Policy Updates: Market Recap of 2017 and Look Ahead to 2018

Posted on 12/31/2017 4:20 PM

NYT article fuels focus on Russia meddling in U.S. elections | U.S.-China issues

Market recap and outlook: In the markets section below, a summary of 2017 for key markets is provided and a look ahead for potential 2018 outcomes.

Regarding agriculture, the biggest unknown is really a known factor: weather and its impact on yields. Those bullish on U.S. crop markets frequently cite the impacts of La Niña (see a link to a Wall Street Journal article on this), while market bears note any corn and soybean yield average at or above trend will likely lead to new lows, despite growing demand for the crops.

Corn and soybean market bulls also have to contend with their recent past early season yield projections being too low, despite last year's varied growing season across the Corn Belt. The year 2017 saw many finally coming to terms with the phrase, “The crop was better than expected” with the “expected” meaning their initial yield forecasts were simply too low. Lesson learned, again: Yield assumptions are key.

The fate of the dollar will also be a factor, but as noted below, less so for ag commodities than for others, especially energy prices.

NYT report: George Papadopoulos told Australian diplomat Russians had 'dirt' on Hillary Clinton before WikiLeaks published hacked emails. Former Trump campaign foreign policy adviser George Papadopoulos has been projected as a relatively unimportant member of the campaign team, but according to a New York Times report, he "stayed influential throughout the campaign." Per the NYT, the reason behind the FBI opening an investigation into Trump's Russia ties was what Papadopoulos told an Australian diplomat about Russia's dirt on Hillary Clinton. The Australian government passed along that information, which spurred the FBI investigation. Trump and others close to him have previously blamed a private intelligence dossier for sparking the inquiry. Link to New York Times article.

South Korea seizes second ship suspected of providing oil to North Korea. South Korean authorities have seized a Panama-flagged vessel suspected of transferring oil products to North Korea in violation of international sanctions, a customs official said on Sunday.

Meanwhile, Reuters reported that "Russian tankers have supplied fuel to North Korea on at least three occasions in recent months by transferring cargoes at sea, ... providing an economic lifeline to the secretive Communist state.” Reuters quoted quoting two senior Western European security sources.

U.S.-China trade relations in focus. President Donald Trump during a recent interview with a New York Times reporter for the first time explicitly that he had gone soft on trade with China in the hopes that Beijing would help put pressure on North Korea to stop its nuclear weapons program. "China's hurting us very badly on trade, but I have been soft on China because the only thing more important to me than trade is war. O.K.?" Trump said in an interview with the NYT. Link.

Other items of note:

  • WSJ ag market outlook: “From Soybeans to Corn, La Niña Could Shake Up Agricultural Markets in 2018.” The article notes that grains, soybeans and other agricultural commodities are likely in for a wild ride if the La Niña weather pattern takes hold. Link.
  • KORUS meeting Jan. 5. U.S. and South Korean negotiators will meet Jan. 5 in Washington in a prelude to official renegotiation talks on the 2012 Korea-U.S. (KORUS) trade agreement. The U.S. Trade Representative's office said the meeting will focus on potential amendments and modifications to the trade pact.
  • President Trump early Sunday warned Iran that the U.S. is watching for human rights violations as anti-government protests flare across the country. “Big protests in Iran. The people are finally getting wise as to how their money and wealth is being stolen and squandered on terrorism,” Trump said. “Looks like they will not take it any longer. The USA is watching very closely for human rights violations!” Iran President Hassan Rouhani, in his first comments since demonstrations began four days ago, said Iranians have the right to protest but should do so without resorting to violence. Iran blocked access to two social media apps to try to blunt the protests, which left two people dead. However, demonstrations escalated, despite threats of a government crackdown.

Markets: A recap of 2017 and a look ahead to 2018.

The Dow posted its second-biggest yearly gain of the past decade in 2017, rising 25.2%, and the most closing highs for the index in a single calendar year at 71. The S&P 500 ended up 19.5% and the Nasdaq was up 28.2% — a rise for the sixth straight year, the longest streak since one ended 1980. The eight-year Dow bull is up 376% from its March 9, 2009, lows, for an average annual return of 19%.

For the fourth quarter, the Dow was up 10.4%, the S&P up 6.2%, and Nasdaq rose 6.3%. The Dow posted its ninth straight quarterly rise, the longest streak since 1997.

Monthly results: The Nasdaq saw its sixth straight monthly rise. The S&P notched its ninth straight monthly gain, the longest streak since 1983. The Dow saw its ninth straight monthly advance, the longest such streak since 1959; for December, the Dow was up 2%, S&P up 1%, Nasdaq up 0.4%.

Global stock indexes also saw near records or multiyear highs, from Japan’s Nikkei Stock Average to the U.K.’s FTSE 100. Japan’s Nikkei rose 19% in 2017, the most since 2013, and London’s export-heavy FTSE 100 climbed 7.6%, ending the year at a record. The MSCI All Country World Index is also near a record. International stocks outperformed the S&P 500 for the first time since 2012, ending with gains of 24%.

The yield on the 10-year note fell to 2.409%, according to Tradeweb, from 2.432% on Thursday, settling below where it ended last year at 2.446%. Bond prices rise as yields fall.

The 10-year yield snapped a two-year streak of gains, while recording the smallest daily percentage change since 1978 this year, according to the WSJ Market Data Group.

