El Niño Roils Commodities: Beneath Calm US Stocks, Markets Begin Pricing 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 looked at US stocks, August seemed like a fairly calm month. The S&P 500 rose 2.7%, and the "Magnificent Seven" tech giants gained 4.4%. Business activity in the US and eurozone remained expansionary, and strong corporate earnings helped risk assets absorb geopolitical conflicts and policy uncertainty.

But beneath the surface calm in equities, commodity and bond markets saw notable volatility. Gold rose 9.7% and silver 15.6%; corn, wheat, and sugar gained 16.8%, 18.3%, and 21.5%, respectively. Meanwhile, the US 30-year Treasury yield hit its highest level since 2007 during the month, and long-term bonds in Europe and Japan came under similar pressure.

Citing Deutsche Bank strategists Jim Reid and Henry Allen's monthly asset performance report, Stephen Innes noted that behind August's surge in agricultural commodities, the market is reassessing two types of supply risk: shipping restrictions in the Strait of Hormuz could push up energy, fertilizer, and transportation costs; and a strengthening El Niño could alter global precipitation and temperature patterns, raising the odds of drought, floods, and extreme heat in major agricultural regions.

This commodity rally still bears clear hallmarks of expectation-driven trading. El Niño does not necessarily cause simultaneous global crop failures, and the Hormuz situation has not yet fully shown up in crude oil's monthly gain. What will truly determine price direction next is whether weather risks translate into lower output, and whether energy and logistics costs feed further into food inflation.

Below is the translated original article:

August did not repeat the sharp volatility often seen in late summer in recent years. Economic data remained resilient, and global equities continued to climb. The S&P 500 posted a total return of 2.7% for the month, with tech stocks still the main driver—the "Magnificent Seven" rose 4.4%, and the US market continued to be led by a handful of large companies.

The macro backdrop supporting risk assets was equally solid. The eurozone flash composite Purchasing Managers' Index (PMI) for August rose to 52.1, a nine-month high; the US flash composite PMI climbed from 54.5 in July to 56.0, the highest level in 52 months. A PMI above 50 typically signals expansion in business activity.

Resilient growth and strong earnings helped US stocks keep climbing, but Deutsche Bank's August asset performance review shows the most dramatic price moves happened outside the equity market.

Precious metals and agricultural commodities were the strongest-performing assets of the month. Gold rose 9.7% and silver 15.6%; corn futures gained 16.8%, their biggest monthly jump in five years; wheat rose 18.3%, its best performance in four years; sugar prices surged 21.5%, the largest monthly gain since 2018.

While US stocks were still trading on growth and earnings, commodities had already begun pricing in supply risks from inflation, geopolitical conflict, and extreme weather.

El Niño intensifies, agricultural commodities first to price in weather premium

Deutsche Bank attributed part of August's agricultural price gains to the El Niño phenomenon.

El Niño refers to a sustained abnormal warming of sea surface temperatures in the central and eastern equatorial Pacific, which alters global atmospheric circulation. It does not directly determine the yield of any single crop, but it can change precipitation, temperature, and storm patterns across regions, increasing uncertainty for agricultural production.

The National Oceanic and Atmospheric Administration (NOAA) said in August that El Niño is strengthening, with sea surface temperature anomalies in parts of the equatorial Pacific exceeding 2 degrees Celsius. The agency estimates the probability of a "very strong" El Niño event in the fall and winter of 2026 at over 90%.

For agricultural markets, the key is not just whether El Niño forms, but when and through which regions and crops it affects global supply.

In Australia, El Niño typically raises the risk of hotter and drier weather in eastern and southern regions, potentially affecting the yield and quality of crops such as wheat. If parts of Southeast Asia see insufficient rainfall, tropical agricultural products like sugar and palm oil could also be hit.

South America faces a different kind of uncertainty. Brazil and Argentina are major global exporters of corn, soybeans, and sugar, and El Niño could alter rainfall distribution in their key producing regions. Too little rain can affect planting and crop growth, while too much rain can delay field operations, damage crop quality, and hinder transportation.

Therefore, August's agricultural rally was closer to a weather-risk trade: the market has not yet confirmed large-scale global production losses, but as El Niño strengthens, investors are starting to price in potential supply losses in advance.

Why did corn, wheat, and sugar rise at the same time?

Corn, wheat, and sugar posting double-digit gains in the same month does not mean they were driven by identical factors.

Corn prices are sensitive to weather, planting progress, and inventory changes in the US and South American producing regions, while also influenced by feed, ethanol, and export demand. If El Niño disrupts planting and growth in Brazil and Argentina, it could change market expectations for next season's supply.

Wheat supply sources are relatively diversified. Besides the US, Canada, and Australia, the Black Sea region is also a major global export source. Drier weather in Australia, rising global shipping costs, or supply changes in major exporting countries could all raise procurement costs for importers.

Sugar prices are especially vulnerable to weather in Brazil, India, and Thailand. Abnormal rainfall can affect sugarcane yields and also shift the share of cane used for sugar versus ethanol production. The market also simultaneously assesses changes in energy prices, exchange rates, and export policies.

El Niño can explain the weather risk common to all three commodities, but it is not enough to explain the entire rally on its own. Inventory levels, speculative positioning, export policies, energy costs, and short-term capital flows can also amplify price swings.

More precisely, the market is currently trading a higher probability of production losses, not actual losses that have already occurred. If subsequent output and inventory data do not confirm supply concerns, the weather risk premium in prices could quickly unwind.

Hormuz risk is feeding into agricultural supply chains

Beyond weather, shipping restrictions in the Strait of Hormuz are another key variable cited by Deutsche Bank.

