Perspective: Morning Commentary for August 28

August 28 – Stocks continue to consolidate, albeit with a negative bias this morning, ahead of Nvidia’s earnings report this afternoon after the close, ahead of a three-day holiday break, and ahead of next week’s key monthly jobs report. The VIX is trading near 16 this morning, while the dollar index is trading near 101.1 after bouncing off one-year lows. Yields on 10-year Treasuries are trading near 3.83%, while yields on 2-year Treasuries are trading near 3.87%, as the yield inversion narrows once again. Crude oil prices are down roughly 1% this morning on lingering demand concerns, while the grain and oilseed sector is mostly lower as well.

Artificial Intelligence is the current craze on Wall Street, and Nvidia is the poster child for AI. Investors are rushing toward companies that are expected to benefit from their development of and/or use of AI. The sense is that AI will take us to a whole new level of efficiency and productivity. The money chasing the development and use of AI remains strong, but investors are also looking for a payoff for that investment as well. Nvidia, whether right or not, is seen as a barometer of the payoff for these investments, setting the tone for risk tolerance on Wall Street. It’s not my intent to speak pro or con regarding Nvidia, as that is not my area of expertise. But there is value in understanding the factors that drive money flow and that set the tone for that money flow as it impacts many of the other sectors of the markets. There’s been a lot of focus on monetary policy over the past several years, and Wall Street is about to get what it wants from the Fed via rate cuts, based on recent comments coming from the central bank. But Wall Street’s response to getting what it wants will also be influenced by whether it gets confirmation of its investments in AI via the Nvidia earnings report, or whether it starts to fear that this is another bubble about to burst.

Money flow into the AI craze is contrasted by the flow out of the grain and oilseed sector. I’ve previously discussed the 10-year correlation between the value of our StoneX commodity basket and the 5-year Breakeven Inflation Rate of 0.87. Money flow in and out of the commodity sector has had a strong correlation over the past 10 years with market expectations regarding the direction of inflation in the months and years ahead. Those inflation expectations are now clearly pointing downward, with the 5-Year indicator breaking below areas of chart support just above 2% during the stock market route four weeks ago. That created significant headwinds for the broader commodity sector, and a breakdown of the sectors reveals that the grain and oilseed sector has seen the greatest losses over the past year. Some might argue that such a position argues for the grain and oilseed sector becoming oversold relative to the rest of the commodities and/or relative to the financial markets. That may be the case, but that alone doesn’t argue for a rebound at this time. The sector is broadly oversupplied and lacks sufficient demand to reverse that trend. Low prices are the eventual cure for soft demand, but that takes time to unfold.

Top importers were summoned by Beijing into meetings this week to be chastised for excessive purchases of foreign grains. Specifically, they were told to halt purchases of barley and grain sorghum due to low domestic prices. The move comes ahead of an anticipated bumper harvest of crops in China in the next several months. The largest supplier of these commodities is Australia and the United States. China imported nearly15 million metric tons of barley and grain sorghum in the current calendar year through July, up from 8.5 mmt in the same period last year. The total through the first seven months of this year approaches the 16.5 mmt imported in all of last year, and the 15.9 mmt in the previous year. China uses import quotas to regulate imports of corn, wheat and rice. Previously purchased grains will apparently be allowed to be shipped, but the flow of barley and grain sorghum imports is expected to slow dramatically the rest of the year.

U.S. National Security Advisor Jake Sullivan is in Beijing today beginning three days of talks with his Chinese counterparts. It’s the first time that someone in his position has been in China in eight years. The purpose of the meeting is to ease tensions between the two superpowers, but that will be a challenge. Talking is always good, but how effective will they be, as China knows that Sullivan’s days in office are numbered? The Biden Administration will come to an end in January – replaced by either the Harris or Trump Administration. As such, we can anticipate that Chinese officials will be wary of making commitments or accepting commitments. Nonetheless, conversation is still important as President Xi Jinping considers his options ahead of the U.S. elections. How does he see the Taiwan question in light of the coming elections. Xi has promised to “reunite” Taiwan to the Mainland during his term in office. He can serve as long as he wants, and he would prefer to play the long game on gaining control over Taiwan. But he will face challenges from the United States when that day comes. Would he prefer the challenges of a Harris Administration, Trump Administration, or wait another four years when he will be 75 or 76 years old? Only he knows the answer to that question, but it has significant implications for the commodity markets.