Extreme frost in Brazil’s coffee-growing region is set to harm next year’s crop, sending prices of coffee to a six-year high.
Futures for arabica beans jumped to $2.08 a pound Tuesday, the highest level in New York since 2014, according to the Wall Street Journal.
Exacerbating the price surge is the fact that the frost is the second major weather shock to hit farms in Brazil, the world’s largest coffee producer. This spring, the region’s rainy season hardly saw any rain during one of its worst droughts in almost a century. The drought hurt the 2021 crop and dropped the coffee supply output in Brazil as plants withered.
Now, traders are spooked that the frost will harm the 2022 coffee harvest, and have pushed coffee futures up 30% in July.
José Marcos Magalhães, president of the Minasul coffee cooperative and also a grower, told the Journal that he expects to lose two-thirds of the 2022 harvest on his farm.
“I normally produce 12,000 bags, and now I think I’ll lose about 8,000,” José Marcos Magalhães said.
Global shares were mixed on Monday, with economically sensitive sectors such as energy and banking under pressure, while more defensive parts of the market such as healthcare rose, as as COVID-19 cases linked to the delta variant continued to rise and bring renewed lockdowns.
Key data on US consumer inflation and regional manufacturing activity along with Chinese economic growth could provide a steer on how much the resurgence of COVID-19 is impacting the global recovery.
Federal Reserve Chairman Jerome Powell will also deliver his semi-annual testimony on the state of the economy to Congress this week, while the European Central Bank will revise its current monetary policies, which investors are expecting will provide them with guidance on growth and inflation in the eurozone.
“In the US, CPI data tomorrow will tell us whether we did indeed see the peak in inflation in May – our economists think we did, forecasting a slowdown in headline CPI from 5.0% to 4.8% in June, potentially putting a cap on Fed rate expectations for now.” ING analysts said.
The yield on the US Treasury 10-year note was last at 1.333%, down by 2.3 basis points, reflecting a degree of investor demand for so-called safe haven assets.
Rising COVID-19 cases linked to the Delta variant are also weighing on global markets as they signal a potential delay in post-pandemic economic recovery.
“We’re also seeing higher case counts in the UK, US and Europe, which could also add to the uncertainty,” Michael Hewson, chief market analyst at CMC markets said. “The lower vaccination rate in Europe could prove problematic in the days ahead,” he added.
European stocks dipped on Monday. Frankfurt’s DAX was last down 0.14%, while London’s FTSE 100 dipped by 0.56% and the EuroStoxx 50 index of top eurozone stocks was 0.25% lower.
The European Central Bank might announce revisions to its monetary policy at its meeting this week, but will not end its post-pandemic recovery program, ECB President Christine Lagarde said on Bloomberg TV.
Asian markets were boosted by Japanese machinery orders rising for the third consecutive month in May and the country posting higher than expected producer price index readings on Monday. The data releases boosted investor confidence in the economy recovering despite a rise in COVID-19 cases in the region.
The energy sector broadly declined on Monday. OPEC+ reached no agreement on production and abandoned a planned meeting last week, which has raised concern that the group could splinter and raise output at will. Brent crude futures were last down by 1.19%, trading for $74.65 per barrel, while WTI crude fell 1.17% to $73.69 a barrel. Natural gas was last trading 1.06% lower, while heating oil declined by 1.35%.
Bank of America is anticipating a preemptive slowdown in the third quarter as investors fearing the “five P’s” pull back across asset classes, analysts wrote in a note.
The first half of the year has brought good news for many assets, but the “Wall St boom/bubble” could use a “breather,” BofA’s analysts wrote.
In their view, the five P’s – pandemic, price, positioning, policy, and profits – look set to weigh on credit, stock, and commodity returns in Q3, partially in expectation of weaker company earnings relative to growth in the fourth quarter.
With Covid cases around the world ticking up due in part to the Delta variant, BofA expects growth and earnings expectations for this year and next to fall. That could lead to downward pressure on asset prices.
The latest Covid wave comes as asset pricing is already robust, with the S&P 500 price-to-earnings ratio at dot-com bubble levels. Commodities and housing are also at or nearing historic valuations. US spreads between risk-free and junk bonds are exceptionally tight, as junk bond yields fell below inflation on Friday. (Prices rise when yields fall.)
