Rice Harvest Florenden

Global financials key influencer for rice, cotton, grain markets

To everyone’s surprise the U.S. Justice Department wished to settle their mortgage securities investigation with Deutsche Bank AG for $14 billion. This settlement amount apparently far exceeded the expectation of those following the case.

In this article, we discuss how building global fiscal and monetary policy intervention will likely yield near term (one to three months) price bearishness; longer term bullish rice, cotton, and grain markets

Key Market Concerns:

  • Deutsche Bank’s U.S. Justice Department mortgage securities penalty causing global financial anxiety.
  • United Kingdom’s May discusses EU exit plans, market uncertainty emerges.    
  • “Hawkish” U.S. Federal Reserve providing elevated guidance for global markets.
  • Dollar strengthens, Pound and Yen weakness; markets focus on impact.
  • Interest rate bias “UP” anticipating reflation through sustained stimulus and monetary intervention.  
  • Global market turbulence is impacting rice, cotton, and grain markets; near term likely price consolidation before advance.
  • Oil price rise presently supported by rising global uncertainties, be respectful of possible price weakness.  
  • Domestic and global market deflationary forces now require massive stimulus through government and Central Bank intervention.  

Market Makers

  • Over the past month global market makers have had an overabundance of ongoing and potential risk events to digest. Why?
  • Communications Breakdown: Over the past month global government fiscal and monetary authorities, whose daily task is managing the uncertainties of a slow growth global economy with low to negative returns and building public debt, have created an “ELEVATED” level of market uncertainty due to what appears to be a communication breakdown internally and externally.

Deutsche Bank’s U.S. Justice Department potential mortgage securities penalty causing global financial anxiety

  • To everyone’s surprise the U.S. Justice Department wished to settle their mortgage securities investigation with Deutsche Bank AG for $14 billion. This settlement amount apparently far exceeded the expectation of those following the case.
  • Deutsche Bank indicated this was not a realistic request.
  • German Chancellor Angela Merkel - Given the European austerity measures associated with German Chancellor Angela Merkel’s leadership, word correctly or incorrectly emerged that no German bailouts would be forth coming for Deutsche Bank. This created significant market concern, alarm and uncertainty.
    • Why? This was not the type of communication financial markets handle well. Deutsche Bank, as well as an array of other global banks, are “To Big to Fail.” This raised concerns about Deutsche Bank’s future financial health and possible contagion of other European and even some global banks.
  • Possible Outcome: Global fiscal and monetary authorities’ appear to have resolved their internal and external communication issues, and a U.S. Justice Department settlement of mortgage securities issues with Deutsche Bank AG is in the works for significantly less than the $14 billion.
  • Accompanying charts show Deutsche Bank and select global bank equity price charts.   
  • Accompanying Charts – Click on http://deltafarmpress.com/datasheet/european-political-economic-developments-continue-cast-shadows.

Weekly Charts, September 2013 – October 7, 2016

  • Chart 1. Deutsche Bank
  • Chart 2. Credit Swiss Group
  • Chart 3. HSBC Holdings PLC
  • Chart 4. Wells Fargo & Co.
  • Chart 5. Bank of America
  • Chart 6. Citigroup, Inc.
  • Chart 7. J.P. Morgan Chase & Company

United Kingdom discusses EU exit plans, market uncertainty merges 

  • UK Prime Minister Theresa May this past week discussed plans to be implemented in March 2017 for Article 50 or the formal process or mechanism to leave the European Union by April 2019.
  • There is no question that the European Union bureaucracy will attempt to make this process as painful as possible for the United Kingdom. Why?
    • First, a UK exit of the EU spotlights the inefficiencies and thug tendencies of the European Union bureaucracy;
    • Second, this process signals the beginning of the end of the European Union though it may be a number of years in the future; and
    • Third, this process signals an emerging progressive future for the United Kingdom, even though, as we have discussed before, Scotland and Northern Ireland will likely separate at some point from the United Kingdom. Still the positives for the United Kingdom family of Britain, Wales, Northern Ireland and Scotland simply outweigh the negatives as all embrace their nationalism.
  • Key Market Impact: The British pound found itself being sold-off.
    • One of the suggested reasons is likely an attempt to discourage the exit process.
    • For the United Kingdom in this global economic setting a weaker pound is an economic positive.
  • Prime Minister Theresa May Comments: The Wall Street Journal on Oct. 2 quoted May saying:
    • “We are going to be a fully independent, sovereign country—a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts.”

