El Niño Disturbs Commodities: Under the Calm of US Stocks, Markets Begin Trading Supply Risks

Original Title: Returns From the Beach: August Looked Calm Until You Checked Bonds and Commodities
Original Author: Stephen Innes

Editor’s Note: If you only look at US stocks, August seems to have been a rather calm month. The S&P 500 index rose by 2.7%, and the "Tech Seven" increased by 4.4%; business activity in the US and Eurozone remained in expansion, and strong corporate earnings helped risk assets absorb geopolitical conflicts and policy uncertainties.

However, beneath the surface calm of the stock market, there have been significant fluctuations in the commodities and bond markets. Gold rose by 9.7%, and silver increased by 15.6%; corn, wheat, and sugar rose by 16.8%, 18.3%, and 21.5%, respectively. Meanwhile, the yield on the US 30-year Treasury bond rose to its highest level since 2007, while European and Japanese long-term bonds also faced pressure.

Stephen Innes, in conjunction with Deutsche Bank strategists Jim Reid and Henry Allen’s monthly asset performance report, pointed out that behind the surge in agricultural products in August, the market is reassessing two types of supply risks: restricted shipping in the Strait of Hormuz may raise energy, fertilizer, and transportation costs; the increasingly strengthening El Niño may alter global precipitation and temperature distributions, increasing the likelihood of droughts, floods, and extreme heat in major agricultural regions.

This commodity market still exhibits clear characteristics of expectation trading. El Niño does not necessarily lead to synchronized crop failures globally, and the situation in the Strait of Hormuz has not yet fully manifested in the monthly rise in crude oil. What will truly determine price direction moving forward is whether weather risks can translate into reduced yields and whether energy and logistics costs will further transmit to food inflation.

The following is a translation of the original text:

August did not see the violent fluctuations typical of late summer in recent years. Economic data remained resilient, and global stocks continued to rise. The total return of the S&P 500 index for the month reached 2.7%, with tech stocks remaining the main driving force, as the "Tech Seven" rose by 4.4%, and the US stock market continued to be dominated by a few large companies.

The macro backdrop supporting risk assets is also robust. The Eurozone’s preliminary composite Purchasing Managers’ Index (PMI) for August rose to 52.1, a nine-month high; the US composite PMI preliminary value increased from 54.5 in July to 56.0, the highest level in 52 months. A PMI above 50 typically indicates that business activity is in expansion.

The resilience in growth and strong earnings reports helped US stocks continue to rise, but Deutsche Bank’s August asset performance review shows that significant price changes occurred outside the stock market.

Precious metals and agricultural products became the strongest performing assets of the month. Gold rose by 9.7%, silver by 15.6%; corn futures increased by 16.8%, marking the largest monthly gain in five years; wheat rose by 18.3%, the best performance in four years; and sugar prices surged by 21.5%, the largest monthly increase since 2018.

While US stocks are still trading on growth and earnings, commodities have begun to factor in inflation, geopolitical conflicts, and extreme weather-related supply risks.

El Niño Warms Up, Agricultural Products First to Factor in Weather Premium

Deutsche Bank attributes part of the rise in agricultural product prices in August to the El Niño phenomenon.

El Niño refers to the climate phenomenon characterized by a sustained abnormal rise in sea surface temperatures in the central eastern Pacific, which alters global atmospheric circulation. It does not directly determine the yield of a specific crop, but it may change the distribution of precipitation, temperature, and storms in different regions, increasing the uncertainty of agricultural production.

The US National Oceanic and Atmospheric Administration (NOAA) stated in August that El Niño is strengthening, with sea temperatures in parts of the equatorial Pacific exceeding 2 degrees Celsius. The agency predicts that the probability of a "very strong" El Niño event occurring in the fall and winter of 2026 exceeds 90%.

For the agricultural product market, the key is not just whether El Niño forms, but also when and through which regions and crops it will impact global supply.

In Australia, El Niño typically increases the risk of hotter and drier weather in the eastern and southern regions, potentially affecting the yield and quality of crops like wheat. In some parts of Southeast Asia, insufficient rainfall could also impact tropical products like sugar and palm oil.

