Perspective: Morning Commentary for December 27

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 27 – This year’s Santa Claus rally is struggling to gain traction, as stock futures again start the day in the red. The major stock indices were able to gain some traction as we went through the day yesterday, but market bulls are having to start in the red each day. The VIX is trading near 16 this morning, while the dollar index is trading near 108.0. Yields on 10-year Treasuries are trading near 4.60%, while yields on 2-year Treasuries are trading near 4.32%. Crude oil prices are 1% higher to start the day, while the grain and oilseed markets posted modest losses overnight as they pulled back from yesterday’s gains.

South Korea remains in turmoil after President Han Duck-soo was impeached earlier today. His impeachment comes less than two weeks after President Yoon Suk Yeol was suspended on impeachment proceedings after he declared martial law for a very short time on December 3^rd. Finance Minister Choi Sang-mok has now assumed the position of acting president while South Korea’s Constitutional Court convenes to consider the impeachment cases against Yoon and Han. The impeachment proceedings were initiated by the opposition party that holds the majority of South Korea’s legislative branch. The political turmoil has paralyzed the world’s 13^th largest economy, which also happens to be a key strategic ally in keeping North Korea, China and Russia in check. Meanwhile, France – the world’s 7^th largest economy – also remains in turmoil after its government was thrown out by a non-confidence vote. The same is true for Germany – the world’s 4^th largest economy. Canada’s government – the world’s 9^th largest economy – is barely hanging onto power after narrowly surviving no-confidence votes thus far.

The United States will have its own share of challenges going forth. President-Elect Trump won the election with a strong majority, which he will use as a mandate to move forward to advance an aggressive pro-business agenda. That includes creation of the Department of Government Efficiency that seeks to cut 30% from our national budget that is deeply in debt, creating increasing challenges for our economy. However, he needs Congress to do that, and Trump’s party only has narrow majorities in both the House and the Senate. That’s where the problems exist for Trump and for his agenda. It starts with an anticipated January 3^rd vote of confidence for Mike Johnson to remain as Speaker of the House. Johnson can only afford to lose one supporter, or he would have to step down. That gives tremendous leverage to any member of the Republican majority that wants to push their own agenda, putting Johnson in a nearly impossible position. As such, the odds are high that he will not survive the vote. But selecting a new Speaker to fill his role won’t be easy. It took weeks to fill the Speaker role the last time this happened, and meanwhile, the legislative calendar sat on hold. That’s not a good sign for Trump, who’s hopes of achieving his agenda in the first two years are highly dependent on a very successful first 100 days to ride the momentum of the election. Meanwhile, China and Russia are watching all of this drama among these western nations with some sense of glee, as it preoccupies the West while they carry on with their agenda.

Treasury yields pulled back from their recent highs on Thursday following a strong auction for seven-year notes. Yields for 10-year Treasuries set nearly 8-month highs prior to that auction on fears that the nation’s rapidly rising national debt was supplying more debt certificates to the market than there were buyers. That’s still a risk going forward as record volume of debt certificates hit the market. That’s a longer-term problem, but the near-term challenge is balancing that supply with demand. China has been slowing its purchases of U.S. debt certificates for years – cutting its ownership nearly in half over the past dozen years. Japanese investors are currently the largest holders of U.S. debt certificates at $1.1 trillion, but they’re starting to move their money home as interest rates there rise back into positive territory. U.S. retail investors have supplied a considerable amount of demand for U.S. debt certificates recently, but they’ve been eyeing record stock levels as an attractive alternative. But the market is finding alternative buyers for now. Europe continues to cut interest rates, and that has investors there looking at stronger rates in the U.S. market as an attractive alternative for now, which may help cap interest rates for us at a time when the Federal Reserve increasingly struggles to do so.

Our StoneX commodity tracker shows that our composite basket of 27 commodities gained 5.3% over the past 12 months. The softs led the way by gaining 33%, while precious metals added 24.2% and livestock added 13.5%. Yet, industrial metals only gained 3.8% year-on-year, while energy gained 2.3%. The grain and oilseed sector was the lone losing sector – falling 16.5% in the past year. That may account for some of their recent strength as managed money rebalances their holdings, while squaring their books for the end of the year to show their profits on year-end statements. That should also provide modest support beneath the markets as index funds rebalance primarily in the 5^th to the 9^th trading session of the new year, although that alone isn’t enough to turn the fundamentals.

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Perspective: Morning Commentary for December 27

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