Fed Tapering Excites Equity Investors

December 19, 2013 12:16 AM

What Traders are Talking About:

Overnight highlights: As of 6:15 a.m. CT, corn futures are narrowly mixed, soybeans are mostly 1 to 2 cents higher and wheat futures are steady to 2 cents higher. Given the light overnight trade, weekly export sales will likely influence price action through the daytime hours. Cattle and hog futures are expected to open with a mixed tone this morning.


* Fed to start tapering. The Fed announced yesterday following the two-day Federal Open Market Committee meeting it will begin reducing its monthly bond purchases next month as the economy is strengthening, especially the labor market. In January, the Fed will cut its asset purchases to $75 billion per month, down $10 billion per month from what it has been purchasing. The Fed plans to gradually phase out all of its monthly asset purchases in 2014, but left the door open to reupping those purchases if the economy needs the support.

The long and short of it: The market response to the tapering was strong. The major U.S. stock indices rallied sharply and closed just below their respective all-time highs. Investors feel that if the Fed is willing to cut back its asset purchases, the economy is strong enough to not need the full crutch any longer. The dollar pared its strong gains late yesterday, but is sharply higher this morning.

* Chinese corn rejections bigger than reported. China has reportedly rejected 500,000 MT to 600,000 MT (nine to ten cargoes) of U.S. corn since mid-November due to the presence of an unapproved GMO trait, which is much higher than reported by Chinese quarantine officials. Bloomberg reports that seven of the rejected cargoes were purchased by state-run grain firm COFCO. Since some U.S. corn shipments are reportedly being allowed to unload and the majority of the rejected cargoes were purchased by a state-run firm, this situation appears to be politically-driven now that China seemingly has bigger domestic supplies.

The long and short of it: The subject of the corn rejections and GMO approvals will be brought up in trade talks between officials from the U.S. and China today and Friday. Developments in those talks could be market-sensitive.

* Brazil seeking U.S. wheat as cover. Brazil bought a cargo of U.S. wheat recently and more purchases could be coming as there are growing concerns Argentina may not be able to cover Brazil's needs. The Brazilian purchase of U.S. wheat comes as reports that exporters are waiting on clearance to ship 1.6 MMT of Argentine 2013-14 wheat that has already been sold. The Argentine government, which controls wheat (and corn) exports may be waiting to ensure there are plentiful domestic supplies before allowing the exports.

The long and short of it: While this news may help stop the bleeding in the wheat market, it's by no means enough to fuel a strong price recovery.


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