Is China the Answer for European Debt Woes?

Published on: 15:54PM Oct 26, 2011


The European Debt issues seem to be the dominating news currently as I am now hearing rumors that China may get involved in the ESFS.  Will that bring enough confidence to get traders excited and get the market back on track?  Not sure yet, but it could.  You have to believe all parties will come to some type of agreement that will implement swift bank recapitalization, a final solution to bailing out Greece, and specifics for addressing the problems arising in Italy, Spain, Portugal, etc... Traders will quickly be looking to see the overall size of the EFSF, and in particular how much it will be leveraged. Estimates are all over the board, but many are expecting the current 450 billion Euro plan could jump to 1-3 trillion Euros. The other big question will be how much of the Greek debt is going to be wiped off the slate, will it be 20%, 40% or 60% like some have been estimating.  My concern is that if the European banks are forced to eat 60-70% of the Greek debt, and move the losses right to their bottom line, how much of their extended lines of credit will they need to reel in to accommodate the losses.  It would be substantial.  
From a more traditional fundamental perspective, grain and soy traders are trying to digest more "bearish" news. To begin with we could turn to rumors that Japan may have in fact purchased a couple of cargoes of Ukraine corn, which would be the first such purchase made in over a year. From what I am hearing Ukraine plans to harvest a record corn crop that could approach 20 million tons, yielding global corn exports of up to 12 million tons. On top of this there are rumors that Japan is planning on buying more cargoes of corn from Ukrainian. It may not mean much to the trade as of yet, but I promise if our top corn buyer starts to snatch up several hundred thousand tons of Ukraine corn the market will be shocked.
There was also some negative soybean news floating around the trade yesterday when well respected South American crop consultant Dr. Michael Cordonnier raised his estimate of the Brazilian corn crop by 1 million metric ton from 74 to 75 MMT. He says he has a positive bias toward the crop as the early onset of rains has made for very good planting conditions for nearly all of the major soybean areas of Brazil. Remember, this is coming on the heels of rumors that corn production in Brazil could jump by 3-4 million metric tons.
My thoughts for the next 30-60 days are that positive news out of Europe could be met with increased "money-flow" into commodities as a whole, and therefore a "risk-on" type environment could ultimately push grain and soy prices higher.  I continue to believe we will be range bound with upside potential no better than the downside risk at this juncture. The "outside" markets will drive price direction for the next two weeks, then we will be staring down the barrel of the November USDA report (due out Nov 9th).  
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