First: The German Federal Constitutional Court (FCC) has put off an immediate decision on the constitutionality of the ESM, so the market has some breathing room and FINANCE MINISTER SCHAEUBLE has some time to define exactly what the Merkel government has signed on to. The EURO held steady today as the attention turned to the U.S. and the FOMC minutes.
The overall tone of the MINUTES was in the market as nothing new was revealed. The only sentence that attracted my attention: “Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”
What jumped out was, of course, SEVERAL. The idea of SEVERAL did not appear in the aftermath of the FOMC meeting so this sentence is interesting. Then of course the question arises: WHAT NEW TOOLS? There is definitely some ideas to ponder, especially as the most recent data has continued to weaken.
Second, tonight the Bank of Japan (BOJ) announces its monetary policy tonight so it will be important to see if the BOJ has made a deal with the Ministry of Finance to raise the sales tax to help stem the growth in public debt. In return the BANK will become more accommodative with liquidity and help to drive the YEN lower to offset fiscal drag. Pay close attention to market action as the announcement is released–watch the YEN CROSSES.
***On April 30, NOTES FROM UNDERGROUND published a blog and directed our readers to the idea of CHINESE GRAIN IMPORTS as the Chinese authorities needed to assure that the BINS were full as a change of leadership was due to take place. As the South American drought had sent grain prices higher in April, I warned that DROUGHT in the U.S. heartland would send GRAIN PRICES TO 2008 HIGHS.
Well, the most feared outcome has been realized and even CNBC has awoken to the fact that lack of rain makes food prices go higher. As GRAIN prices have headed higher, fears grow that the DROUGHT will send prices to levels that become politically dangerous for an incumbent president. Remember that the high global food prices caused worldwide riots as governments were forced to cut subsidies for food. As this BLOG is primarily concerned with GLOBAL MACRO events and their impact on markets, the THEORETICAL QUESTION MUST BE ASKED: IF THE DROUGHT CONTINUES, WHAT WILL BE THE RESPONSE OF THE OBAMA ADMINISTRATION?
- If the U.S. crop is diminished by 50%, would the U.S. move to curb grain exports in order to assure that U.S. consumers were guaranteed enough grain to keep prices from skyrocketing? In 2010, when Russia experienced severe drought, Vladimir Putin announced: “IN CONNECTION WITH ABNORMALLY HIGH TEMPERATURES AND DROUGHT, I THINK IT IS ADVISABLE TO INTRODUCE A TEMPORARY BAN ON THE EXPORT FROM RUSSIA OF GRAIN…..” (August 5, 2010). There is precedent in the markets for this, and yes, I know that the U.S. is not Russia, but it is an election year.
2. Will the U.S. administration move to change the ethanol mandates to conserve grain? In a very important and seemingly wise move, President Obama did remove the ETHANOL SUBSIDIES and shifted some ETHANOL production to Brazilian sugar-based. In the midst of a drought this is no small matter. Also, in the use of CORN for ETHANOL PRODUCTION, the entire CORN CROP IS NOT USED AS 60% or more of the used corn is returned to the feedstock in a very enhanced form called DISTILLERS GRAIN. But continued drought will certainly impact the GOVERNMENT’S ETHANOL MANDATE.
3. The most important impact of continued drought will be the impact on CHINA. The Chinese have been massive buyers of global grain and thus any curtailment of U.S. exports will weigh heavily on China’s domestic economy. Food is a very important issue in all domestic politics–even authoritarian regimes–so great attention must be paid to weather in the U.S. growing regions. If the DROUGHT CONTINUES AND GRAIN EXPORTS WERE TO BE CUT,GLOBAL TENSIONS WILL BECOME STRAINED. Again, this is merely FOOD FOR THOUGHT and will lead investors to consider the fallout for other markets from SUGAR TO GASOLINE. Also, China’s suspected slowdown will take on an entirely new perspective.