Is the reversal in external markets such a bad thing for
Investors in, say, shares
are having something of a tough time of it at the moment, following Tursday's weak
data on Chinese data - the flash
purchasing managers index came in at 49.6 on Thursday for January, well below
forecasts – spurring concerns over the state of developing country economies.
It isn't just the Argentine peso that has been tumbling, as it did on Thursday, suffering its
worst one-day fall since 2002.
The Turkish lira also
plunged to a record low, and there is many expectations that this may not be
the end of the trend.
"Devaluation of the Argentinean peso by 13% stoked fears
that more emerging markets will simply let their units fall rather than lose foreign
exchange reserves via interventions,"
Crédit Agricole said.
After all, the peso's tumble reflected a decision by the Argentine
central bank to reduce support for the currency.
However, in these days past the period of "risk on" and "risk
off trading", which marked the global economic crisis and its immediate
aftermath, when assets from shares to soyeans showed close correlations, the
tumble in external markets might not be such a bad thing for agricultural
"A continued equity market sell-off would be viewed as
positive for commodity assets," Richard Feltes at RJ O'Brien said, noting a bounce
of more than 3% in the CRB commodities index from a low two weeks ago.
"We don't know if the equity plunge will be viewed as a
buying opportunity or warning flag for stale equity longs that have grown fat
on 2013 gains.
"Either way, what appears to be largest single day equity
correction since August may trigger stepped up diversification into commodities
which are trading at the lowest levels since the summer of 2012.
"The take home point here is that global investors may view
easing Chinese growth, equity market volatility and an eroding Argentine peso
as catalysts to extend commodity ownership - a potentially near term
constructive factor for grain markets starving for new direction."
Not all upside
It has to be said that there are potential negatives for
commodities in the latest macro-economic jitters too, given, for example, that
China is the leading importer of many, including cotton, rubber and soybeans.
In fact, it is notable that these three have been amongst
the worst ag performers in the past couple of sessions.
In fact, rubber hit a six-month low of 239.10 yen a
kilogramme in the main session in Tokyo today, although that also reflects
strength in the yen, among the developed country currencies, also including sterling,
which have rallied as investors have sought havens from shaky emerging markets.
In New York, cotton
for March was down 0.7% at 86.76 cents a pound as of 08:40 UK time (03:40 New
York time, 02:40 Chicago time), if still remaining well up for 2014 so far, at
levels which may be putting consumers off.
Luke Mathews at Commonwealth Bank of Australia noted that
cotton prices were by, besides the weak Chinese data, "reports that physical
enquiry has waned in response to the recently strong prices".
New year factor
In Chicago, soybeans
struggled too, easing 0.1% to $12.75 ½ a bushel for March delivery, also under
pressure from hopes for rain to refresh crops in Argentina.
Then there is the continued talk that some Chinese buyers have
ditched orders of US supplies and switched to cheaper Brazilian ones, now that
the South American country's harvest has started, apparently to good effect.
In fact, the number of cargos allegedly cancellations has
swollen from two to 12, although no confirmation has been forthcoming.
And, in another negative from China, the country's new year
celebrations start soon too, signalling an end to pre-holiday stockpiling
besides keeping its buyers away for a week.
"A slowing China economy with the lunar new year festivities
almost upon us, is also negative to soy and could potential slow demand,"
Benson Quinn Commodities said.
maintained its upswing, with the Saudi Arabian tender for 660,000 tonnes of
wheat, following on from Algerian and Iraqi purchases on Wednesday, doing much
to fuel ideas of end-user buying, and value at levels near three-year lows in
"With prices falling to a 3.5-year low during the week,
bargain buying occurred," Vanessa Tan at Phillip Futures said.
"Chicago wheat prices are currently being supported by
increasing export demand," although she added that "the main picture is still
bearish due to the current global surplus of wheat".
Furthermore, there is potential frost damage to factor in,
given cold weather in the US and former Soviet Union.
"The current cold snap across the US is expected to have
damaged the winter wheat crop," CBA's Luke Mathews said, if adding that "the
extent of the damage will not be known until the crop emerges from dormancy".
Brian Henry at Benson Quinn Commodities said: "While I don't
doubt there has been some damage or could be damage to the winter wheat crop,
it is tough to make winterkill a reason to own wheat.
"However, given the typically oversold nature of all three
wheat crops and a need for a correction, I can certainly see why a short
position holder that, in many cases has plenty of profit, would [close short
'Decent sized rebound'
Indeed, with hedge funds holding a large net short position
in Chicago wheat futures and options, there is scope for further position
closing, especially with technical indicators tuning less negative.
"Technical studies in the winter wheat markets improved with
Thursday's price action," Mr Henry said.
He added: "We have seen this happen many times, but fail to
attract follow-through on this break that began in late October."
But could that change this time?
Another broker said that "since the wheat is in oversold
territory we may see this latest bounce continue.
"The technicals support a decent sized rebound. We will see
if the market agrees."
Wheat's strength helped corn
at least mark time, at $4.29 a bushel for March delivery, despite the pressure
from improved South American weather.
A call by two North American grain groups on Syngenta to
withdraw a corn variety at the centre of a swathe of rejections of US cargos by
China, and another variety also unapproved in Beijing, issued a reminder of
this issue overhanging the market.
More direction may be found later in weekly US export sales
data expected to come in at 250,000-650,000 tonnes for corn, 300,000-600,000
tonnes for wheat and 300,000-625,000 tonnes for soybeans.
Macroeconomic tremors may, of course, have an impact too.