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Editor's Note: Hamish Risk | September 15, 2020
Trading the ags may not be a staple for many of our readers but it bears some attention according to some of the analysts we feature in today’s Macro Briefing due to it’s knock on effects on the macro environment. As Cornerstone Macro explain, when one looks at the price action and long-term trends, this is a sleepy old market that has underperformed compared to some of its more illustrious peers in the commodities complex. But the market, and the technicals, seem to be springing into life they say, sending off multiple buy signals. As Top Down Charts note, speculative futures positioning has surged in recent weeks bringing with it broad implications for the wider market in the form of rising inflationary pressures, not to mention the potential for geopolitical instability. Meanwhile, a fascinating recent webinar from Gro Intelligence and Evercore ISI explores the trade angle, explaining why agricultural commodities are at the very heart of trade relations between China and the US, and why Beijing’s attempts to reduce the concentration risk in its food supply chain is likely to produce a long-term change in global trading patterns that will last well into the next decade. Elsewhere, SouthBay Research flags up worrying warning signs in the jobs market for US small business and the economy, and CrossBorder Capital sets out its liquidity-based thesis on why EM equity prices deserve to double from here.
Inflation Soft commodities Top Down Charts
1. Agri commodities – surging interest with macro implicationsSentiment has for the most part been fairly muted on agri-commodities since 2014, says Callum Thomas at Top Down Charts, but that has changed. He says speculative futures positioning has surged in recent weeks; and with nothing really that remarkable going on in prices, that has got him curious. As Thomas notes, a break higher in food prices could make things interesting to say the least on the macro front. The deflated/real price of grains remains below the long term average – in other words is cheap – he says, and global food producer capex has thus been quite weak in recent years, and particularly recently. It is therefore, according to Thomas, fair to say there is some element of potential under-investment and pandemic disruption, which could impact on supply, adding to potential upward pressure on prices. While a breakout in grains, and/or broader agri commodities prices would be interesting from an investment standpoint, it will complicate the macro picture as it shows up in higher food prices; and hence higher general inflation, he says. Given the impact on consumers – and potentially even geopolitical stability -i t is thus also a tail risk to monitor if it goes to extremes, adds Thomas.
Soft commodities Technicals Cornerstone Macro
2. The sleepiest area of the commodity complex is coming to lifeMost grains and soft commodities have been in multi-year downtrends, with many even in multi-decade downtrends says Carter Worth, Cornerstone Macro’s technicals strategist. He says, however, that one of the most established downtrends in all markets may be coming to an end. This, says Worth, is not just another counter-trend rally but the beginning of something enduring to the upside. He explains why he is a buyer of soybeans, corn, wheat, sugar, coffee and cotton, and reveals which equities he believes will benefit from the theme.
agriculture China Global trade Evercore ISI Gro Intelligence
3. How agriculture is driving US-China relations and future global trade patternsSara Menker from Gro Intelligence and Evercore ISI’s Dennis DeBusschere recently hosted a fascinating webinar to discuss how agriculture is driving US-China relations just as much as other sectors like heavy industry and tech. As Menker explains, Chinese President’s Xi Jinping’s recent call on his countrymen to curb food waste is rooted in concerns over food security and its over reliance food supply from the US and Brazil. Those concerns have only been exacerbated by the Covid-19 pandemic, she says, making concentration risk in the Chinese food supply chain just as concerning to Beijing as the problems that have affected economies and supply chains in other industries globally since the onset of the pandemic. What China does to secure its food supply chain over the long term could fundamentally change the channels of global trade, adds Menker, who believes the world is at an inflection point, creating new trade routes that could see Africa in particular become increasingly important to global supply chains as Beijing puts its massive land investment in the continent to use. You can listen in to the 38 minute webinar here.
US economy US jobs SouthBay Research
4. Lockdown is economic slowdownSouthBay Research has built up a formidable record as one of the top forecasters on US economic activity, consistently beating consensus forecasts on Bloomberg and ranking in the Top 3 forecasters on for US employment data. The key to this success is the way in which they collate data from the real economy, which differentiates them from most other forecasters. On labour for instance, they’ve developed a proprietary database that tracks US hiring in real-time at the individual company level. SouthBay’s latest data highlight worrying trends for the US economy and in particular the small business sector, arguably the key driver of economic growth. The metro areas with the weakest job creation are the ones still in lockdown, says the firm, and unfortunately for the US economy, they are also the cities with the largest populations. At the extreme, says SouthBay, is Honolulu, where Covid-19 has essentially eliminated the tourist industry, the main driver of business. The significant impact on long-term business is evident in the collapse of job postings for basic business services, says the firm, signalling the collapse of Hawaii’s small businesses and the fact that after six months, not many can survive. This is no longer a story of restaurants, according to SouthBay – continued shutdown means long-term economic collapse. In other words, simply re-opening restaurants and bars will not lead to an overnight economic rebound.
EM equities liquidity US dollar Cross Border Capital
5. EM liquidity – killing the dollar softly, doubling EM equities, probablyAfter several years of net capital outflow and several months of tight Chinese PBoC policy liquidity, emerging markets could be set for a sea-change according to CrossBorder Capital, which says the champagne corks should be popping from Beijing to Sao Paulo. As always, says the firm, the main factor driving EM risk is the FX market, and its data show downward pressures on EM currencies appear to be easing. Policymakers in Asia want stable currencies, says CrossBorder, and they are likely to monetise any future US dollar inflows, led by China. A weaker dollar, says the firm, will also drive commodity markets higher, and it continues to maintain its gold price target of US$2,500/oz. It is inconceivable that gold prices would rise without EMs outperforming according to CrossBorder. Indeed, the firm says if gold reaches US$2,500/oz. – and the EM/ gold relationship reverts to normal – EM share prices deserve to double from here.