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Morning markets: can ags bounce on share market tremors?

Is the reversal in external markets such a bad thing for commodities?

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.

'Positive for commodity assets'

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 commodities.

"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 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.

'Bargain buying'

But wheat 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 Chicago.

"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".

Cold concerns

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 positions]."

'Decent sized rebound' ahead?

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."

Data later

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.

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