South America faces another type of uncertainty. Brazil and Argentina are major exporters of corn, soybeans, and sugar, and El Niño may alter the distribution of precipitation in key production areas of both countries. Insufficient rainfall can affect planting and crop growth, while excessive rainfall may delay field operations, damage crop quality, and hinder transportation.

Therefore, the rise in agricultural products in August is more akin to a weather risk trade: the market has not confirmed that large-scale crop failures have occurred globally, but as El Niño strengthens, investors are beginning to price in potential supply losses in advance.

Why Did Corn, Wheat, and Sugar Rise Simultaneously?

The simultaneous double-digit increases in corn, wheat, and sugar in the same month do not mean they are driven by completely identical factors.

Corn prices are sensitive to weather, planting progress, and inventory changes in the US and South America, and are also influenced by feed, ethanol, and export demand. If El Niño disrupts planting and growth in Brazil and Argentina, it may change market perceptions of next season's supply.

Wheat supply sources are relatively dispersed. In addition to the US, Canada, and Australia, the Black Sea region is also a significant global export source. Dry weather in Australia, rising global transportation costs, or changes in supply from major exporting countries can all increase procurement costs for importing countries.

Sugar prices are particularly susceptible to weather conditions in Brazil, India, and Thailand. Abnormal rainfall can affect both the yield of sugarcane and the ratio of sugarcane used for sugar production versus ethanol production. The market will also simultaneously assess changes in energy prices, exchange rates, and export policies.

El Niño can explain the weather risks faced by these three types of commodities, but it is not sufficient to explain the entire increase alone. Inventory levels, speculative positions, export policies, energy costs, and short-term capital flows may also amplify price volatility.

More accurately, the market is currently trading on the rising probability of reduced yields, rather than actual reductions having already occurred. If subsequent yield and inventory data do not validate supply concerns, the weather risk premium in prices may also quickly recede.

Hormuz Risks Are Transmitting to the Agricultural Supply Chain

In addition to weather factors, restricted shipping in the Strait of Hormuz is also an important variable mentioned by Deutsche Bank.

The Strait of Hormuz is a crucial passage for the transportation of oil and liquefied natural gas globally. Shipping disruptions primarily impact the crude oil, natural gas, and refined oil markets, but the shock may also transmit along the production chain to agricultural and food prices.

Agriculture is highly dependent on energy. Diesel affects cultivation and transportation costs, natural gas is a key raw material for producing nitrogen fertilizers, and restricted shipping may also push up freight, insurance, and delivery times. Even if agricultural products themselves do not immediately face shortages, their production and trade costs may rise.

Weather and energy risks may also interact. El Niño increases the probability of reduced yields, while the situation in Hormuz raises the costs of agricultural inputs and cross-border transportation. When uncertainties on both the supply and cost sides rise simultaneously, traders and investors typically demand higher risk premiums.

However, Brent crude oil only rose by 0.4% in August, marking one of the smallest monthly changes of 2024. This seemingly stable result conceals significant fluctuations within the month and reflects the market's ongoing adjustment of expectations between shipping restrictions and potential negotiation progress.

Therefore, one cannot simply judge that energy supply risks have dissipated based on the near-zero monthly increase in crude oil. The impact of the Hormuz situation on inflation may manifest more gradually through refined oil, fertilizers, shipping, and food costs.

Gold and Silver Strengthen, Commodity Trading Is Not Just About Weather Logic

Beyond agricultural products, precious metals were also among the strongest asset classes in August. According to Deutsche Bank’s data calculated in USD, gold rose by 9.7%, and silver increased by 15.6%.

The strength of precious metals occurred alongside rising short-term Treasury yields. Generally, rising interest rates increase the opportunity cost of holding non-interest-bearing assets, putting pressure on gold. However, gold and silver prices continued to rise in August, indicating that investors are trading on more than just interest rate directions.

The yield on the US 30-year Treasury bond rose to 5.31% during the month, reaching its highest level since 2007; the yield on the German 30-year Treasury bond rose to 3.81%, the highest level since 2011. The rising long-term financing costs have brought fiscal deficits, debt supply, and monetary credit back into the market's focus.

