Editor's Note: If you only looked at the US stock market, August seemed to be a rather calm month. The S&P 500 Index rose 2.7%, the "Big Seven Tech" stocks rose 4.4%; US and Eurozone business activities continued to expand, strong corporate earnings also helped risk assets absorb geopolitical conflicts and policy uncertainty.
However, beneath the surface calm of the stock market, the commodity and bond markets have experienced significant volatility. Gold rose 9.7%, silver rose 15.6%; corn, wheat, and sugar rose by 16.8%, 18.3%, and 21.5% respectively. At the same time, the US 30-year Treasury bond yield rose to its highest level since 2007 during the month, while European and Japanese long-term bonds came under pressure simultaneously.
Stephen Innes, in conjunction with Deutsche Bank strategists Jim Reid and Henry Allen, pointed out in their monthly asset performance report that behind the sharp rise in agricultural products in August, the market is reevaluating two types of supply risks: restricted shipping in the Hormuz Strait may raise energy, fertilizer, and transportation costs; the ongoing strong El Niño may alter global precipitation and temperature distribution, increasing the probability of droughts, floods, and unusually high temperatures in major agricultural regions.
This commodity rally still bears the characteristics of speculative trading. El Niño does not necessarily lead to a synchronous global reduction in agricultural output, and the situation in the Hormuz Strait has not fully materialized in the monthly gains of crude oil. What will truly determine the price direction next is whether weather risks can translate into yield declines, and whether energy and logistics costs will further transmit to food inflation.
Below is the translation of the original text:
August did not see the sharp swings common at the end of summer in recent years. Economic data remained resilient, and global stocks continued to rise. The S&P 500 Index recorded a total return of 2.7% for the month, with tech stocks remaining a key driver, as the "Big Seven Tech" rose by 4.4%, and the US stock market rally continued to be led by a few large companies.
The macro backdrop supporting risk assets is equally robust. The Eurozone's August Composite Purchasing Managers' Index (PMI) rose to 52.1, hitting a nine-month high; while the US Composite PMI rose from July's 54.5 to 56.0, reaching the highest level in 52 months. A PMI above 50 usually indicates that business activity is in an expansionary phase.
Resilience in Growth and Strong Earnings Reports Help U.S. Stocks Continue to Rise, but Deutsche Bank's August Asset Review shows that the most drastic price changes occurred outside the stock market.
Precious Metals and Agricultural Commodities emerged as the best-performing assets of the month. Gold rose by 9.7%, Silver by 15.6%; Corn futures climbed by 16.8%, marking the largest monthly gain in five years; Wheat rose by 18.3%, its best performance in four years; Sugar price surged by 21.5%, achieving the largest monthly gain since 2018.
While U.S. stocks are still trading in growth and profitability, commodities have begun to account for inflation, geopolitical conflicts, and supply risks stemming from extreme weather.
El Niño Heating Up, Agricultural Products Leading Weather Premium Pricing
Deutsche Bank attributed part of the August agricultural price increase to the El Niño phenomenon.
El Niño refers to the sustained abnormal warming of the sea surface temperatures in the central-eastern equatorial Pacific Ocean, which alters the global atmospheric climate circulation. It does not directly determine the yield of a particular crop but can change rainfall, temperature, and storm distribution in different regions, increasing uncertainty in agricultural production.
The U.S. National Oceanic and Atmospheric Administration (NOAA) stated in August that El Niño is intensifying, with sea surface temperature anomalies exceeding 2 degrees Celsius in parts of the equatorial Pacific. The agency projected a probability of over 90% for a 'very strong' El Niño event to occur in the fall and winter of 2026.
For the agricultural market, the key is not only whether El Niño forms but also when and through which regions and crops it will impact global supply.
In Australia, El Niño usually increases the risk of hotter and drier weather in the eastern and southern regions, potentially affecting the yield and quality of crops such as wheat. In parts of Southeast Asia, if there is insufficient rainfall, tropical agricultural products like sugar and palm oil may also be impacted.
