During the final week of January, we all became re-familiarized with the word coronavirus, when news spread (no pun intended) of the outbreak of this virus in the city of Wuhan China and the surrounding region. Markets reacted as they often do when confronted with a new potentially demand disrupting element, which is to sell off as participants want to reduce exposure, or what we refer to as risk-off. As more disclosed about the virus, now officially labeled Covid-19, and the realization it had not spread significantly outside of China, markets somewhat returned to a state of normalcy, if there really is such a thing in markets. That is at least until this morning, and now as we enter the last week of February, it would appear that we have another round of risk-off trade and it would appear there is an outbreak that has shown up in northern Italy (jumping from 5 cases last week to 150). It is difficult to blame traders for wanting to run for the exits as here is a sampling of a few headlines I saw this morning; Is COVID-19 getting deadlier? Coronavirus may be worse than Wall Street is Wagering, and then further panicking the Democratic establishment in this country, Bernie Sanders wins big in Nevada. I would like to believe that this latest panic will subside as quickly as did the first, but that is the unknown this morning. While the spread of this disease in areas where an outbreak occurs is surprisingly rapid, for the majority of the globe, there is a much higher risk of just getting a case of old-fashioned flu. Still, until more is known, it is challenging to think many will be interested in “risk-on” positions, at least until we have moved beyond the month-end.
Maybe one of the few fortunate realities of the fact that many commodities remain towards what has been multi-year lows is that there is less panic type liquidation that could occur. When there are no longs in the market, it is hard to fear liquidation. Wheat could be the exception here as according to the CFTC, as during the week ending February 18th, large speculators bought just over 21,500 futures contracts of Chicago and KC wheat, bringing their net long position to over 26,000 contracts for the two commodities but in corn held a new short of 114,000 contracts and 97,600 in beans. The same most certainly cannot be said of the equity markets as even though they did close lower last week, that was after recording a new record high at mid-week. Those market did begin this week with a gap lower, and interestingly enough as right back to where they were at the end of January when the outbreak was initially reported. While I am not sure if we are on the cusp of a rush to the exits, the theater is mighty crowded, so nobody better yell fire.
Over the weekend, Treasury Secretary Steve Mnuchin stated that he does not believe the coronavirus will have a material impact on the Phase 1, U.S./China trade deal, but added that could change as more information becomes available. Obviously well versed in the art of hedging his bet. According to the Brazilian meat giant BRF, the have seen no disruption in shipment to China as of yet, but also could be doing a little hedging as there are reports that some container shipping firms are demanding a $1,000 “congestion fee” for refrigerated containers head for that country. Argentina, in turn, reported a significant decline in beef shipment to China during January versus the previous month. Total shipments were just under 31,500 MT, down 30% from the 44,878 moved in December. Do keep in mind though that we were not really informed of the outbreak until the latter part of January, and this slippage could be more about China looking to renegotiate prices on a previous agreement. Hard to imagine China would ever do something like that.
We do have at least one bit of positive news to report this morning. In the daily system, the USDA published a sale of 163,290 MT of beans to Mexico. Certainly, not million-tonne type sales were used to see to China regularly but is a step in the right direction. Have you ever noticed that Mexico seems to show up a buyer when markets are at their most depressed? Someone there appears to have a good pulse on what is happening.