Good morning. Here are the updated risk metrics for Monday, December 19, 2022.

TL;DR

There have been no significant changes in markers since the end of last week: shipping costs continue to slide while iron and steel remain very high. Reports over the weekend suggest that COVID is spreading rapidly in China following the recent easing of restrictions. How this plays out, and what Beijing does next, will have significant consequences for global supply chains plus steel and iron prices so this is something we'll be tracking closely.

Relative Values (90-Days)

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Trends (21-days)

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Commentary and Evaluation

Brent Crude

Brent crude is at very low levels for this quarter and has continued to move downwards over the past three weeks. These lower prices have significantly eased fuel prices and associated costs such as transportation and supply chain costs.

What to Watch

(No change) Russia may retaliate against EU oil sanctions that cap what signatory countries will pay for Russian crude by cutting production. Other OPEC+ countries may join this production cut, driving up prices.

See Reuters for more.

Iron and Steel

Iron and steel remain very high for the quarter and prices increased moderately over the past three weeks.

What to Watch

China’s relaxation of COVID restrictions should allow the country’s construction and manufacturing sectors to swing back into action which would increase the demand for raw materials, increasing demand and prices. However, reports this weekend suggest that the virus is sweeping through the country with widespread effects on society and the economy. There does not appear to be a good solution to this problem: re-imposition of lockdowns will hamper growth and increase public dissatisfaction and unrest, while letting COVID run rampant in a population with low levels of immunity would be devastating.

See the Financial Times for more.

Market Volatility (VIX-US)

Despite a relatively low rating for the quarter, volatility in US markets rose sharply over the last three weeks, flattening after the US Federal Reserve’s rate announcements on December 14.

What to Watch

The range of conditions facing markets and investors remains significant and complex meaning that it’s unclear what will help ease tensions and reduce volatility. The New Year may allow a market reset where risk and uncertainty have been priced in more effectively, reducing turbulence and volatility.

Wheat

Wheat prices are relatively low for the period and saw moderate decreases over the past 21 days. Markets appear to have priced in the effects of Russia’s invasion of Ukraine and stabilized to account for the resultant impact on spring harvests and exports via the Black Sea.

What to Watch

(No change) Despite agreements brokered by Turkey, Russia is still in a position to impose a blockade on Ukrainian grain exports to exert pressure on Kyiv and her allies. Moscow could also conduct military operations to disrupt spring planting meaning that prices could rise again next spring and summer.

Read more in AGWeek.

Ocean Freight (FBX)

Ocean freight is at its lowest point this quarter and prices continued to drop sharply over the last few weeks. Prices are still above pre-COVID levels but significantly lower than this time last year and appear set to continue their steady reduction.  

What to watch

China’s easing of COVID restrictions should bring manufacturing levels back up but this is in doubt unless Beijing can control the spread of COVID (See Iron and Steel commentary above). However, recessionary conditions in many countries, plus the difficulty in raising funds while markets are so unsettled (see VIX above), suggest that demand will not be high enough to place significant demands on supply chains.

Up-to-date shipping data supplied by our partner Freightos

Random Stats

192 lasers + 100-millisecond, 2.05 megajoule energy pulse = 3 megajoule energy release

A target pellet inside a hohlraum capsule with laser beams entering through openings on either end, seen in an illustration (Lawrence Livermore National Laboratory/AP)

Read more - Scientists Achieve Nuclear Fusion Breakthrough With Blast of 192 Lasers, NYT

That's it for today's update. I'm switching publication dates to Tuesday and Friday as the market data isn't updated in time to provide a meaningful update on a Monday.

Meanwhile, let me know what you think - use the poll below or hit reply.