​“Hawkish” U.S. Federal Reserve providing elevated guidance for global markets

  • The Feds visible actions of the past few weeks have created an elevated level of confidence in their monetary intervention activities, though deciphering their verbal guidance presents many challenges.   
  • The not so visible activities of the global fiscal and monetary policy makers appear to be paying dividends in the fight to limit near term damaging deflationary forces.  

What you need to know:

  • There are global banks that are “To-Big-To-Fail,” and Deutsche Bank is one of them. In a perfect world this would not be the case, but this world is less than perfect.
    • The building economic uncertainties associated with regulatory penalties on big banks with mortgage-backed security issues are now likely to be handled in a way limiting global bank contagion and limiting any major global financial repercussions.
    • Near term, over the next one to three years, ongoing fiscal and monetary policy intervention will be more positive than negative for financial institutions; therefore catastrophic risk to nations and taxpayers will be reduced. Beyond this one to three year period major risks likely reemerge.     
  • United Kingdom is taking charge of their future.
    • As Prime Minister Theresa May said: “We are going to be a fully independent, sovereign country—a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts.”
    • Near term the pound continues to show weakness but for the United Kingdom and global markets there are more positives than negatives to a weak pound.
  • “Hawkish” U.S. Federal Reserve providing elevated guidance for global markets
    • The Fed coupled with global fiscal and monetary policymakers are continuing to roll-out an aggressive stimulus and monetary policy package to address the needs of an anemic global economy.
    • They collectively are in the process of carrying out a reflation agenda, which will pay dividends over the next one to three years for hard assets like equities, commodities, land and fine arts, which, in turn, will give lenders some enhanced pricing power to counteract historic low interest rates.
  • Dollar strength, Pound and Yen weakness; markets focus on impact
    • For the purposes of this article over the next several months expect more strength than weakness in the dollar and more weakness than strength in the pound and the yen.
  • Interest rate bias “UP” anticipating likely sustained fiscal and monetary intervention 
    • The interest rate globally has the world basically at historically low interest rate levels. For the borrower that may seem positive, but this is a huge symptom of chronic slow global growth.   
    • Unfolding global fiscal and monetary policy intervention should progressively raise the demand for capital. The rise in interest rates will be modest, but healthy for economic momentum.
  • Global market turbulence impacting rice, cotton, and grain markets; near term likely price consolidation before advance.
    • Yes, given the above factors over the next one to three months it’s a little challenging to see many positives for rice, cotton, and grain prices, so we most likely will finish a bottoming process over the next one to three months, before prices advance.
  • Oil price rise presently supported by rising global uncertainties, be respectful of possible price weakness.
    • Oil price expectations this year have been elusive. We seem to be working toward a West Texas Intermediate trading range of $40 to $60 per barrel. Presently, if oil pushed above $52, there is a potential for $60 before oil prices likely revisit the $40 area.  
  • Domestic and global market deflationary forces now require aggressive global intervention activities. 
    • The time has come for fiscal and monetary authorities to intervene with levels of stimulus and Central Bank activities to induce an acceptable level of growth, inflation and price stability.
    • Therefore expect building levels of inflationary forces to be supportive of domestic and global growth over the next one to three years.   

Chart Book Index – See http://deltafarmpress.com/datasheet/european-political-economic-developments-continue-cast-shadows

Weekly Chart, September 2013 – October 7, 2016

  • Chart 1. Deutsche Bank
  • Chart 2. Credit Swiss Group
  • Chart 3. HSBC Holdings PLC
  • Chart 4. Wells Fargo & Co.
  • Chart 5. Bank of America
  • Chart 6. Citigroup, Inc.
  • Chart 7. J.P. Morgan Chase & Company
  • Chart 8. Soybeans
  • Chart 9. Corn
  • Chart 10. Rice
  • Chart 11. Cotton
  • Chart 12. Wheat
  • Chart 13. Copper
  • Chart 14. $WTIC
  • Chart 15. 10-Year US Treasury Yield

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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