With the end of winter is coming a structural change in financial market too.
The “great reset in risk capital”, Benson Quinn Commodities called it, as investors adjust asset class allocations on expectations of the end of the pandemic period - but not necessarily in line with the moves that authorities are trying to encourage.
“The era of free money from world central bankers appears to end not from the removal of the punch bowl, but refusal from the party patrons to imbibe,” the broker said.
While monetary policy officials may be talking loose reins, “markets are looking for a quicker recovery in global economic activity which in turn will move up the timetable for interest rate increases”.
So bond markets are being sold, but also the prospect of higher borrowing costs is shaking investors’ commitment to some other markets too.
And what better time than the last session of the week, and month end, to undertake profit-taking and portfolio adjustment?
Shares fell 2.5% in London, 3.6% in Hong Kong and 4.0% in Tokyo, although did stabilise on Wall Street, where the S&P 500 index stood up 0.3% in late deals, although the Dow Jones industrial average was 0.6% lower.
Commodities dropped too, with the Bcom index shedding 2.1%, with Brent crude’s relatively modest 1.2% decline outpaced by, for instance, a 2.3% fall in gold.
“A surge in [Treasury bond] yields of around 30 basis points in the space of just a few days is a bitter pill for gold to swallow, as it does not itself yield any interest,” said Commerzbank.
“This also increases the real interest rate, which is important for gold.”
Against this backdrop, it was a pretty good bet that cotton, the industrial ag, would struggle.
And indeed, the May lot stood down 1.0% in late deals in New York at 88.81 cents a pound, adding to losses sustained in its limit-down close to the last session – although at least well above an intraday low of 87.28 cents a pound.
In the last session, “the dramatic key reversal taking out three-days of trade and closing down the 4 cent limit suggests a major top may be in place”, ADM Investor Services said.
Plexus Cotton said that Thursday’s “price action looks horrible as it produced the largest ‘black candle’ on the chart since this uptrend began last April”, and came in high volume too.
Furthermore, with the prospect of a negative close on Friday on “follow-through” liquidation, “the weekly chart will paint a bearish ‘shooting star’ [pattern], which will invite more selling”.
‘Should be positive for commodities’
That said, the reflation trade idea, and the boost rising inflation gives ot the appeal of commodities, remains live.
“Between all the stimulus money, the pandemic starting to subside, supply constraints and pent-up consumer demand, it is easy to see why more and more investors feel that inflation might get out of hand,” Plexus noted.
“While this is potentially negative for stocks and bonds, it should be positive for commodities, which are seen as an inflation hedge.
“If this inflation narrative prevails, we should see higher commodity prices over time.”
Whether such thinking prevails in March, with month beginnings viewed as often bringing fresh money into grain markets, is a question for next week.
The close of February, and month-end, lived up to its reputation as a period of weakness in Chicago, with sentiment little helped too by a 0.8% jump by the dollar against a basket of currencies.
A stronger dollar cuts the affordability of dollar-denominated assets, such as many ags, just as US crop exports are coming under scrutiny after some poor weekly data on Thursday.
Adding to the pressure was a step up in the concerns on African swine fever in China, as Agrimoney revealed on Thursday, and evident in particular in a 3.2% tumble to 3,485 yuan a tonne in Dalian soymeal futures for May – with the contract at one point down 5.2% on the worries over reduced feed needs.
Terry Reilly at Futures International noted that, ominously, China’s ag ministry “issued a notice that all localities must step up control of African swine fever”.
Chicago soymeal for May stood a more modest 0.6% lower at $420.30 a short ton in late deals, with US demand ideas at least remaining reasonably resilient.
Soybeans themselves for May were down 0.6% too, at $13.98 ¾ a bushel, also feeling pressure from some improved ideas over South American weather.
“Better-than-expected rainfall in Brazil weighed on overnight trade, as did month-end profit taking,” said Karl Setzer at AgriVisor.
That said, not all commentators are agreed on the idea of a more benign outlook, with Maxar saying that in Mato Grosso, “wet weather will continue to slow fieldwork”, while in Argentina, “below-normal rainfall… over the next 15 day will allow dryness to build, increasing stress on corn and soy growth”.
Chicago corn futures for May shed 1.2% to $5.43 ¼ a bushel, with CHS Hedging flagging “follow-through weakness from yesterday’s steep drop on disappointing exports”.
It also felt a tug from wheat, which stood 2.5% lower in closing deals at $6.59 a bushel for May, proving a particular target for month-end profit-taking.
With the US facing more competition in the wheat market than the likes of corn and soybeans, this market is particularly vulnerable to moves in the dollar.