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Commodities get close attention


27 June 2022 Written by Chris Weston  Pepperstone Head of Research Chris Weston

On the week we saw the US500 +6.7%, NAS100 +8.9%, FRA40 +3.2%, HK50 +3.1%, Crude -3.1%, and Copper -6.7%, while the NOK was the best performing G10 currency and the JPY the worst. The USD has eased back following US 2yr Treasury yields, which have pulled back from 3.45% to 3.06%, and we see a pennant consolidation pattern in the USDX daily that needs to play out and may impact sentiment in broad markets when it does. Certainly, the mood in equities has lifted but remains unconvinced and we’ve seen both the US500 and NAS100 fill and break above their respective 10 June gap – will month-end flows continue to support, with further fund rebalancing, trader short-covering and relief buying?

Clearly, sentiment was so shot to pieces and positioning so light into mid-June that (with hindsight) there was always going to be a risk of a sustained bear market rally in risk assets, but let’s see if the bulls can build on this, as we assess the potential to take the NAS100 into 12,800 and US500 into 4100 – how the market digests this week’s economic data will be closely watched, notably the US ISM manufacturing report.

With Jay Powell validating the ‘recession’ callers growing belief, there has been some easing in US and global rate hike expectations, with 29bp priced out of the US swaps market over the next two years. FX volatility (vol) has dropped, and most pairs on my vol matrix sit around the 40th percentile of the 12-month range. Equity vol is still elevated with the VIX index at 27.23% and there is scope for the market to push into the 23-25% range. We see the CBOE S&P 500 put/call ratio dropping back to 0.51 and well off the highs we saw in April/May, so the demand for puts and portfolio hedges has been unwound.

Anyhow, keeping a close eye on US equity indices, crude, and commodities more broadly and what they signal on growth. Copper has become the bellwether again on economics and having lost 16% in the past 14 days, this is one that is getting the love from the shorts – that said, we saw some indecision to push this far below $3.70 on Friday and shorts are at risk of a quick move into $3.95. Keen to watch the XLE ETF (energy sector) and whether this can find buyers, I see risks that will be the case.

Key themes aside, here are the core focal points. Anything growth focused seems key – notably the US ISM manufacturing report later in the week may get the lions share of attention. A G7 plan to ban gold imports is unlikely to promote too much reaction from Putin, but it does suggest keeping an eye on XAUUSD, while talk of oil price caps is worth exploring too. If cant see the pictures clearly, here's the Twitter link for clarity.

Interest rate expectations – I’ve looked at the implied rate for each meeting (using swaps and futures pricing). I’ve looked at the step-up in rate hike expectations for each following meeting. For example, we see 70bp of hikes priced for the July FOMC meeting, with a further 57bp priced for the September meeting. We see 45bp priced for the next RBA meeting, which suggests if the RBA meeting was today and they hiked by 50bp – without considering the outlook and how it reconciles with the forward pricing, the AUD shouldn’t move on a 50bp hike.

Implied volatility matrix – Again, I looked at the options market and the implied volatility priced by dealers – we can then look out and calculate the implied trading range. This is one of the only forward-looking guides and is based on expectations of movement. I find it useful to understand how the market is feeling about key event risks and how to guide my risk and we can also use it for mean reversion levels. With vols pulling back it suggests closer stop placement which means potentially increasing position sizing. Positioning – here I’ve looked at the CoT/TFF futures report on positioning in our most traded markets and added the current skew of longs from clients.

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