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Ready to-Pick - Copy.JPG Ron Smith
. Cotton prices need to end the week of September 2, 2019, holding above 55 cents per pound or additional serious price weakness could emerge.

Hong Kong truce offered, markets breathing easier

Hong Kong residents fighting for autonomy

What do Hong Kong residents seek to accomplish through their masterfully orchestrated protests? In two words “Promised Autonomy” or self-government (self-rule).   

It should be pointed out that Hong Kong demonstrators and the Peoples Republic of China’s definition of administered autonomy are at an extreme divergence. Hong Kong demonstrators (freedom fighters) see their freedoms being eroded as China’s leadership moves to bring conformity between Mainland China and Hong Kong, which is a Special Administrative Region (SAR) of the Peoples Republic of China (PRC) with a population of 7.5 million people. 

On July 1, 1997, Hong Kong’s (the former British colony) sovereignty reverted to the Peoples Republic of China, under the provisions of a 1984 international treaty, known as the “Joint Declaration,” negotiated between China and the United Kingdom.

The Joint Declaration promised Hong Kong residents, as the Congressional Research Service says, a High Degree of Autonomy, except in foreign and defense affairs” and pledges that Hong Kong’s “current social and economic systems” will remain unchanged for at least 50 years.

Current Tension

What is the catalyst for potentially deescalating tensions between Hong Kong demonstrators and Mainland China? Tensions have potential to slowly unwind, given the withdrawal of the highly contentious extradition bill by Carrie Lam, who is the fourth Chief Executive of Hong Kong since 2017. She served as the Chief Secretary for Administration, the most senior principal official, from 2012 to 2017, and as Secretary for Development from 2007 to 2012.

Since June 9, 2019, a group of Hong Kong residents have orchestrated extremely complex and sophisticated marches, demonstrations, riots, and aggressive confrontations to drive home their demands for promised autonomy. 

An extremely dangerous situation appears to be “ever so slowly” being defused, but expert observers mostly expect varying level of tensions (confrontations) will likely remain for weeks, or, more likely, months to come. 

What if tensions do not subside?

If tensions do not subside, but intensify, Hong Kong could easily lose its regional premiere financial leadership position to Singapore’s financial community and Hong Kong residents would find the possibility of freedom diminishing. 

What now?

Mainland China’s leadership under President Xi will now patiently wait, watch, and manage the situation, most likely through invisible collective dynamic actions to achieve their long-term goals of completing unification of Hong Kong with Mainland China.   

What is the near-term impact on grain and cotton markets?

Global equity markets breathed a huge sigh of relief with Chief Executive Carrie Lam’s withdrawal of the highly contentious extradition bill, the week of September 2, 2019.

Hong Kong demonstrators near-term will likely continue pushing their broader agenda of self-government, driving a wedge between the U.S. and China, which will further limit the possibility of grain and cotton purchases at least near-term.   

Bottomline for the Hong Kong Community

 Near-term it does not matter if you are in one of the three major Hong Kong Community groups: Pro-Mainland China, Neutral, or Pro-Self Government, the fear is Honk Kong could easily lose its regional premiere financial position to Singapore’s financial community, which could significantly diminish the Hong Kong community’s lifestyle. Additionally, Mainland China’s South and Southeast Asia leadership could be diminished.

Therefore, near term U.S. grain and cotton producers certainly have a dog in this fight.

Near-term global stability is a little shaky, so we will have to watch the price action to see the impact on the commodity sector.

Market Outlook for the Week Beginning September 9, 2019

Soybeans. Larger Price Trend Remains Down. The September 6, 2019, close was $8.58 per bushel, down 11.25 cents on the week or down 1.29 percent. Closing below $8.50 per bushel opens the possibility of revisiting the $8.00 per bushel area. An exit of short positions at November $8.34 is one consideration. Soybean prices likely remain in the 2019 trading range of $7.95 to $9.39 per bushel, Charts B10 to B13.

Long Grain Rice. Near-Term Price Trend Remains Bullish. September 6, 2019, November futures close $11.97 per cwt. or $5.39 per bushel. November prices closing below $11.36 per cwt or $5.11 per bushel would warrant caution. Acreage numbers will gain clarity with USDA’s WASDE September 12, 2019, report, while yield and production figures will gain increasing clarity with each passing week, Charts B18 to B20.

