollar and bond market where yields rose again in response to the passing of the $1.9 trillion stimulus package. While the deal will support growth, it will also stoke inflation risks but following a weak US CPI reading earlier in the week, such risk is not yet being reflected in the numbers.
We maintain a positive outlook given our belief inflation will eventually overshoot current market expectations. Until such time, however, a continued rise in 10-year bond yields towards the next big target at 2% from the current 1.6% could see the downside being challenged again. For now, gold remains caught in a downtrend with key support being an important area between $1670 and $1690 while potential buyers are in no rush to enter longs before it manages to regain $1765/oz, the level below which helped trigger the latest weakness.