Investors On Edge About Italian Banks

The next big “macro event” on the horizon is Italy’s referendum to amend its constitution, which will be held this Sunday, December 4. The proposed changes have been called the most extensive since the end of World War II, which Prime Minister Matteo Renzi will believes will make the country’s government more efficient. There are growing worries though that a “no” vote could send shock waves through financial markets and put as many as eight of Italy’s biggest banks at risk of failure. A large part of that stems from the fact that Renzi’s proposed reforms would make it easier to recapitalize Italy’s struggling banks and avoid “resolution” under new EU rules. Resolution imposes a bank’s losses on both equity and debt investors. Italy’s banks currently have about €360bn of problem loans versus €225bn of equity on their books following year’s of mismanagement by both bank and government officials. Renzi’s government, along with market backers like JPMorgan want to recapitalize largest failing banks as well as backstop problems as smaller ones. Keep in mind, Renzi has said that if a “no” vote wins, he will step down as Prime Minister, which means the whole government would be thrown into turmoil. That would mean no clear path for solving Italy’s distressed banks, which in turn means any plan for investors to recapitalize failing banks is likely to fall through. The country’s third-largest bank, Monte Paschi, is the most worrisome. Bankers and officials believe if it fails to secure recapitalization and bad-debt restructuring demanded by EU regulators, a lack of confidence could spread through the rest of the banking system. Monte Paschi is scheduled to begin a much needed debt for equity swap on Monday, but a “no” vote in Sunday’s referendum would greatly imperil its success.

Big Crop VS Big Demand Remains The Theme For Soybeans

Soybean traders continue to battle it out, with the bears talking about record production here in the U.S., followed by increased acreage in 2017, and non threatening weather so far in South America. The bulls on the other hand continue to sight extremely tight global supply of vegetable oil and strong demand for soy. The battle between “big crops” and “big demand” remains the theme. Technically it would be nice to see the front-end of the trade breakout back above the $10.60 area. On the downstroke the $10.20 to $10.30 area still seems to be nearby support. I’m not giving the current selloff the past couple of days much attention as it might simply have been due to fund repositioning into month-end. I still think soybeans have the only legitimate fundamental bullish story if you want to put money to work in the ag space. Even thought it’s a bit of a stretch with U.S. ending stocks perhaps pushing north of 500 million bushels. Don’t forget the USDA will be out with oil and crush numbers. The trade already has “big demand” factored into the equation, so the surprise would have to be some type of disappointment to the downside.


USDA Early-Release Baseline Numbers

In case you missed the data, the USDA released their early estimates for new-crop corn at 90 million planted acres vs. 94.5 million planted last year. They estimated the average yield for next years crop at 170.8 bushels per acre vs. the current crop yield of 175.3 bushels per acre. This means they have total production for next years corp estimated at 14.060 billion bushels vs. the current crop production estimate at 15.226 billion bushels. In other words the USDA’s early thought is that we will produce -1.2 fewer bushels of corn in next years crop. For new-crop soybeans, USDA estimates 85.5 million planted acres vs. 83.7 million planted last year, in other words up +1.8 million acres. They estimated the average yield for next years crop at 47.9 bushels per acre vs. the current crop yield of 52.5 bushels per acre, down -4.6 bushels per acre. This means they have total production for next years corp estimated at 4.050 billion bushels vs. the current crop production estimate at 4.361 billion bushels. In other words the USDA’s early thoughts are that we will produce -311 fewer bushels of soybeans in next years crop, a reduction of around -7%.

USDA will release the complete Agricultural Projections to 2026 report in February 2017. All of the early-released tables are available HERE.

U.S. Corn & Soybean Harvests Are Pretty Much Complete

The USDA estimates the U.S. corn crop is about 97% harvested, meaning it basically faces no further risks and is likely to produce a fresh new record in both yield and total production.


USDA discontinued their harvest progress report for soybeans with the majority of the crop now out of the fields. Below are details for states that had data available. As you can see, there are only a handful that have anything left to harvest.


Reaction To U.S. Elections Often Doesn’t Last

Bloomberg conducted an interesting analysis last week, where they found that investors’ immediate reaction to U.S. elections doesn’t tend to last longer-term. Remember that Wall Street seemed to largely be pricing in a win by Hillary Clinton. Most insiders had expected a big market sell off on Trump’s surprise win, but stocks did just the opposite, rallying to fresh all-time highs. In fact, the Dow Jones had its best week since 2011 as it rose +5.4%. Both the S&P 500 and Nasdaq were up +2.8% for the week. Interestingly, analysts across the board had forecast a knee-jerk sell off, with some like  Barclays predicting a nose dive of over -10%. Industrials and bank stocks are getting the biggest boost from Trump’s election with investors expecting a boon for construction under Trump’s $1 trillion infrastructure plan. Banks and other financial stocks are seen benefitting from decreased regulations and a pick up in inflation, which should lead to higher interest rates. Technology stocks, however, have been sliding. Analysts seem to believe this has more to do with some of the harsh criticism that tech leaders had for Trump during the election. Overall, it’s believed that they too could benefit from a Trump Presidency though, if he does indeed implement his plan to lower corporate taxes and let these companies bring their cash hordes back to the U.S. at significantly lower rates. Of course the big question right now is whether or not Wall Street is able to extend its overall rally, or will investors book their profits as they await Trump actually taking office and more details of his policies come to light? Bloomberg’s analysis shows that investors have reversed their initial sentiments to U.S. presidential elections within three months after 7 of the last 13 campaigns. (Source: Bloomberg) 


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