Wheat Jumps Most Since War in Ukraine Due to Weather Swings

Commodity

Economic

Summary:

In April, Ukrainian farmer Yurii Sekh was looking forward to a good wheat harvest. One of the driest Mays in the region's records dashed those hopes. It also sent prices for the staple grain soaring, reviving fears of rising food costs.

Russia, which along with Ukraine accounts for almost a third of global wheat exports, has seen parched crops during a vital month for their development. Unseasonal frost also devastated acres of standing crops, and with harvests now only weeks away, the chances of a substantial recovery are dwindling.

Prices have come down substantially from record highs witnessed in the immediate aftermath of Vladimir Putin's invasion of Ukraine, in large part due to back-to-back bumper Russian harvests and resilient supplies from Ukraine. But the whipsawing weather has returned volatility to the market.

Benchmark wheat futures are headed for a 13% monthly gain, the biggest such jump since February 2022, when the invasion began.

Ukraine expects a crop of 19.1 million tons of wheat, according to the country's grain association — the lowest in over a decade. Still, earlier spring rain helped offset further losses. The country's weather center has forecast more rain across the country in the coming weeks.

Meanwhile, Russia may declare a national emergency after frost in the early weeks of May devastated hundreds of thousands of hectares of crops, according to local media. Analysts have slashed production estimates for the world's top exporter by more than 10% through the month.

Russian farming company Grainrus estimates that 40% of its winter wheat area was damaged by the frigid weather. It expects yields to be 20% lower than earlier estimates in its fields in Rostov in Russia's south, according to their analyst Mikhail Bebin.

Images of the damaged crops show brown fields with swathes of shriveled wheat plants. The company has over 100,000 hectares (247,000 acres), including in Russia's key growing areas in the Central Black Earth region.

News from other key producers — Australia is dealing with dry weather and India will likely become a net importer — has also boosted prices. Global stockpiles are expected to fall to a nine-year low in the coming season, according to the US Department of Agriculture.

Much of Ukraine, Belarus, and south-central Russia experienced one of the driest Mays on record, according to Donald Keeney at Maxar. Dry weather will last through the next few weeks in eastern Ukraine and the southeastern portions of the Central Region. But there could be improvements in western Ukraine, and the western part of the Central Region of Russia over the next ten days, he said.

While the exact extent of the damage won't become clear for at least another few weeks, producers like Sekh are already seeing their losses mount.

When the frost came “everything stopped growing,” he said. “Then came the dry May. The earth is dry and there is no rain.”

Ukraine's resilience has also been put to the test. It managed to boost exports via its Black Sea ports almost to pre-war levels in March. But since then Moscow has stepped up its attacks on port and railway infrastructure.

For Kees Huizinga, who farms 200 kilometers (124 miles) south of Kyiv, the damage from the weather fades in comparison to the risks from the missiles flying over his land.

“I mean those are problems, you know. The drought — that's not a problem anymore.”

Source: Bloomberg

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Alex

Economic

Bond

China escalated a battle against investors betting on an extended rally in government bonds, hinting the central bank may sell some of its own holdings to cool the advance.

The People’s Bank of China could step into the market to sell bonds if demand for the haven assets continues to rise, according to a newspaper backed by the monetary authority. Leveraged bond-buying not only amplifies volatility but raises the risk of large losses in the event of a market reversal, it warned.

The rally in bonds is a double-edged sword for Beijing. On the one hand, it helps support growth by lowering borrowing costs for everything from corporate debt to residential mortgages. But the emergence of a bond bubble has the potential to destabilize financial markets and derail the recovery if it bursts.

“The PBOC hopes the market will discipline itself and correct on its own, so that it doesn’t have to intervene directly,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “Whether it will intervene by selling bonds depends on whether the market will share its rationale or recognize its capacity of guiding the market.”

