China’s Mounting Covid Protests Roil Markets

China’s economic challenges mounting | Canada calls China a “disruptive” global force that must be contained

Protests are erupting in major cities in China over President Xi Jinping’s zero-tolerance approach to Covid-19. Public anger spread following a deadly high-rise fire in Xinjiang where many believe virus controls prevented escape or rescue. Apple fell premarket as the turmoil at its Foxconn-operated manufacturing hub in Zhengzhou took its toll on iPhone Pro production. Worker unrest may result in a deficit of 6 million units this year, a person familiar said. In a bid to retain staff, Foxconn is offering bonuses of as much as $1,800 to workers who stay.

The Hang Seng Index opened down more than 4% in a knee-jerk reaction before paring losses to trade 1.5% lower, while the Shanghai Composite settled down 0.8%. The bigger move was seen in oil markets, with crude futures sliding 3.6% to $73.60 per barrel. As case numbers continue to hit record highs — with over 40,000 new infections recorded on Monday — China’s central bank cut its reserve requirement ratio by 25 basis points, freeing up around $70 billion in liquidity to support the economy. The zero-Covid stance has already had serious implications for the economy, with China’s GDP expanding only 3% at the end of the third quarter, well below the official target of around 5.5% announced in March.

The U.S. expanded bans on telecom and surveillance equipment from Chinese companies including Hikvision, Huawei and ZTE, citing national security concerns.

The U.S. gave Chevron a limited license to expand its energy operations in Venezuela. It had been forced to stop after sanctions halted all drilling activities almost three years ago. The reprieve followed the resumption of talks by Venezuela’s political factions on Saturday.

OPEC and its allies are due to make a big call on oil production this week, as expanded sanctions are set to strike Russia’s energy industry.

Ukraine’s national power supplier says it’s back at about 80% capacity following Russian strikes that have wreaked havoc on the country’s energy grid ahead of winter. Power, water, heat and internet are “almost completely restored” in the Ukrainian capital of Kyiv after a scramble to make repairs, city leaders said today.

EU members have been locked in talks over how strict the G7-led price cap on Russian crude should be, with negotiations set to resume later today.

Equities today: U.S. futures are sharply lower on unrest in China as protests erupted across the country following more Covid restrictions. In Asia, Japan -0.4%. Hong Kong -1.6%. China -0.8%. India +0.3%. In Europe, at midday, London -0.8%. Paris -0.7%. Frankfurt -0.4%.

U.S. equities Friday: The Dow rose 152.97 points, 0.4%, to 34,347.03. The S&P 500 fell 1.14 points, less than 0.1%, to 4,026.12. The Nasdaq dropped 58.96 points, 0.5%, to 11,226.36.

All three major indices ended the holiday-shortened week higher, while the 10-year Treasury yield ended the week at 3.72% and the 2-year yield clocked in at 4.48%. The S&P 500 rose 1.5% for the week, and has risen four of the past six weeks. The Dow gained 1.78% for the week, and has risen in six of the past eight weeks. The Nasdaq is lagging the other two indexes but was still up 0.72% in the same timeframe.

Agriculture markets Friday:

• Corn: March corn futures rose 4 1/4 cents to $6.70 1/2, nearer the session high after marking a low at 6.64 1/4.
• Soy complex: January soybeans fell 2 1/2 cents to $14.33 1/2, nearer the session low after trading as high as $14.48. January soymeal fell $1.00 to $406.40. January soyoil fell 55 points to 71.65 cents.
• Wheat: March SRW wheat fell 20 3/4 cents to $7.92 3/4 after marking a session high at $8.20 1/4. March HRW wheat fell 9 1/2 cents to $9.10 1/4. March spring wheat fell 2 3/4 cents to $9.49 1/2.
• Cotton: March cotton fell 273 points to 80.17 cents.
• Cattle: February live cattle fell $0.30 to $155.125. January feeder cattle fell $0.5750 to $178.675.
• Hogs: February lean hog futures fell $0.35 to $88.45, closing lower for the third consecutive session. The CME lean hog index continues to meet seasonal pressure as slaughter is on the rise, albeit behind year-ago levels; with anticipation of a seasonal low in the index and nearby futures will be posted soon.
  

Ag markets today: Corn, soybean and SRW wheat futures faced pressure overnight amid concerns with mounting Chinese Covid protests. As of 7:30 a.m. ET, corn futures were trading 2 to 4 cents lower, soybeans were 4 to 5 cents lower, SRW wheat was 6 to 8 cents lower, HRW wheat was narrowly mixed and HRS wheat was mostly 9 to 12 cents higher. Front-month crude oil futures were more than $2 lower, and the U.S. dollar index was down around 350 points this morning.