South America faces a different kind of uncertainty. Brazil and Argentina are major global exporters of corn, soybeans, and sugar, and El Niño may alter the rainfall distribution in the main producing areas of the two countries. Insufficient rainfall would affect planting and crop growth, while excess rain could delay fieldwork, damage crop quality, and hinder transportation.
Therefore, the August surge in agricultural products is more akin to a weather risk trade: the market has not yet confirmed a large-scale global production cut, but with the strengthening El Niño, investors are starting to price in potential supply losses.
Why Did Corn, Wheat, and Sugar Rise Simultaneously?
The double-digit increases of corn, wheat, and sugar in the same month do not mean they are being driven by entirely the same factors.
The price of corn is sensitive to weather conditions, planting progress, and inventory changes in the U.S. and South American production areas. It is also influenced by feed, ethanol, and export demand. If El Niño disrupts planting and growth in Brazil and Argentina, it could alter the market's outlook for next season's supply.
Wheat's supply sources are relatively diversified. In addition to the U.S., Canada, and Australia, the Black Sea region is also a globally significant export source. Drying weather in Australia, rising global transportation costs, or supply disruptions in major exporting countries could increase importing countries' procurement costs.
Sugar prices are particularly susceptible to weather conditions in Brazil, India, and Thailand. Abnormal rainfall can affect sugarcane yields and the allocation of sugarcane for sugar production versus ethanol. The market will also assess changes in energy prices, exchange rates, and export policies simultaneously.
El Niño can explain the weather risks faced by three commodity classes, but it is not sufficient to explain all price hikes alone. Inventory levels, speculative positions, export policies, energy costs, and short-term fund flows could also amplify price fluctuations.
More precisely, the market is currently trading on the probability of a production cut rather than an actual production cut having occurred. If subsequent production and inventory data do not validate supply concerns, the weather risk premium in prices could quickly retreat.
The Hormuz Risk Transmitting to the Agricultural Supply Chain
In addition to weather factors, Deutsche Bank also mentioned the restriction of shipping through the Strait of Hormuz as an important variable.
The Strait of Hormuz is a critical passage for global oil and liquefied natural gas transportation. Shipping disruptions primarily impact the crude oil, natural gas, and refined product markets, but the shockwaves could also transmit along the production chain to agriculture and food prices.
Agriculture is highly dependent on energy. Diesel affects cultivation and transportation costs, natural gas is a key raw material for nitrogen fertilizer production, and shipping restrictions could push up freight, insurance, and delivery times. Even if agricultural products themselves do not immediately face shortages, their production and trade costs could rise.
Weather and energy risks could also overlap. El Niño increases the probability of production cuts, while the situation in the Strait of Hormuz raises agricultural input and cross-border transportation costs. When uncertainty on the supply side and cost side simultaneously rises, traders and investors typically demand a higher risk premium.
However, Brent crude oil rose by only 0.4% in August, marking one of the smallest monthly changes since 2024. This seemingly stable result masks significant intramonth volatility, reflecting the market's continuous adjustments between shipping constraints and potential negotiation developments.
Therefore, it is not sufficient to judge that energy supply risks have dissipated solely based on a near-zero monthly oil price change. The impact of the Strait of Hormuz situation on inflation may become more evident gradually through refined products, fertilizers, shipping, and food costs.
Gold and Silver Strengthen as Commodity Trading Defies Weather Logic
Apart from agricultural products, precious metals were also one of the strongest-performing asset classes in August. According to Deutsche Bank data in US dollars, gold rose by 9.7% and silver by 15.6%.
The strength in precious metals occurred as some short-term government bond yields rose. Normally, rising interest rates would increase the opportunity cost of holding non-interest-bearing assets, putting pressure on gold. However, the continued rise in gold and silver prices in August indicates that investors were trading not only based on interest rate directions.
The US 30-year Treasury bond yield rose to 5.31% during the month, reaching a high not seen since 2007; the German 30-year Treasury bond yield also rose to 3.81%, hitting the highest level since 2011. The increase in long-term financing costs has brought fiscal deficits, debt supply, and monetary credibility back into market focus.