The US Treasury subsequently announced an expansion of liquidity support for long-term Treasury bond repurchases, increasing the single repurchase scale for nominal coupon Treasury bonds with maturities of 10 to 20 years and 20 to 30 years from a maximum of $2 billion to at least $4 billion, effective from September 9.

These repurchases are mainly used to improve the liquidity of older bonds and the functioning of the Treasury bond market, and do not equate to quantitative easing, nor do they mean the Treasury has begun to directly control yields. However, after the announcement of the measures, long-term yields briefly fell, and the market began to discuss whether policymakers would more proactively limit the rise in government long-term financing costs.

In this environment, the rise in gold and silver may simultaneously reflect demand for safe-haven assets, inflation concerns, fiscal pressures, and investor attention to sovereign debt market interventions. Although precious metals and agricultural products both belong to the commodity category, their trading logic is not entirely the same: the former leans more towards currency and credit risks, while the latter more directly reflects weather, energy costs, and supply expectations.

The Calmer the Stock Market, the More Attention Should Be Paid to Cross-Asset Divergence

While commodity prices surged rapidly, the volatility of US stocks and some tech assets actually decreased.

The Philadelphia Semiconductor Index only rose by 2.0% in August, following four consecutive months of monthly fluctuations exceeding 10%. The S&P 500 index continued to rise, but there was no significant risk-off shock.

This divergence is related to economic growth resilience. The PMI in the US and Eurozone continues to expand, and corporate earnings remain strong, providing fundamental support for stock valuations. However, the same data means that the central bank lacks a quick reason to shift to easing; if commodity price increases further elevate inflation, monetary policy space may face more constraints.

The US Treasury yield curve flattened in August. According to Deutsche Bank statistics, the 2-year US Treasury yield rose by 5 basis points during the month, and increased by 11 basis points on the day after Federal Reserve Chairman Kevin Warsh's speech at Jackson Hole. In contrast, although the 30-year yield reached multi-year highs during the month, it decreased by about 3 basis points compared to the end of July.

The pressure on European and Japanese bond markets is even more pronounced. The yield on French 10-year Treasury bonds rose by 18 basis points, Italy by 13 basis points, and Germany by 12 basis points; Japan's 10-year Treasury yield rose by 15 basis points, and the 2-year yield increased by 23 basis points, reflecting the market's heightened expectations for further tightening of policy by the Bank of Japan.

Thus, stocks, bonds, and commodities have formed three different pricing mechanisms: the stock market bets on growth and continued earnings, the bond market worries about inflation, fiscal issues, and policy tightening, while the commodity market has begun to trade in advance on supply disruptions caused by energy and weather.

How Long Can This Round of Commodity Market Last?

The primary variable determining whether this round of commodity market can continue is whether El Niño will further strengthen and whether weather anomalies can truly translate into yield losses.

Next, it is essential to closely monitor corn and soybean planting in South America, wheat harvest in Australia, sugar production in Brazil and Asia, as well as inventory and trade policies of major exporting countries. If these indicators continue to deteriorate, the weather risk premium that emerged in August may continue to expand; if actual yields exceed expectations, the previous gains may face a pullback.

The second variable is the shipping situation in the Strait of Hormuz. If transportation continues to be restricted, energy, fertilizer, and insurance costs may remain high, increasing friction costs in global agricultural trade; if shipping routes gradually recover, some energy and logistics risk premiums may recede.

Finally, it is also necessary to observe whether commodity prices transmit to inflation data. If energy and food prices continue to rise, central banks may need to make more difficult choices between growth and inflation, and the bond market may also raise expectations for maintaining high interest rates. Conversely, if global demand significantly cools, even if supply remains at risk, the upside potential for commodities may be limited.

Therefore, the double-digit increase in agricultural products in August cannot be directly viewed as the starting point of a new long-term commodity bull market. Currently, a clearer change is that El Niño, geopolitical conflicts, and supply chain costs have re-entered prices.

US stocks are still trading on growth, while commodities have begun to trade on the inflation and supply costs behind that growth.

Note: Deutsche Bank calculates total returns for stocks, credit bonds, and bonds, and spot returns for foreign exchange and commodities, with all returns calculated in USD. The fluctuations in different assets are not based on entirely identical statistical methods.