Bobby Coats and Bert Greenwalt attend Ag council of Arkansas meeting
Bobby Coats and Bert Greenwalt, agricultural economists with the University of Arkansas and Arkansas State University, catch up at the Agricultural Council of Arkansas annual meeting in Little Rock.

Reflation trade re-emerging; ‘bullish commodities’

The unexpected Federal Reserve verbal guidance of a likely March 15 rate increase has given many global equity markets a reason to consolidate.

Note: To view the charts accompanying this article, click on http://www.deltafarmpress.com/marketing/market-price-considerations-week-beginning-march-13

The bullish commodity reflation trade appears to be re-emerging from a month dominated by bearish headwinds resulting from fiscal, monetary and trade policy actions and fundamental market considerations.

Since the week of Feb. 13, global currency, bond, equity and commodity markets have been digesting more potentially bearish than bullish information.

Key Bearish Market Driving Forces:

I address this issue from near term market impacts and my primary focus is the commodity market sector:

First, the unexpected Federal Reserve verbal guidance of a likely March 15 rate increase now replaces the expected June 14, 2017 rate increase. This has given many global equity markets a reason to consolidate.

Why and what impact on commodities? The now almost certain rate increase on March 15 has market participants concerned about the impact of a potentially strengthening dollar as well as other potentially bearish global unfolding fiscal, monetary and trade events. These collective concerns have lead many market participants to start protecting first quarter gains as fears of re-emergence of global deflationary forces create commodity demand uncertainty.

Second, building European Union populist’s movement concerns over the next six-plus weeks and beyond have the potential to provide support to the U.S. Dollar and weaken ongoing global reflation efforts.

The biggest European Union concern is the French presidential elections on May 7. A win by Marine Le Pen would accelerate the unwinding of the European Union, though the unwinding should be orderly and take several years to accomplish.

Third, commodity market fundamentals in normal times would have commodity prices more depressed than today’s current prices, were it not for government and Central Bank stimulative economic momentum activities globally.

Key Bullish Market Driving Forces:

Like above, I address this issue from near term market impacts and my primary focus is the commodity market sector:

First, there is a building awareness that fiscal, trade and regulatory policy objectives will take time to receive Congressional approval to be implemented. On the one hand this may sound bearish, but if the U.S. were aggressively moving ahead without global government and Central Bank complimentary actions then a likely rising dollar would impede U.S. export sales, especially agricultural exports.

Second, the “Debt Ceiling Debate” is about heat-up in a very big way. Interestingly enough this will strengthen the Euro for a period and allow the dollar to be sideways to down and take some of the near term bearish pressure off agricultural exports.

Damian Paletta’s Feb. 28 Washington Post article “Fight over debt ceiling could accelerate Trump’s budget clash with GOP” said:

“Throughout President Barack Obama’s term, Republicans used debt-ceiling deadlines as a cudgel to compel the administration to accept budget changes that would limit federal spending. Several times, the nation careened toward a potential default on the national debt before a last-minute agreement kept the government funded. In 2015, the Obama administration and Congress agreed to suspend the federal debt ceiling until March 15, 2017.

“After that date, the Treasury Department is expected to enact “emergency” measures to buy more time to allow the government to continue paying its bills. These emergency steps often include actions such as suspending pension payments, but the Treasury Department runs out of flexibility after several months.”

Read full article at the following link:

https://www.washingtonpost.com/business/economy/fight-over-debt-ceiling-could-accelerate-trumps-budget-clash-with-gop/2017/02/28/cd7f0c9e-fdc7-11e6-99b4-9e613afeb09f_story.html?utm_term=.585369241506

 

  1. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]

 

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