Combining Market Fundamentals with Sentiment: October in Review

The markets have shaken me out of the old markets I’d known, but in the strange period of October I forgot it almost completely.

In a sense I remembered the old marketplace.  I remembered when market moves matched market fundamentals; when industries did not plunge due to a presidential candidate’s social-media feed; when markets did not drop and surge 11% on a general misinterpretation of a currency devaluation. I remember when volatility targeting and risk-parity was reserved for men with pocket protectors and smudgy glasses, when untold piles of money did not focus on an industry far beyond its market capitalization; and when people saw the wisdom of not cramming a non-equity into an equity product.

But none of it was alive in my mind any longer.  It is something far away and this past month has confirmed that I probably could not go back to it. Twenty-five years ago it would never have occurred to me that someday I might want to go back to it.  Or that we should.

Foreign Exchange

The U.S. dollar spent the month of October in high demand, supported by stronger trend growth in consumer spending, an improving labor market, and a recommencement of credit growth.  Despite these apparent economic “green shoots”, the U.S. dollar index (DXY) spent the month within a relative broad and volatile trading range.  The DXY began the month trading at 96.40 made a month low of 93.83 on October 15 before spending the next two weeks climbing to its October 10-28 high-water mark of 97.895; closing October at 97.08.

During the scheduled October meeting the European Central Bank (ECB) opened the door to more monetary-policy action in December.  Additionally, ECB President Mario Draghi got the markets excited with what was essentially a reaffirmation of his “whatever it takes” promise he made circa. 2012.  The euro/U.S. dollar opened the month at 1.1185 and climbed steadily against the greenback to its October 15 apex of 1.1505. After spending one week of consolidation, the ECB delivered another round of dovishness subsequently pushing the Euro down to a month low of 1.0904 on October 28 and finishing the month around 1.1017.

Metals

After opening the month near $1,114 an ounce, gold fell to a month low of $1103.80 on October 2, and shot up mid-month to the $1,190 area, before closing October at $1141.40.  Consensus believes that a sharp and lasting move below $1,145 will be enough to confirm the strong possibility of a deeper retracement initially towards $1,130 and probably even towards $1,120.

Currently, gold struggles with an identity crisis on whether it’s a commodity or currency.  Expect continued broad and volatile trading ranges.  On the other side of the spectrum, October was a good month for palladium – gaining 14% following the Volkswagen diesel scandal.

Iron ore prices continued to stall in October falling another 4%.  Steel prices are still feeling the effects of massive overstocking in 2014 and finished the month down over 6.0% to levels not seen in over ten years.  Although nickel prices ended the month in positive terrain +4.0%, the general theme of muted demand growth and insufficient supply cuts plagues the market as aluminum shaves off another- 4.0% on the month and copper down almost a full percent.

Petroleum

With two brief exceptions, oil prices remained within a fairly narrow between $45 $50 a barrel trading range throughout the month of October.  We did see a $51.42 high and a low at $42.07, however, the majority of the month, crude prices swung in a muted $5 range.  The increasingly accommodative monetary policy from Europe, Japan, and China appears middle-of-the-road for oil market fundamentals, but has resulted in a stronger U.S. dollar, which has weighed on the entire petroleum complex.

All said, crude option implied volatilities fell steadily throughout the month.  Brent 3-month options implied volatility fell to 43%.  This is lower than what the market is accustomed to however still 8-9 points above its one-year average.

Despite a record power burn this summer, higher than expected exports to Mexico, and rumors of aggressive coal plant retirements, U.S. natural gas prices plummeted 14% in October as continued production growth from the Marcellus along with rumors of “normal winter” to “warm winter” have crossed the newswires

Agriculture

Corn prices wound up flattish on the month as strong crop conditions in Iowa, Nebraska, and South Dakota vastly offset haggard conditions reported in the Eastern Corn Belt of Indiana, Illinois, Missouri, and Ohio.  Corn opened the month trading 387’6 a bushel, rallied to near 400 on sour crop condition reports only to back off to a low of 372 as harvest conditions in the west proved much better than feared.  Corn closed the month a little softer than where it began at 382’20.

Soybeans had a similar path to corn as the crop was in generally good shape – where intermittently spaced trouble areas were well offset by areas of plenty.  Soybeans began the month at 885’6/bushel, climbing as high as 920 (10/14) as markets became a little uncomfortable with tightening U.S. inventories.  Soybeans spent the remainder of October falling slowly back to basically unchanged as strong South American competition – in spite of the Brazilian Reals recent stability versus the U.S. dollar - weighed on pricing.