The analysts pointed to survey data showing fund managers pouring money into “late cycle” assets – those best suited for inflation and weak growth. In Q3, they see the S&P 500 falling below 4,000, a drop of roughly 8% from current levels, led by flagging tech stocks, which many investors (wrongly, in their view) see as a good defensive option.
Inflation across the developed world will force monetary and fiscal authorities to ease up on stimulus measures in the coming quarter. Moreover, prospects for Joe Biden’s proposed $1.7 trillion infrastructure package have dimmed as the administration now pursues a slimmed down bipartisan deal.
China is still a “wild card” in terms of policy, the BofA analysts wrote, but the central bank seems wary of overheating the country’s fragile financial sector.
Between potential future Covid restrictions, supply shortages, and likely growth deceleration, corporate profits are poised to feel the pinch in the second half of the year. Stocks may also fall preemptively, as investor jitters make lower Q4 profits show up in Q3 share prices.
China is pumping copper, aluminum, and zinc into commodity markets to tamp down soaring materials costs, the country’s strategic reserves agency announced on Wednesday.
The move, which was first reported by Bloomberg, comes as commodity prices have marched steadily upward for months, with the S&P GSCI commodity index rising more than 30% year-to-date.
Last month, the strategic reserves agency pledged to keep commodity prices down, to prevent supply cost crunches that have begun to creep in. June saw China’s producer price index, a measure of inflation faced by suppliers, rise 9%, the highest rate in over a decade.
China appears to still be keeping some of its powder dry, however. Wednesday’s commodity reserves dump – consisting of around 100,000 tons of copper, aluminum, and zinc – is just a fraction of the country’s estimated reserves. Prior to this sale, China held two million tons of copper, 800,000 tons of aluminum, and 350,000 tons of zinc in reserve, according to a Citibank estimate reported by CNBC.
The drop is a sign that pandemic-driven booms in certain sectors will wear off as economies rebalance and supply catches up with demand, Bank of England Governor Andrew Bailey said in a speech on Thursday.
“We are seeing rebounds and normalisation of some commodity prices,” Bailey said. “In the US, lumber prices having risen sharply, are now retracting a sizeable part of that rise.”
“There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.”
In the UK, year-on-year inflation jumped to a two-year high of 2.1% in May. In the US, year-on-year inflation hit a 13-year high of 5% in the same month.
But both Bank of England – the UK’s central bank – and the Federal Reserve argue that sharp price rises are a result of strong growth and bottlenecks in certain sectors. They say inflation will cool as growth slows, businesses adapt and people’s eagerness to spend wanes.
In the lumber market, analysts say prices are tumbling because people are spending less on home improvements as restrictions are lifted. Meanwhile, lumber producers have increased their supply.
However, not all analysts agree that falling prices in some sectors mean inflation will be temporary.
Hugh Gimber, global market strategist at JPMorgan Asset Management, said rising wages across economies as firms rehire workers could cause prices to rise more than expected.
The S&P 500 is too richly valued to benefit much from the post-pandemic recovery and investors looking to ride the economic upcycle should add Canadian stocks, Bank of America strategists wrote in a note this week.
The S&P 500 is trading at a multiple of forward earnings not seen since the dot-com bubble, according to the BofA note. Meanwhile, Canada’s main equity benchmark, the TSX, trades at a steep discount to the S&P 500 – a historical leading indicator of Canadian overperformance.
Other factors bode well for the TSX, including a stronger Canadian dollar and a boom in commodities prices. Relative to the S&P 500, Canadian stocks enjoy greater exposure to commodities, and have gained from surging oil and gold prices.
But these positive portents could easily sour, the strategists warned. Further hawkishness from the Fed could push up the dollar and hurt Canadian exporters. And China’s bid to suppress commodity prices by unleashing its stockpiles onto the market could prove painful for Canada’s big materials and energy sectors.
Commodity-exposed sectors make up 26% of the TSX, versus 6% of the S&P 500.
The economies of Canada and the US have both begun to rebound from the pandemic, with annualized GDP growth for the first quarter coming in at 5.6% and 6.5%, respectively. However, Canada’s air travel and restaurant activity have remained sluggish, whereas the US is nearing pre-pandemic levels.
Global shares on Friday headed for their steepest weekly drop in a month, while the dollar neared two-month highs, as investors began to prepare for an end to the Federal Reserve’s multitrillion-dollar economic-support program.