The yield on the two-year Treasury note recorded its largest yearly climb in over a decade. The note tends to be more sensitive to the path of rate increases.

Inflation as measured by the core CPI has risen at an average rate of 1.76% since 2009.

The inflation tracker that the Fed prefers — the core Personal Consumer Expenditures, or PCE, index — was up 1.5% as of November.

As for 2018, by next December, the broader CPI, which was growing at 2.2% as of November, will probably have risen 2.1% from today’s level, according to 52 economists surveyed in Blue Chip Economic Indicators. The Fed sees core inflation rising 1.9% next year.

Inflation usually lifts commodities. And if the dollar weakens, commodities — most of which are priced in dollars — generally become more valuable. Any inflation rise above expectations would likely come with rising economic growth in the U.S. and the world, sparking more demand for oil, agricultural products, and other commodities.

But for now, some ag commodities like corn and soybeans are entrenched in a down market on building stocks and the possibility of trend line or higher yields in 2018 — see below for more on the ag sector.

Wages rose at an annual rate above 2.5% in 2017, faster than since the end of the recession.

Many analysts expect a steeper slope next year, as job openings are at the highest level since records were first tracked, in 2000.

The U.S. dollar fell Friday, posting its largest yearly percentage drop in a decade. The dollar snapped a five-year winning streak, dropping 7.5% in 2017, its biggest annual decline since 2007.

Energy and metals tend to have the highest degree of negative correlation with the dollar. Agricultural products have shown the least correlation — reason: weather has the biggest grip on ag commodities. (See ag commodity recap, below.)

The euro climbed 0.5% against the greenback on Friday, rising above the $1.20 level to $1.2003, gaining 14% in 2017 and breaking a three-year losing streak against the dollar.

Wild cards. While some are looking at whether the Fed may make a rate mistake in 2018, others note the wild card could be President Donald Trump's trade policy.

An aggressive move on China's trade policy and/or a collapse of NAFTA 2.0 talks could bring a host of market impacts – both bullish and bearish. Trade restrictions could boost some prices, while the U.S. farm sector would likely go into a deep recession.

Oil prices ended 2017 above $60 a barrel, a mark not seen in more than two years. Brent, the global benchmark, gained 71 cents on Friday, 1.1%, to $66.87 a barrel.

Global economic growth has pushed expectations for oil demand higher. The International Energy Agency forecasts that oil demand rose by 1.5 million barrels a day in 2017, and will increase further in 2018 by 1.3 million barrels a day.

The EIA anticipates that U.S. output will average 10 million barrels a day in 2018 — eclipsing the record of 9.6 million barrels a day set in 1970.

Diesel futures closed at the highest level in more than two years, up 1.1% on Friday at $2.0755 a gallon. Gasoline futures settled up 0.3% at $1.7992 a gallon.

Natural gas prices rose Friday, boosted by the emergence of cold weather across much of the U.S. Futures for February delivery gained 3.9 cents, 1.3%, to $2.953 a million British thermal units on the New York Mercantile Exchange, the highest close since Dec. 4. Prices rose 11.1% for the week, the largest one-week percentage gain since August 2016. But prices fell nearly 21% for 2017 on warmer-than-average temperatures through much of December, and steadily rising production from U.S. shale companies. A tighter natural gas market in 2018 is seen by some, especially if the recent cold weather persists.

Gold prices closed 2017 with 11 days of gains in the last 12 sessions and up 14% for the year — their best year since 2010.

Copper added 31% for the year and also posted its best year since 2010.

Ag commodity recap:

  • Corn ended 2017 nearly unchanged. CBOT front-month corn closed out 2017 at $3.50-3/4 per bushel, barely changed from its year-ago close of $3.52.
  • Chicago soybean futures firmed on the last trading day of the year, but soybeans still recorded a yearly loss of about 4% on big 2017 harvests in South America and the United States. Chicago Board of Trade front-month soybeans climbed 6 cents to settle Friday at $9.51-3/4 a bushel, versus the closing 2016 spot futures price of $9.96-1/2.
  • Wheat drifted lower on Friday but posted its first yearly gain since 2012. CBOT wheat slipped lower Friday in quiet pre-holiday trade but posted a yearly gain of nearly 5%, snapping a four-year skid. The spot contract ended at $4.27 a bushel, up from $4.08 at the end of 2016.
  • Cotton for March delivery ended 2017 at 78.63 cents a pound, marking their best annual performance (up 25%) since 2010, with prices hovering near a 3-1/2 year high on the last trading day of 2017. Cotton futures rose nearly 20% in the fourth quarter of 2017r, notching their best quarterly gain since 2011, while also registering a tenth straight weekly gain. Reports note that mills are caught unpriced on their purchases, giving the market a reason to push the market higher in early 2018.
  • Cattle futures for Feb. delivery fell 0.6% Friday to close at $1.2155/lb on the CME. Live cattle gained 3.4% for 2017, ending a two-year slump. More strength is expected early in 2018, as supplies in U.S. cold storage at the end of November were at a three-year low for the month. Cattle futures climbed the past week on concern the U.S. deep freeze will reduce animal weights.
  • Hog futures rose 8.2% in 2017, capping the second straight yearly gain. Adding to the strength: November frozen stockpiles were at the lowest for the month since 2014.


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