Demand for bonds has surged as Chinese asset managers direct a wave of inflows from households and companies into fixed-income securities from low-yielding bank deposits. The gains in bonds also point to pessimism over the China’s long-term growth potential, despite the PBOC’s effort to reflate the economy and promote confidence.

Also, some traders are betting on further stimulus which could weigh on yields, even though the PBOC has resisted market calls for more interest rate cuts. Since its last policy rate cut in August, it has focused on safeguarding the under-pressure yuan and making sure existing funds in the financial system are used more efficiently.

Xi’s Mandate

The PBOC trading bonds has been a hot topic since March, when a book cited President Xi Jinping mentioning such a possibility as a way China could enrich its toolbox of monetary policies. However, there has been little official follow up on whether its going to happen and when it might start doing so.

The mention has managed to stir speculation that China might turn to quantitative easing, a highly controversial stimulus that involves a central bank buying government bonds. In the past, the PBOC has signaled disapproval of QE.

At the end of April, the central bank held about 1.52 trillion yuan ($210 billion) of government bonds, according to its balance sheet. Some 1.35 trillion yuan of that were special sovereign notes sold by the Ministry of Finance in 2007.

Hidden Risks

Investors should be aware that they can lose money if bond prices decline and need to pay close attention to interest-rate risks, the Financial News said. China’s 10-year yield is currently too low and should be around 2.5% to 3%, it added.

The benchmark yield was around 2.3% Friday, close to the lowest in more than two decades. Just a year ago, the notes were yielding around 2.7%.

In response to questions from Bloomberg News, the PBOC said it’s paying close attention to any hidden risks in the market and may sell some low-risk bonds including government debt when needed.

The PBOC has repeatedly warned on risks in the government bond market. In late April, Beijing sought to push back on the rally as it warned of a reversal and hinted that a mismatch between market prices and the economic outlook will correct.

But soon after that, a buying spree by retail investors drove newly issued special government bond prices as much as 25% higher in the exchange market, a venue not traditionally used for trading debt. The volatility prompted state media to urge investors to refrain from engaging in speculative activities.

Looking ahead, the rally in bonds could also be challenged by an increase in issuance of ultra-long special bonds and local government debt. The special bond sale, aimed at stimulating the economy, may reduce liquidity in the market and pressure yields higher.

But market participants aren’t ruling out more active intervention from the central bank.

“I think PBOC selling bonds is possible, since it’s said it so explicitly and directly,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “I don’t think it’s just a verbal warning.”

Source:Bloomberg

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Alex

Economic

Commodity

Market Overview

Oil prices fell as Fed officials suggested it is too early to consider rate cuts, and an unexpected increase in U.S. gasoline stocks weighed on the market. Dallas Fed President Lorie Logan emphasized the need for flexibility in monetary policy, citing concerns about inflation.

U.S. crude oil inventories dropped by 4.2 million barrels, while gasoline stocks rose by 2 million barrels, defying expectations of a draw. Meanwhile, OPEC+ is negotiating to extend its production cuts into 2025.

These developments led to a bearish outlook for oil, impacting natural gas and oil forecasts with potential downward pressure on prices.

Natural Gas Price Forecast

Natural Gas and Oil Forecast: Unexpected Inventory Rise, NG at $2.55, WTI Falls 0.23%_1

Natural Gas (NG) is currently priced at $2.552, down 0.07%. The pivot point, marked by the green line, stands at $2.63. Immediate resistance levels are at $2.72, followed by $2.84 and $2.93. On the downside, immediate support is at $2.48, with further support at $2.39 and $2.28.

The 50-day Exponential Moving Average (EMA) is $2.60, suggesting potential resistance, while the 200-day EMA is $2.32. The technical outlook for NG is bearish below the pivot point of $2.63.

A break above this level could shift the bias to bullish, targeting higher resistance levels. Conversely, staying below $2.63 may lead to testing lower support levels, maintaining downward pressure.