The Fed met this week to discuss monetary policy and, in light of the resilience of the recovery in the US economy and the pickup in consumer inflation, indicated it might raise interest rates by the end of 2023, sooner than it originally expected.
This more-hawkish stance has forced equity indexes off recent record highs, boosted the dollar, and forced government bond yields up, as chances grow for the central bank to taper the vast asset-purchase program it put in place last year to keep borrowing rates low and protect the economy.
Futures on the S&P 500 and the Dow Jones Industrial Average were flat Friday, while those on the Nasdaq 100 rose 0.2%, suggesting tech stocks might get a lift when trading starts later in the day.
The MSCI All-World index of global shares was down 0.4% on the day, heading for a 0.64% decline this week, the largest in percentage terms in a month.
“Investors have been digesting the latest statements from the US central bank, which surprised markets with a far more hawkish stance than expected,” the AXI strategist Milan Cutkovic said.
“While this hasn’t led to a reversal in stock markets, it could limit further gains in the near-term as taper talks intensify,” he said.
In Europe, the STOXX 600 index was last down 0.1%, echoing the modest weakness across the Asian market, where the Shanghai Composite closed flat and Tokyo’s Nikkei lost 0.2%.
The dollar hovered near its highest in about two months, buoyed by an influx of capital from investors who have ditched assets that tend not to perform well when US rates rise, such as emerging-market currencies and some commodities.
“The world’s reserve currency is heading for its best week in nearly nine months after the surprise change in tone from the Federal Reserve on Wednesday continues to rattle markets and fundamental positioning,” Lukman Otunuga at FXTM said.
“A market accustomed to liquidity on tap from a ‘patient’ Fed has had to face the reality that a tightening is coming far sooner than it previously thought,” he said.
In cryptocurrencies, bitcoin was down 3.7% at about $37,840, while ether was down 4% at about $2,340, in line with the sell-off across other risk assets.
The gold price was heading for its largest weekly loss since early February, on track for a drop of 4%, thanks in part to the strength of the dollar, which makes bullion less appealing for non-US investors to hold.
“The most important driving force behind the price slide is the massive appreciation of the US dollar, which has gained more than 2 cents since the Fed’s meeting on Wednesday,” the Commerzbank analyst Carsten Fritsch wrote in a research note.
Gold was last up about 1% at $1,792 an ounce, having recovered some of Thursday’s 3% decline, which was the biggest one-day drop since January.
Other commodities also declined broadly, having been swept lower by the same dollar-related selling as gold. Lumber was set for a weekly drop of 15%, while copper was on track for a decline of 7.5% and palladium, which is used in autocatalysts for gasoline-powered vehicles, was heading for a fall of 7% on the week.
Gold prices fell almost 3% on Thursday, marking their largest one-day slide since January, after the Federal Reserve indicated it may raise US interest rates faster than it originally planned, which sent investors flocking into the US dollar and other higher-yielding assets.
A sudden hawkish development at Wednesday’s FOMC meeting was the “dot plot” chart now showing the 2023 median dot pricing in two rate hikes in 2023, compared to zero hikes at the last meeting in March.
The yield curve responded swiftly, with the belly of the curve seeing the most movement, said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson, referring to a larger rise in near-dated Treasury yields than in longer-dated bonds.
An update on the interest rate outlook saw equities weaken, while the US dollar and bond yields all rose. 5-year US Treasury yields jumped around 0.1%, with the benchmark 10-year yield also higher at 1.569%. In contrast, 30-year US Treasury yields were little changed as the Fed’s longer-run interest rate forecast remained the same at 2.5%. “This has acted as a reference point for the longest-dated Treasuries for some time,” Blackbourn said.
11 of 18 governors wanted to keep rates at near-zero through 2023 with only six pricing in more than one hike, according to Deutsche Bank analysts. But on Wednesday, only five wanted to keep rates at near-zero through 2023, while eight governors projected three or more hikes.
Lower interest rates drive investors to alternative assets like gold, as other generally higher-yielding assets like bonds wouldn’t be able to pay regular interest. This makes gold a safe haven, or a store of value, in times of economic uncertainty.
But Chairman Jerome Powell’s tone has now shifted to optimism about the pace of growth for the job market, despite near-term bottlenecks, over the COVID-19 vaccination drive going strong. He also flagged the possibility that inflation could turn out to be higher and more persistent than expected.