Corn. Larger Price Trend Remains Bearish. Corn closed the week of September 2, 2019 at $3.56 per bushel, down 14.25 cents for the week or down 3.85 percent. Expect more price weakness than strength, until fundamentals are more supportive of higher prices with a possible decline to $3.01 per bushel. If corn ends the week of September 9, 2019, above $3.78 per bushel, I will consider a near-term bottom possibly in place, Charts B14 to B17.

Wheat. Near Term Price Trend Remains Down. Wheat closed the week of September 2, 2019, at $4.64 per bushel, up 1.25 cents on the week or up 0.27 percent. Wheat prices need to end the week of September 9, 2019, above key resistance of $5.08 per bushel for me to favor additional price strength, Charts B25 to B28.

Cotton. Price weakness remains problematic. The September 6, 2019, close 58.58-cents per pound, down 0.25 cents on the week or down 0.42 percent. Cotton prices need to end the week of September 2, 2019, holding above 55 cents per pound or additional serious price weakness could emerge, Charts B21 to B24.

Interest Rates. 10-Year U.S. Treasury Yield: September 6, 2019 close 1.55, up .05 on the week or up 3.33 percent, Charts A1 to A4.

Little support exists for the 10-Year Treasury Yield until the previous low made in 2016 is reached at 1.37 and given time further downside to 1.00 or lower now becomes a real possibility. The November 2018 high was 3.24 percent.

The U.S. Federal Reserve lost the battle to continue raising the Fed Funds rate, due to a dangerously slowing global economy. This has two key implications: first, if the Fed had continued raising rates another 1 to 2 percentage points this would have provided much needed relief from low interest rates to the fixed income sector, and, second, this would have allowed the Fed to continue preparing for the next economic downturn.

What does this mean to the investment community? Going forward the private interest rate will be increasingly decoupled from the public rate or U.S. Treasuries rate.

  • Fed Rate. The U.S. Federal Reserve is on course to lower the Fed Rate, from today’s 2.25 percent, by possibly: first, another ¼ percent to ½ percent in September 2019; second, another ¼ percent before the end 2019; and third, likely another ½ percent or more in 2020.
  • Today the world is awash in at least $14 trillion in negative rate bonds, mostly government. This was totally unthinkable only a few years ago.
  • When will interest rates start rising again? Public debt or government debt will rise with the next major wave of inflation, which I would guess emerges in 2021. Private debt interest rates from financial institutions will rise with their risks and/or their ability to pass increases along to their borrowers.

U.S. Dollar Index. Larger Trend Sideways to Up. The U.S. Dollar Index decreased 0.50 percent the week of September 2, 2019, down 0.50 to close at 98.36. Dollar Bulls see global money increasingly flowing into the U.S. as a safe heaven. Dollar Bears are anticipating lowering of the Fed Rate at the September Federal Reserve FOMC meeting, reflation emerging, and the European Central Bank and the Bank of Japan elevating stimulus activities providing the dollar with some potential weakness, Charts A5 to A8.

Much of the world’s debt is dominated in dollars, especially frontier countries and emerging markets. Thus, a lower dollar is supportive of U.S. economic activity and global economies in general. A lower dollar may also be supportive of a number of building global asset bubbles.

$WTIC Light Crude Oil. Prices Trading in a Range. September 6, 2019 close $56.52 per barrel, up $1.42 per barrel or up 2.58 percent for the week. Present near-term trading range $51.11 to $57.57 per barrel, Charts B6 to B9.

Geopolitical uncertainties, political dynamics, coupled with possible supply disruptions, make this market unpredictable for the world’s most talented analysts, so be highly respectful of price action. Do not try to outthink this market, just follow the price action.

No Crystal Ball

Since no one has a crystal ball or knows the future always consult an investment professional or professionals before making investment decisions. The world’s most talented speculators, investors and money managers are challenged by today’s global business environment.  

Source: Bobby Coats is an economist with the Arkansas Department of Agriculture. E-mail: robert.coats@agriculture.arkansas.gov and is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.

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