WTI Oil Price Forecast

Natural Gas and Oil Forecast: Unexpected Inventory Rise, NG at $2.55, WTI Falls 0.23%_2

USOIL is currently priced at $77.61, down 0.23%. The pivot point, marked by the green line, stands at $78.18. Immediate resistance levels are at $79.14, followed by $80.03 and $81.20. On the downside, immediate support is at $76.16, with further supports at $75.18 and $74.51.

The 50-day Exponential Moving Average (EMA) is $78.59, indicating potential resistance, while the 200-day EMA is $79.66.

The current technical outlook is bearish below $78.18, with a break above this pivot point potentially shifting the bias to bullish. If prices fail to stay above $78.18, they may test lower support levels, suggesting continued downward pressure.

Brent Oil Price Forecast

Natural Gas and Oil Forecast: Unexpected Inventory Rise, NG at $2.55, WTI Falls 0.23%_3

UKOIL is currently trading at $81.65, down 0.27%. The pivot point, marked by the green line, is at $82.21. Immediate resistance levels are at $83.56, followed by $84.66 and $85.55. On the downside, immediate support is at $80.65, with further supports at $79.76 and $78.63.

The 50-day Exponential Moving Average (EMA) is $82.82, indicating potential resistance, while the 200-day EMA is $84.08. The technical outlook for UKOIL is bearish below the pivot point of $82.21.

A break above this level could shift the bias to bullish, targeting higher resistance levels. Conversely, remaining below $82.21 may lead to testing lower support levels, maintaining downward pressure.

For a look at all of today's economic events, check out our economic calendar.

Source: FX Empire

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Samantha Luan

Economic

Commodity

Among industrial metals, copper prices slipped tracking weaker-than-expected purchasing managers index data from top importer China.

Metal markets saw some relief on Friday after the dollar slid from over two-week highs in overnight trade, tracking weak gross domestic product figures. But this relief was limited, as fears of sticky inflation and high interest rates persisted before key inflation data.

Spot gold steadied at $2,342.86 an ounce, while gold futures expiring in August fell 0.1% to $2,363.80 an ounce by 00:19 ET (04:19 GMT). The yellow metal was still set to gain about 2.6% in May, after it shot up to record highs earlier in the month.

Gold trims May gains, PCE test looms

But gold was now trading about $100 below its May record highs, as fears of high-for-longer U.S. interest rates sparked some profit-taking in the yellow metal.

A string of Federal Reserve officials warned in recent weeks that the central bank had little confidence to begin trimming interest rates, amid sticky inflation.

This put PCE price index data- which is the Fed’s preferred inflation gauge- squarely in focus. The reading is due later on Friday and is expected to show inflation cooled slightly in April but remained well above the Fed’s 2% annual target range.

High-for-longer interest rates bode poorly for gold and other precious metals, given that they push up the opportunity cost of investing in the space.

Platinum, silver set for bumper gains in May

Other precious metals sank on Friday, also seeing a measure of profit-taking after strong gains through May. Platinum futures fell 0.6% to $1,028.95 an ounce, while silver futures slid 1.6% to $31.030 an ounce. But the two metals were up 9% and 17%, respectively, in May, as they benefited from exposure to a speculative frenzy that drove up the prices of industrial metals.

Both platinum and silver have some industrial applications.

Copper prices sink on weak China PMIs

Benchmark copper futures on the London Metal Exchange steadied at $10,141.0 a tonne, while one-month copper futures fell 0.5% to $4.6350 a pound.

Both contracts wiped out a bulk of their gains through May despite hitting record highs, as a speculative frenzy died down and gave way to severe profit-taking.

Sentiment towards copper was also dented by weaker-than-expected PMI data from top copper importer China. China’s manufacturing sector unexpectedly contracted in May, while non-manufacturing activity grew at a slower pace.

Source:Investing

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Warren Takunda

Stocks

Economic

Asian stocks inched higher on Friday, while the dollar was steady, keeping the pressure on the yen, as investors await inflation readings from Europe and the U.S. that will likely dictate the path of interest rates globally.