Technical viewpoints from Jim Wyckoff:

On tap today:

• European Central Bank President Christine Lagarde appears at a European Parliament committee hearing at 9 a.m. ET.
• Dallas Fed’s manufacturing survey for November is out at 10:30 a.m. ET.
• Federal Reserve speakers: New York’s John Williams on the economic outlook at 12 p.m. ET, and St. Louis’s James Bullard on the economic outlook at 12 p.m. ET.

Turbulence in supply chains is cracking the yearslong stability that globalization brought to the food sector. Food-price inflation hit multidecade highs this year in the U.S. and elsewhere, outpacing overall consumer prices. The Wall Street Journal reports (link) that food-industry executives and economists point to manufacturing and transport disruptions stemming from the pandemic and the impact of Russia’s invasion of Ukraine on energy and grain prices. The impact of those issues may be receding, but analysts expect price swings to be more frequent. Huge gains in farming and food-manufacturing productivity, globalization and lower transport costs have all served to expand choice and hold down prices for consumers. Some suppliers say they will try to source more goods closer to home, but that will be a heavy task since almost a quarter of overall global food exports now have a foreign component, according to the World Trade Organization. “Everything was working in perfection, and then the pandemic happened,” said Felipe Hasselmann, CEO of Cuisine Solutions, on the vacuum-packed meals producer’s supply chain.

Market perspectives:

• Outside markets: The U.S. dollar index is lower. Nymex crude oil prices are solidly lower, hitting a 10-month low overnight, and are trading around $74.00 a barrel. The yield on the benchmark U.S. 10-year Treasury note is presently 3.692%.

• South Korea is considering ordering striking truckers back to work as the job action starts to hit exports.

• Ag trade: South Korea purchased 138,000 MT of optional origin corn.

• NWS weather: Heavy snow for parts of the Cascades/Central Rockies and the Upper Great Lakes on Tuesday... ...Winter Storm Warnings/Winter Weather Advisories for the Cascades/Northern Intermountain Region and Winter Storm Watch for parts of the Upper Great Lakes... ...There is a Slight Risk of excessive rainfall and a Moderate Risk of severe thunderstorms for parts of the Lower Mississippi and Tennessee Valleys.

Items in Pro Farmer’s First Thing Today include:

• Mostly weaker tone overnight
• China’s mounting Covid protests roil markets (see China section)
• Argentina revives ‘soy dollar’ FX rate through year-end
• Relief rains this week in areas of Argentina, Brazil
• Brazil soybean, first corn planting nearly complete
• Firmer cash cattle expectations
• Seasonal pressure on cash hog index continues

— Summary: Ukraine is preparing for more Russian strikes and has warned of the possibility of a new round of evacuations from the capital. Russia has been attacking energy facilities and other key infrastructure in recent weeks, and authorities are struggling to make repairs as quickly as the damage is inflicted.

• Ukraine President Volodymyr Zelenskyy announced a new effort to move grain to Africa, with the U.S., France, U.K., Sweden, Austria and Canada all committing financial resources to the effort. Ukraine originally proposed the action at the G20 summit and the “Grain from Ukraine” effort was formally unveiled over the weekend. The Guardian reports the effort would aim to send up to 60 ships of grain to poorer countries in Africa. Countries contributing to the effort include $30 million from Canada, $20 million each from the U.S. and France, $9.5 million from Sweden, $6 million from the U.K. and $3.9 million from Austria. Politico reported the European Commission said it would finance the transport of 40,000 tonnes of Ukrainian grain in the effort.
• Some EU officials accused the United States of unfairly profiting from the war in Ukraine, citing sales of American gas to Europe and weapons to Kyiv. Link to details via Politico.
• Ukraine grain exports slowed in November. Exports of Ukraine’s grain will not reach 3 MMT in November as Russia tries to limit ship inspections at ports, Ukraine’s Infrastructure Minister Oleksandr Kubrakov said late Sunday. That would be down from 4.2 MMT of grain that left Ukrainian ports in October. Kubrakov said 77 ships were queuing to pass inspection in Turkey while the three Black Sea ports were using only 50% of their capacity. Since July 1, Ukrainian grain exports totaled 17.2 MMT, down 31.9% from the same period last year, including 9.1 MMT of corn, 6.6 MMT of wheat and 1.4 MMT of barley.

• Russian grain exports increased in November. Black Sea consulting firm SovEcon estimates Russia will export 4.9 MMT of grain in November, up 200,000 MT from October, including 4.4 MMT of wheat. Grain exports would be up from 3.958 MMT in November 2021. After a slow start to 2022-23, Russian grain exports have gradually built after record production.