The Strait of Hormuz is a critical chokepoint for global oil and liquefied natural gas transportation. Shipping disruptions first hit crude oil, natural gas, and refined product markets, but the impact can also transmit along the production chain to agricultural and food prices.

Agriculture is highly energy-intensive. Diesel affects farming and transportation costs, natural gas is a key feedstock for nitrogen fertilizer production, and shipping restrictions can also push up freight rates, insurance premiums, and delivery times. Even if agricultural products themselves do not face immediate shortages, their production and trade costs can rise.

Weather and energy risks can also compound each other. El Niño raises the probability of production losses, while the Hormuz situation increases the cost of agricultural inputs and cross-border transportation. When uncertainty on both the supply and cost sides rises simultaneously, traders and investors typically demand a higher risk premium.

However, Brent crude rose only 0.4% in August, one of the smallest monthly changes since 2024. This seemingly stable result masked significant intra-month volatility and reflected the market constantly adjusting expectations between shipping restrictions and potential progress in negotiations.

Therefore, one cannot conclude that energy supply risks have faded simply because crude's monthly gain was near zero. The inflationary impact of the Hormuz situation may emerge more gradually through refined products, fertilizers, shipping, and food costs.

Gold and silver strengthen, commodity trading is not just about weather

Beyond agricultural commodities, precious metals were also among the strongest asset classes in August. According to Deutsche Bank's dollar-denominated data, gold rose 9.7% and silver 15.6%.

The strength in precious metals came amid rising yields on some short-term government bonds. Typically, higher interest rates raise the opportunity cost of holding non-yielding assets, putting pressure on gold. But gold and silver continued to climb in August, suggesting investors were trading more than just the direction of rates.

The US 30-year Treasury yield rose to 5.31% during the month, the highest since 2007; Germany's 30-year yield climbed to 3.81%, the highest since 2011. Rising long-term financing costs have brought fiscal deficits, debt supply, and monetary credibility back into market focus.

The US Treasury subsequently announced an expansion of liquidity support buybacks for long-term Treasuries, raising the maximum size of individual buyback operations for 10- to 20-year and 20- to 30-year nominal coupon securities from $2 billion to at least $4 billion, effective September 9.

These buybacks are primarily aimed at improving liquidity in older issues and the functioning of the Treasury market; they are not equivalent to quantitative easing, nor do they mean the Treasury has begun directly controlling yields. However, after the announcement, long-end yields briefly pulled back, and the market began debating whether policymakers would more actively limit the rise in the government's long-term financing costs.

In this environment, the rise in gold and silver may simultaneously reflect safe-haven demand, inflation concerns, fiscal stress, and investor attention to intervention in sovereign bond markets. Although precious metals and agricultural commodities both belong to the commodity complex, their trading logics are not identical: the former leans more toward monetary and credit risk, while the latter more directly reflects weather, energy costs, and supply expectations.

The calmer stocks are, the more cross-asset divergence matters

While commodity prices surged, volatility in US stocks and some tech assets actually declined.

The Philadelphia Semiconductor Index rose only 2.0% in August, after four consecutive months of monthly moves exceeding 10%. The S&P 500 continued to climb, but there was no obvious risk-off shock.

This divergence is tied to resilient economic growth. US and eurozone PMIs remained expansionary, and corporate earnings stayed strong, providing fundamental support for equity valuations. But for bond markets, the same data means central banks lack a reason to pivot quickly to easing; if rising commodity prices further push up inflation, monetary policy space could be even more constrained.

The US Treasury yield curve flattened in August. According to Deutsche Bank, the 2-year Treasury yield rose 5 basis points during the month, including an 11-basis-point jump in a single day after Federal Reserve Chair Kevin Warsh's Jackson Hole speech. By contrast, the 30-year yield, despite hitting multi-year highs intra-month, ended the month about 3 basis points lower than at the end of July.

Pressure in European and Japanese bond markets was more pronounced. France's 10-year yield rose 18 basis points, Italy's 13 basis points, and Germany's 12 basis points; Japan's 10-year yield climbed 15 basis points and the 2-year yield 23 basis points, reflecting increased market expectations for further tightening by the Bank of Japan.

Stocks, bonds, and commodities thus formed three different pricing narratives: equities are betting on continued growth and earnings, bonds are worried about inflation, fiscal policy, and tightening, and commodities have begun trading supply disruptions from energy and weather ahead of time.

How long can this commodity rally last?

The primary variable determining whether this commodity rally can continue is whether El Niño strengthens further and whether weather anomalies truly translate into output losses.

Key indicators to watch next include corn and soybean planting in South America, Australia's wheat harvest, sugar production in Brazil and Asia, and inventories and trade policies in major exporting countries. If these indicators continue to deteriorate, the weather risk premium that emerged in August could widen further; if actual output beats expectations, earlier gains could face a pullback.

The second variable is shipping conditions in the Strait of Hormuz. If transportation remains restricted, energy, fertilizer, and insurance costs could stay elevated and add frictional costs to global agricultural trade; if the waterway gradually returns to normal, some energy and logistics risk premiums could fade.

Finally, watch whether commodity prices feed into inflation data. If energy and food prices keep rising, central banks may face a tougher choice between growth and inflation, and bond markets could reprice expectations for rates staying higher for longer. Conversely, if global demand cools significantly, the upside for commodities could be limited even if supply risks persist.

Therefore, August's double-digit gains in agricultural commodities cannot yet be seen as the start of a new long-term commodity bull market. What is clearer for now is that El Niño, geopolitical conflict, and supply chain costs have re-entered prices.

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

Note: Deutsche Bank uses total return for equities, credit, and bonds, and spot return for currencies and commodities, with all returns calculated in US dollars. Different asset classes do not use exactly the same statistical methodology for price changes.