A downward revision to consumer spending meant the U.S. economy grew more slowly than expected in the first quarter, data showed on Thursday, weighing on Treasury yields and the dollar.

The revised GDP data also stoked expectations that the Federal Reserve has scope to cut rates this year, with market pricing putting a September cut at a coin toss, CME FedWatch tool showed. For the year, traders are pricing in 35 basis points of easing.

Financial markets have been biding their time for the main data event of the week - Friday's April report on U.S. core personal consumption expenditures (PCE) price index, which is the Fed's preferred inflation gauge. Inflation report from the euro zone is also due on Friday.

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, said the PCE reading should not provide much of a surprise.

"But investors will still be very sensitive to even small misses," he said.

The shifting expectations over interest rates has kept the markets on edge, with European stock markets set for a subdued open. Eurostoxx 50 futures was down 0.04% and FTSE futures was flat.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.20%, pushing away from the three-week low hit on Thursday. Analysts said month-end rebalancing by fund managers helped lift equities in the region.

The index was set for a gain of 2.7% in May, rising for the fourth straight month.

China stocks also rose, with the blue-chip index up 0.20% while Hong Kong's Hang Seng index gaining 1%.

The upturn in China's markets came even as the nation's manufacturing activity unexpectedly fell in May, an official factory survey showed on Friday. The soft outcome kept alive calls for fresh stimulus as a protracted property crisis continues to weigh on businesses, consumers and investors.

Meanwhile, markets have so far shrugged of the Donald Trump verdict after he became the first U.S. president to be convicted of a crime on Thursday.

Traders are also looking over their shoulders for any hints of intervention from the Tokyo authorities as the Japanese yen flirts with levels that led to suspected bouts of intervention late in April and early this month.

The yen was last at 156.80 per dollar, having touched four-week lows of 157.715 on Wednesday. The currency weakened to its lowest in 34 years at 160.245 on April 29, sparking at least two suspected rounds of interventions.

Data on Friday showed core consumer prices in Japan's capital rose 1.9% in May on rising electricity bills but price growth excluding the effect of fuel eased, heightening uncertainty on the timing of the central bank's next interest rate hike.

The dollar index , which measures the U.S. currency against six rivals, was at 104.82, on course for 1.4% decline in May, snapping a four-month winning streak.

The euro eased 0.12% to $1.08192 ahead of euro zone inflation data for May that is set to influence the European Central Bank's policy path. The central bank is all but certain to cut rates in June but what comes after that remains uncertain.

Markets are pricing 60 basis points of ECB cuts this year.

In commodities, oil prices eased after a surprise build in U.S. gasoline stocks weighed on the market. Brent futures was down 0.28% at $81.63 a barrel, while U.S. West Texas Intermediate (WTI) crude CLc1 was down 0.35% at $77.64.

Asian Stocks Subdued, Dollar Steady as Inflation Tests Await_1

Source: Reuters

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Samantha Luan

Economic

Central Bank

Japan's wage-inflation dynamics are changing in ways unseen in the past with intensifying labour shortages pushing up labour costs and prodding more firms to hike prices, said Hoshi, an economics professor at the University of Tokyo.

Having ended a package of unconventional easing steps in March, the BOJ will keep raising rates to anchor inflation expectations around 2 per cent, and eventually start quantitative tightening, Hoshi told Reuters in an interview on Friday.

"Unless the BOJ raises rates, inflation could accelerate too much. The kind of inflation seen in the U.S. and Europe could very much happen in Japan," said Hoshi, who has close ties with incumbent BOJ policymakers.

"There's a significant risk of inflation exceeding the BOJ's target. That's something the central bank should worry about from now on," he said.

Hoshi declined to say how soon the BOJ could raise its interest rate from current near-zero levels, but said hikes should happen "steadily" given upside risks to inflation.

