Ag Markets March 16, 2020
The macroeconomic environment will again be the primary driver for agriculture futures this week.
The U.S. Federal Reserve introduced a massive stimulus package last night including 100bps of rate cuts, $700B in QE4 bond buying, new repurchase and credit facilities, and new US dollar central bank swap lines.
The Fed's goal is to increase liquidity, lower the cost of money, backstop markets, and boost investor confidence.
Under normal circumstances this Fed bazooka would weaken USD and drive up inflation expectations (good for agriculture prices), but today we're seeing overwhelming Covid-19 risk-off trading: US stock futures are locked limit down, US treasury rates and bonds are rallying (lower yields), crude oil -5.0%, U.S. dollar weaker, Gold firmer. Most ag futures are down ~1% in the overnight session.
For our agriculture futures markets, there are no macro positives to point to today. Correlations to major macro indices are strongly positive (many in the upper 1st percentile), which is dragging our markets lower.
Other non-fundamental inputs for agriculture markets are mixed:
Price seasonals remain broadly negative until mid-April (U.S. planting risk).
Market structure is a ~neutral input overall, hedge funds still have room to sell.
Momentum CTA traders are the shortest they've been in 24 months.
What Matters This Week:
Investors want to see how markets react to the Fed's emergency policy measures. Nine other central banks are also scheduled for this week including the RBA, RBNZ, and BoJ. Investors want to see more aggressive monetary and fiscal backstop efforts.
The gamma on reported Covid-19 cases isn't slowing, new cases are approaching ~200k.
Economic data matters less this week with all the central bank noise. That said, it's worth noting China's Feb manufacturing, retail sales, and investment numbers cratered this morning.
It's another week to be very careful with long futures positions in agriculture futures. A firmly negative macro environment combined with negative March price seasonals points to further downside for our markets.
Chart of the Week: Strong risk-off trading continues today despite the U.S. Fed’s historic stimulus measures last night. This matters for agriculture markets: correlations between macro indices and ag futures have risen significantly over the past two weeks. The macro environment is a strong negative headwind for commodities today.
For a trial of our industry-leading agriculture research, reach out to us: insight@peaktradingresearch.com.
