Gathering Storms

By Benjamin Picton, senior strategist at Rabobank

Hurricane Helene has strengthened to a to a Category 4 storm ahead of its expected landfall on the Florida gulf coast on Thursday evening. Strong wind and flash flood warnings have been issued as far up as the northern parts of Georgia, threatening cotton crops in the United States’ second-largest cotton producing state just as harvest is about 15% progressed. Pecans, avocados, citrus and peanuts are also set to be heavily impacted by the storm.

While one storm lashes the South of the United States, another storm is gathering in the Middle East. Israel continued its stepped-up bombardment of Hezbollah positions in Southern Lebanon overnight, striking approximately 220 targets according to the Israeli Defence Forces. Israeli Prime Minister Benjamin Netanyahu poured cold water on a push from US and European officials for a 21-day ceasefire, saying that Israel will continue to strike Hezbollah “with full force” until all of its goals are met. Those goals include the return of evacuated Israeli citizens to their homes near the border with Lebanon.

In recent days, the Chief of the Israeli Defence Forces told soldiers that they would soon “enter enemy territory”, raising the prospect of a ground invasion of Lebanon. There is speculation that Netanyahu will use a Friday speech to the United Nations in New York to announce that the conflict with Hezbollah is moving into a new phase, putting pressure on Hezbollah and Iran to back down from missile strikes on Israeli territory and the Iran-sponsored Houthi blockade of the Red Sea. Netanyahu may be seeking to escalate in order to de-escalate, but raising the stakes runs a substantial risk of sparking the broad regional conflict that we have been warning of since October 7th last year as Iran and Hezbollah grow frustrated with repeated loss of face.

Despite the momentous geopolitical events occurring in the Middle East, the Bloomberg dollar spot index remains rangebound and Brent crude prices have fallen further over the past 24 hours. Brent is currently trading at $71.60/bbl, just a little above Rabo Research’s recently revised price target of $71/bbl for the fourth quarter of 2024. Crude prices weakened following news out of Saudi Arabia that the Kingdom is ready to abandon its unofficial $100/bbl price target in a bid to regain market share. Other OPEC+ producers are also set to pump more crude from early December once an agreement on short-term production cuts expires. Rabo Research now sees the crude oil market in oversupply to the tune of ~700,000 barrels/day in 2025.

A storm of a different kind may be brewing in financial markets. The Chinese Politburo yesterday followed up the PBOC’s performance of a day before by announcing new fiscal stimulus measures aimed at supporting China’s ailing real estate sector. The Politburo offered few specifics beyond a commitment to halt the sharp slide in residential real estate prices, but reports suggest that policy measures will include approximately 2 trillion Yuan of new bond issuance this year to support consumption and alleviate debt burdens at the local government level. Cynics will say that the numbers announced are inadequate to the challenge (and they are probably right), but the material point is that the central government is now sending a clear signal that this is their “whatever it takes” moment.

Interestingly, the Politburo’s plans also include limitations on the construction of new homes as the central government seeks to address oversupply in the housing stock that has contributed to falling prices. We are not talking about an expansion in the real capital stock here, but measures to ensure that fictitious capital built up over decades is not destroyed by unwelcome market forces seeking a new equilibrium. Consequently, billionaire investor David Tepper told CNBC yesterday that he is buying “everything” China.

Despite the Politburo’s announced intention to place strict limits on new development the market latched onto the broad state support theme to bid up construction-adjacent commodities like iron ore, copper and steel futures. SGX iron closed yesterday’s session up more than 2% and has rallied past through the $100/mt level in early trade this morning.

So why is this a storm? Because China has just fired the stimulus bazooka 5 minutes after the Fed kicked off its easing cycle with a supersized rate cut. Suddenly we are watching a rally in commodity markets (the Bloomberg Commodity Index has closed higher in 12 of the last 15 sessions) right at the moment that the Fed declared “Mission Accomplished” in the inflation fight and turned its attention instead to a softening labor market.

Inconveniently, the third read of US Q2 GDP was upgraded from 2.9% to 3% annualized yesterday, initial jobless claims printed lower than expected at +218k and durable goods orders also looked more than respectable at +0.5% M-o-M for the durables ex transportation reading versus market expectations of just +0.1%. Perhaps aggressive monetary easing (with the promise of more) while growth is still robust, unemployment is still low(ish) and the fiscal deficit is still wide (and sure to get wider) might explain why 10-year yields have risen ~15bps since the Fed cut rates back on September 18th and gold just set another all-time high?