"In deciding when to shift policy, the BOJ must also take into account how its U.S. and European counterparts move as that could affect asset prices including exchange rates," he said.

Hoshi participated in the BOJ's workshop held on May 21, which was part of a review of the pros and cons of its past unconventional monetary policy. He chaired a session that analysed Japan's economic and price developments.

The BOJ ended eight years of negative rates and a policy capping long-term borrowing costs around zero in March, making a historical shift away from its radical stimulus.

BOJ Governor Kazuo Ueda has said the central bank intends to hike rates to levels considered neutral to the economy, as long as growth and inflation move in line with projections.

Many market players expect the BOJ to raise rates sometime this year with some betting on action as soon as in July.

Expectations of a near-term rate hike pushed up the 10-year Japanese government bond yield to 1.10 per cent on Thursday, the highest since July 2011. The benchmark yield stood at 1.065 per cent on Friday.

Hoshi said the recent rise in 10-year yields was a "good sign" that showed the BOJ's decision to end its bond yield control was allowing yields to be driven more by market forces.

But the BOJ must be careful in communicating a strategy for slowing bond buying, and eventually selling bonds, as the huge size of its holdings could magnify the market impact, he said.

"One idea could be for the BOJ to communicate how it would unload its huge bond holdings in, say, 20 years. In doing so, it needs to remind markets that the plan isn't set in stone, and could change depending on circumstances," Hoshi said.

Japan's core inflation hit 2.2 per cent in April, staying above the central bank's target for more than two years, as companies continued to pass on rising raw material costs to households.

The BOJ has stressed the need to keep interest rates low until inflation becomes driven more by sustained wage hikes and robust domestic demand. Ueda has also said inflation expectations are now around 1.5 per cent, short of the BOJ's 2 per cent target.

Source: Reuters

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Samantha Luan

Stocks

Investors pulled money from exchange-traded funds in China in May for the first time in 15 months, raising questions over the strength of a recent stock market rebound.

Equity ETFs in Shanghai and Shenzhen saw a combined withdrawal of $4.2 billion in the month through Monday, according to data compiled by Bloomberg. That's more than investors had poured into the funds in the prior two months.

Chinese stock markets have rallied hard since a February bottom, with state funds helping to halt months of rout by buying some of the biggest ETFs. While expectations over Beijing's increasing policy support for the beleaguered property sector led to more gains, a tepid earnings season and questions over the efficacy of the rescue measures undermined conviction calls.

“Much of the inflows into stocks in the past weeks could have been ‘fast money' betting on anticipation of property polices,” said James Wang, head of China strategy at UBS Investment Bank. “There may be an urge to sell” as the stimulus was weaker than expected, he said.

While officials said a central bank program can incentivize loans worth 500 billion yuan ($69 billion) to deal with unsold homes, that would only address a fraction of the value of vacant apartments, which economists estimate at multiple trillions of yuan.

Funds with the biggest outflows this month include the China CSI 500 ETF, which lost $977 million, and the Huatai-Pinebridge CSI 300 ETF. The funds were favored by the so-called national team during the earlier selloff.

Stock investors are wavering in confidence even as the CSI 300 Index gained as much as 16% in May from this year's trough. Signs are growing that risk-appetite is stalling, with onshore turnover slipping and leveraged trades failing to pick up.

China's domestic private funds lowered equity positioning in the first two weeks of this month, with their aggregate stock exposure at 79% as of May 17, according to data from fund tracker Shenzhen PaiPaiWang Investment and Management Co.

Offshore funds have also been slow in building back their positions, with many still keeping China among the most underweight markets.

Investor sentiment for Chinese equities declined sharply this week as traders took profit following offshore market weakness, according to Morgan Stanley strategists including Laura Wang.

The nation's technology and property shares fell near bearish milestones earlier this week.

If more policies targeting property follow “we see more upside than downside risk,” said Wang of UBS. “But right now some are harboring doubt about the market's trajectory.”