Global Equities Correcting. U.S. and Global equities are correcting and realigning. They are only correcting some of their upside gains, which is totally normal and essential if the current business cycle is going to be extended one or more years into the future, which I believe to be the case.
Equity Correction Beneficiaries. There are always multiple reasons for market price action, but at least to-date some grains, cotton, and other commodity markets have been beneficiaries of the ongoing global equity price weakness.
First, if global equity price weakness were defining a trend change from bullish to bearish in the equity sector, money may aggressively leave equities and move into commodities for a period and generate some significant price upside in one or more commodities or the sector in general.
This does happen when hard assets, like equities and commodities, are in a topping process. I do not believe this to be the case, but many market participants believe global equities are in a topping process and will potentially significantly elevate the price of one or more or all commodities.
I believe the following to be true:
Second, if the ongoing global equity price weakness is defined by a correction or a price pullback before prices move higher in most global equity markets, then the duration of the correction will likely define the price lift grains, cotton, and other commodities may receive as U.S. and global equities go through a price pullback before moving higher.
Duration Equity Correction. The U.S. and global equity correction will likely be longer than normal with equity prices possibly correcting deeper and/or sideways for an extended period. Why? Several reasons, but consider these two:
First, global governments and central banks need to avoid a recession for an extended period and extend the current business cycle expansion. They will make every effort to achieve this goal and will likely meet with success.
Second, Policy dynamics between the U.S. and most other countries are out of equilibrium, which means the president will likely press his fiscal, monetary, trade, and regulatory policy agenda for an extended period or until progress is made toward more acceptable agreements on an array of policy issues.
China vs U.S.
The fiscal, monetary, trade, and regulatory policy friction between the world’s two economic giants is extremely or historically problematic. China may already have technological supremacy over the United States — if not, they soon will if U.S. policy between the two countries remains status quo. How this affects all markets near and longer term becomes extremely important to understand.
Recession? Presently, no recession is on the horizon. As a cautionary measure or from a risk management perspective, one should consider the “possibility” of a recession late next year or the first half of 2020, but I do not expect a recession until after 2020 and maybe as late as 2023.
The outcome of U.S. policy negotiations on all fronts, coupled with U.S. and global financial engineering or government intervention, likely defines the emergence of the next recession.
Beyond the scope of this article, but we may periodically have small engineered recessions emerge to remove excesses or bubbles in the financial and commodity markets. Global economic momentum remains stimulus-driven in market after market around the world. Reality is, country after country are financially anemic or too weak to manage the cleansing process of a recessionary economic downturn, so stimulus in country after country will continue flowing.
Market expectations over the next several weeks.
- U.S. 10-Year Treasury. Yield Sideways to Down - As U.S. and global equity markets continue correcting upside gains, the demand for U.S. 10-Year Treasuries is likely to pull the yield slightly lower. Beyond this ongoing equity corrective process yield will regain upside momentum, due to inflationary global growth expectations and other factors. Charts (A1-A4)
- U.S. Dollar. Sideways to Down - The U.S. Dollar moves sideways to down against the Euro with many other major currencies increasingly having a sideways to upside bias over the next few weeks. That said, beyond near-term weakness, dollar strength could be a major issue into the middle of next year. Charts (A5-A13)
- U.S. Equities. Sideways to Down - Most U.S. equity markets likely need to finish correcting upside gains before moving higher. Several policy factors will determine near-term price strength or weakness in U.S. equity markets. It would be desirable for price excess to be removed from these markets before moving higher. Charts (A14-A18)
- Global Equities. Sideways to Down – Near term ongoing policy discussions between the U.S. and its economic and trading partners likely limit upside potential. The Global equity index (EFA), emerging markets (EEM), and frontier markets (FM) mostly sideways to down over the next several weeks. The strongest and most stable index will likely be the global index, followed by the emerging market index, and the frontier index will likely be the weakest index over the next several weeks. Charts (A19-A29)
- $WTIC Oil. Important Week - If $WTIC oil prices fall below $71-per barrel, oil prices likely revisit the $65 per barrel area. (October 12, 2018 - $71.34), Charts (B6-B9)
- Soybeans. Sideways, Retest Lows, Define Trading Range - Soybeans (October 12, 2018 - $8.68 per bushel) are pushing into some heavy resistance, but near term will global money flows leaving global equity markets be the catalyst that provides potential near term lift to soybean prices? Until soybean prices hold above $9.00 per bushel, I remain more concerned about the downside than the upside. Charts (B10-B13)
- Corn. Sideways Trading Range - This market needs to end the week of October 15, 2018 above $3.92 per bushel to suggest additional upward price momentum is sustainable. Otherwise, this market may carve out a sideways trading range between $3.40 and $3.90 per bushel. (October 12, 2018 - $3.74 per bushel). Charts (B14-B17)
- Wheat. Neutral to Bearish - Wheat is simply moving sideways with a downside bias. If wheat ends the week of October 15, 2018 below $5.00 per bushel, wheat likely has weakness to $4.56 per bushel. (October 12, 2018 - $5.17) (B14-B17)
- Long Grain Rice. Neutral - Fundamentals continue to weigh heavily on this market. Closing the week of October 15, 2018 below $10.68 per cwt. would likely be bearish for prices. (Chart B18-B20)
- Cotton. Potentially Bullish - Key consideration: If cotton can remain above December 78 cents per pound, this market has potential to regain upside price momentum, given today’s global economic setting. Finishing the week of October 15, 2018 below 78 cents per pound would likely indicate additional price weakness lies ahead (October 12, – 78.37-cents per pound). Charts (B21-B24)
- Soft Commodities. Fundamentals, coupled with stable but not strong global growth, continue weighing on these markets. Near term: Coffee more price strength than weakness; Cocoa near term price strength; Sugar continues searching for a bottom; Cotton a critical week lies ahead, holding 78 cents would be supportive of a reversal in price trend; Orange Juice more price weakness than strength; and Lumber continues searching for a bottom.
- Livestock. Bullish - Lean Hogs, Feeder Cattle and Live Cattle remain bullish.
- Gold and Silver. Near-Term Bullish - Gold and silver could find some near-term price support especially if the dollar continues to correct its upside move.
Tax Cuts Video: Attorney Kristine Tidgren: The Impact of the Tax Cuts and Jobs Act on Agriculture, October 11, 2018
Kristine Tidgren, Attorney and Director, Center for Agricultural Law and Taxation, Iowa State University, reviewed the impact of the Tax Cuts and Jobs Act on farming businesses. She discussed issues affecting owners of small C corporations, S corporations, LLCs, partnerships, and sole proprietorships. Included in the discussion was a review of the new IRC § 199A deduction and its impact on agricultural cooperatives and their patrons, new depreciation and expensing provisions, new loss provisions, and the new tax treatment for personal property “trades.”
Video Link: https://www.uaex.edu/farm-ranch/economics-marketing/food-agribusiness-webinars/
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]
Download Slide Show for charts and expanded details, Click Download Link