— USDA tweaks sugarbeet crop insurance provisions. USDA’s Federal Crop Insurance Corporation has published a final rule which adjusts the crop insurance program relative to sugarbeets. The final rule (link) would bring back stage guarantees and make the stage removal option permanent to ensure all producers have maximum flexibility to obtain the crop insurance coverage they need for their operation. The changes are effective for the 2023 and succeeding crop years for counties with a contract change date on or after Nov. 30, 2022, and for the 2024 and succeeding crop years for counties with a contract change date prior to Nov. 30, 2022. USDA is seeking comments on the plan, with feedback due by Jan. 27.

— China’s doctors have warned Xi Jinping that the healthcare system isn’t prepared for the huge outbreak likely to follow the easing of strict anti-Covid measures, the Financial Times reports (link). Chinese-made vaccines aren’t as effective compared to those made in the U.S. And China has worrisomely low vaccination rates among older people.

— Biggest challenge to the authority of the Chinese Communist Party in years took place over the weekend as protests across China over the country’s strict zero-Covid policies shook up global markets over worries that the authorities will take longer to reopen the world’s second-largest economy. Exchanges in Shanghai and Hong Kong closed lower, as did those in Japan and Australia. Investor jitters quickly spread west, with Europe down at the open and U.S. futures dropping. Crude prices, meanwhile, fell to an 11-month prewar low.

Demonstrations began after 10 people died in a fire on Thursday in Urumqi, a city in Xinjiang where some residents have been under lockdown for more than 100 days. Many Chinese blamed Covid restrictions, saying residents were unable to escape in time and rescue efforts were delayed. (The authorities deny the allegations). Anger erupted on social media and thousands took to the streets in multiple cities, including Shanghai, Wuhan and Chengdu.

In Shanghai, some demonstrators called for Xi to step down — an extremely rare public challenge — and many were arrested, including two foreign journalists.

Deutsche Bank said in a note to clients that the country would not reopen until late spring 2023. “Until then, we see China’s growth stagnating,” it said.

— Japan Diet gives final approval for beef trade revision. Japan’s parliament gave final approval to a deal amending a beef safeguard mechanism under the U.S./Japan trade agreement. The change will reduce the probability that U.S. beef could be hit with higher Japanese tariffs, according to the U.S. Trade Representative (USTR). The updated safeguard “will ensure our farmers and ranchers continue to have access to one of the world’s most dynamic markets,” said USTR Katherine Tai. “The protocol represents a foundational pillar of our bilateral trade relationship — and I am grateful to our producers and stakeholders who helped make it possible.” Japan was the second largest U.S. beef market in 2021.

— Biden administration clears Chevron to produce, export Venezuelan oil. The Biden administration Saturday announced it would allow Chevron to produce and export Venezuelan oil after the country agreed to restart talks with opposition groups. A senior Biden administration official insisted the move was not aimed at addressing oil market pressures. “This action is not being taken in response to energy prices, this is a limited license,” the official said. “As we have said in the past, this is about the regime taking the steps needed to support the restoration of democracy in Venezuela.” The official said much of the crude that would be produced and exported under the license would probably have reached the market anyway via the black market. The license would still bar Venezuela’s PdVSA, the state-owned oil company, from receiving any profits from the oil sales in the joint venture with Chevron.

— HPAI confirmed in Nebraska commercial egg layer flock. Nebraska announced that the Animal and Plant Health Inspection Service (APHIS) has confirmed highly pathogenic avian influenza (HPAI) in a commercial layer flock with 1.8 million birds in Dixon County. This marked the seventh commercial flock with HPAI in the state and the thirteenth overall operation affected. This puts Nebraska second only to Iowa relative to the number of birds affected at 6.8 million compared with 15.5 million in Iowa.

— One product with falling prices: chicken. Prices for chicken breasts in the U.S. have plunged about 70% since the first week of June, according to market-research firm Urner Barry. Wings and tenders have gotten cheaper, too, as poultry companies have increased production while demand from restaurants and supermarkets has remained flat.

— Summary:

• Global Covid-19 cases at 641,674,543 with 6,631,068 deaths.
• U.S. case count is at 98,568,990 with 1,079,199 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 650,810,290 doses administered, 267,476,279 have received at least one vaccine, or 81.18% of the U.S. population.
  

— Cutting-edge tech made this tiny country a major exporter of food. The Netherlands has used advances in vertical farming, seed technology and robotics to become the world’s second-largest agriculture exporter. The country is a bit bigger than Maryland and is the world’s second largest exporter of agricultural products by value behind the United States. The Dutch have pioneered cell-cultured meat, vertical farming, seed technology and robotics in milking and harvesting — spearheading innovations that focus on decreased water usage as well as reduced carbon and methane emissions. The Netherlands produces 4 million cows, 13 million pigs and 104 million chickens annually and is Europe’s biggest meat exporter. Link for details via the Washington Post.

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