Subsequently, the US Treasury announced an expansion of long-term Treasury liquidity support repos, increasing the single-repurchase size of 10- to 20-year and 20- to 30-year nominal coupon Treasury securities from a maximum of $20 billion to at least $40 billion, with the new size effective from September 9.
These repos are mainly used to improve the liquidity of old securities and the operation of the Treasury market and do not amount to quantitative easing, nor do they mean that the Treasury has begun to directly control yields. However, after the measures were announced, long-end yields briefly fell, and the market began discussing whether policymakers would more actively limit the rise in government long-term financing costs.
In this environment, the rise in gold and silver prices may simultaneously reflect safe-haven demand, inflation concerns, fiscal pressures, and investor scrutiny of sovereign debt market interventions. While both precious metals and agricultural products belong to commodities, their trading logics are 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.
As Stock Markets Remain Calm, Cross-Asset Divergence Deserves Attention
While commodity prices surged rapidly, US stocks and some tech assets instead saw a decrease in volatility.
The Philadelphia Semiconductor Index rose by only 2.0% in August, following four consecutive months of monthly changes exceeding 10%. The S&P 500 Index continued to rise but did not experience a significant flight to safety.
This divergence is related to economic growth resilience. The US and Eurozone PMIs continue to expand, with strong corporate earnings providing fundamental support for stock valuations. However, for the bond market, the same data implies that central banks lack a rapid reason to pivot towards easing; if commodity price increases further drive up inflation, monetary policy space may also face additional constraints.
The U.S. Treasury yield curve flattened in August. According to Deutsche Bank, the 2-year Treasury yield rose 5 basis points during the month and spiked 11 basis points in a single day after Fed Chair Kevin Warsh's Jackson Hole speech. In contrast, although the 30-year yield touched multi-year highs during the month, it ended the month down approximately 3 basis points compared to the end of July.
The pressure in the European and Japanese bond markets was more pronounced. The French 10-year government bond yield rose by 18 basis points, Italy increased by 13 basis points, and Germany rose by 12 basis points. Japan's 10-year government bond yield surged by 15 basis points, with the 2-year yield rising by 23 basis points, reflecting market expectations of further policy tightening by the Bank of Japan.
Stocks, bonds, and commodities thus formed three distinct pricing narratives: the stock market betting on growth and continued earnings, the bond market concerned about inflation, fiscal, and policy tightening, and the commodity market starting to price in supply disruptions from energy and weather.
How Long Can This Commodity Boom Last?
The primary variable determining whether this commodity boom can continue is whether La Niña will further strengthen and whether weather anomalies can truly translate into production losses.
Next, close attention needs to be paid to South American corn and soybean planting, Australian wheat harvest, Brazilian and Asian sugar production, as well as the stock levels and trade policies of major exporting countries. If these indicators continue to deteriorate, the weather risk premium seen in August may continue to expand; if actual production outperforms expectations, the earlier gains may face a reversal.
The second variable is the shipping situation in the Strait of Hormuz. If transport remains constrained, energy, fertilizer, and insurance costs may stay elevated, increasing frictional costs in global agricultural trade; if the waterway gradually reopens, some of the energy and logistics risk premium may recede.
Finally, it will be crucial to observe whether commodity prices transmit to inflation data. If energy and food prices keep rising, central banks may need to make tougher choices between growth and inflation, and the bond market may raise expectations for sustained high rates. Conversely, if global demand significantly cools off, even with lingering supply risks, the upside for commodities may be limited.
Therefore, the double-digit gains in agricultural commodities in August should not be directly seen as the beginning of a new long-term commodity bull market. The more immediate change is the reemergence of La Niña, geopolitical conflicts, and supply chain costs impacting prices once again.
While U.S. stocks continue to trade growth, commodities are now trading the inflation and supply cost behind that growth.
Note: Deutsche Bank uses total return metrics for stocks, credit bonds, and government bonds, and spot return metrics for currencies and commodities, with all returns calculated in U.S. dollars. The percentage changes in different assets are not based on entirely the same statistical methodology.
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