Because gold bears no yield of its own, it cannot compete for investor cash when bond yields pick up. This is particularly true of so-called “real yields,” or those that are adjusted for inflation. Real 5-year yields are still deeply negative, given the prevailing consumer inflation rate of 5%. But they have risen to -4.12% this week from -4.28% a week ago, meaning gold is far less attractive.
The US dollar was stronger against the euro on Thursday as currencies responded to changes in real yields. Higher real yields make the greenback more attractive to investors. Analysts expect this will put some pressure on European equities and currencies in the coming days.
“The Fed’s hawkish pivot is a major buzzkill for gold bulls that could see some momentum selling over the short-term,” said Edward Moya, a senior market analyst at OANDA. “Short-term Treasury yields will continue to rise and that should provide some underlying support for the dollar, which will keep commodities vulnerable.”
Despite recent weakness for gold over the past week, its medium-and-longer term outlook remains bright, Moya said, adding that the $1,800 level is the limit that needs to be defended for bullish bullion investors.
Gold was last trading 2% lower at $1,809.45 per ounce on Thursday. It is down about 5% so far this year.
The dramatic slide in lumber prices has further to go, as speculators pull out of the market and supply catches up with demand, Saxo Bank’s chief commodity strategist has said.
Lumber prices have fallen more than 42% since May’s record high of over $1,700 per thousand board feet, although they remain more than 150% higher for the year.
Ole Hansen, head of commodities at the Danish bank and a leading authority in the field, said a number of factors meant prices likely have further to drop.
“Something like lumber has been very much a pandemic-driven spike,” he told Insider. He said a lack of mill capacity and “people going crazy in their backyards, redoing their houses or buying a bigger house” had caused prices to soar.
Skyrocketing prices had sucked in speculators such as hedge funds, who are now pulling out of the market as prices dip, Hansen said.
“Some of that activity is bound to slow [and] supply is starting to meet the demand,” he said.
Hansen said the curve for lumber futures contracts is sloping downwards, showing that “the market is looking for quite some weakness as we head into the autumn and winter months.”
Hansen also said copper could drop another 10% from its current level over the summer, before rebounding later in the year. Copper is down roughly 10% from May’s high of around $10,750 per ton.
One reason for this is that investors think the chances of a dangerous rise in inflation have died down, he said. That means they are moving away from commodities like copper, which are seen as good stores of value at times of rising prices because they’re widely used in industry and technology.
Paul Donovan, chief economist at UBS Wealth Management, told Insider that commodities prices can be taken as a barometer of wider forces in the economy.
He said soaring home prices had cooled down some of the “frenzied” buying in the market, weighing on lumber. And he said peoples’ spending in many other areas had cooled after an initial splurge when economies first reopened.
Investment adviser Rich Bernstein said in a CNBC interview Monday that bitcoin is a bubble, and crypto mania is making investors ignore other asset classes that have more potential.
Institutional acceptance of bitcoin and other major cryptocurrencies has led to mainstream adoption, making it one of the most trending alternative assets. The fear of missing out on the cryptocurrency buzz led to a jump in the number of crypto wallets to 73 million in May this year, from about 49 million at the same time in 2020, according to data from Statista.
“It’s pretty wild,” Bernstein, the CEO and CIO of Richard Bernstein Advisors, told CNBC’s “Trading Nation.” “Bitcoin has been in a bear market, and everybody loves the asset. And oil has been in a bull market, and it’s basically, you never hear anything about it. People don’t care.”
According to the star investor, oil is the most ignored asset class and commodity traders have good reason for optimism.
“We’ve got this major bull market going on in commodities, and all people are saying is that it doesn’t matter,” he said.
Bitcoin was last trading 1.3% higher at around $39,815 as of 7:55 a.m. ET on Tuesday, but it’s fallen more than 36% in the past two months. Brent crude rose 1.2% to $73.75 and West Texas Intermediate rose 1.4% to $71.90. Both are up 97% and 89%, respectively.
By officially establishing itself as an asset class, the most popular digital asset has had a historic year as Wall Street titans like Goldman Sachs opened its trading floor to it. But Bernstein thinks bitcoin’s bull run isn’t sustainable in the longer term.
Investors could suffer portfolio declines over the next two to five years if they overlook other asset classes, he said. “The side of that see-saw you want to be on is the kind of pro-inflation side which most people are not investing in,” he said.
Bernstein listed energy, materials, and industrials as his top bets “because that’s where the growth is going to be” within the next six to 18 months.