Sometimes the market environment is just hopelessly difficult. Just when consensus grew comfortable with the new mantra of “bad is bad” and “good is good,” October proved otherwise pulling the old “bad is (for the moment) good”.
It actually started on September 29 with the massive 30% implosion of Glencore stock accelerating a 2.5% correction in the S&P500, which led to the retest of the August lows on September 29. At the same time and deep in the back pages of the paper, there were reports of Chinese stimulus aimed to boost credit conditions in their housing and auto industry.
By Thursday October 1, the market was severely oversold and exhausted – ripened conditions for a rally especially when one considers China’s national NBS and PMI numbers hit the tape no worse than feared! By October 2, the trap was set as the U.S. jobs report poured fuel on a market in search of a reason to bounce. The result is an uninterrupted 150 point climb in the S&P 500 as “bad is good again!”
It’s been a strange two weeks.
Strange in that real activity continues to grow, yet inflation has moved sharply lower. Strange in that although markets have screamed higher, recent demand for VIX, Wall Street’s fear gauge, calls has shattered a nine-year old record as investors are paying record amounts to guard against a spike in volatility.
Strange in that the U.S. dollar has been a drag anchor against most currencies; acting strangely similarly to the March post- FOMC meeting. Strange in that markets are moving as if we’ve finally reached escape velocity while the news flow starkly reinforces a combination of fragile, fleeting, or no worse than fearsome. Strange that not many recall how Chinese data and the U.S. Fed rate-hike delay is nothing new. As there’s nothing new under the sun, recall 2012 when worsening Chinese PMI numbers pushed U.S. rate hike expectations way down the pike.
Highlights of October
After falling 8% in September, crude market fundamentals steadied in October as the NYMEX WTI November futures contract began October at $45.38, quickly bolted to $50.92 on October 9, only to settle back slightly above unchanged by mid-month.
Over the past two weeks fund managers have grown increasingly bullish on crude; perhaps bullish enough to keep any future short-term rallies in-check. However, intra-day price action remains quite volatile – especially since the shockingly bad U.S. jobs number on October 2 – as the crude complex has taken additional cues from downward pressure on the U.S. dollar.
Currently options traders are pricing crude three-month implied volatility near 44.0% or nine percentage points above their one-year average. Personally, I am a little suspicious of this recent rally as it was not copied in crude’s ancillary markets. If this crude oil / product market divergence persists will we see another wave of surplus due to forced refinery cuts? For the near-term, I see a limited ceiling for crude and any sustained rally will need to come from a source other than market fundamentals.
Severe supply cuts and credible conversations over a market nearing deficit (2016) has overtaken a deeply negative market sentiment ratcheting COMEX December copper futures 11 cents higher in October to 2.4160 – matching price levels not seen since mid-September.
On the surface, the last two-week up-move is nothing special however; placing it within its proper context may prove otherwise. After hitting a contract low of 2.2480 on August 24th, September brought with it a copper rally of nearly 5% after beleaguered commodity giant, Glencore, revealed plans to suspend some of its copper operations in an attempt to reduce debt. Copper prices then fell sharply to close the month virtually unchanged on news that future mining operations would be sold in a so-called “streaming deal” – a type of alternative financing in the mining industry.
At the mid-month point, traders have slowly become “less bearish” on copper and are relieved to read news of apparent increased flow of material into China. For the short-term, it will be fascinating to watch the price action and whether the focus stagnates on demand weakness issues or its response to that of supply.
During the month of September cattle traders grappled with news of record-breaking steer weights and disputed demand precipitating a 10% decline in CME October Live Cattle futures prices. However, on October 2, after hitting a two-year low price of 120.025, live cattle prices have steadily rebounded and have settled mid-month at 133.40.
The cattle market is currently adjusting to news of both heavier cattle weights and rising feeder supply. And that news is being felt in the futures markets as live cattle is experiencing unheard of $5.00 daily ranges and will continue to do so until markets adapt to this new norm of supply.
Extremely reduced market exposure is a counterintuitive hedge fund against anxiety, but it today feels to me like insulation from the vicissitudes of our markets recent volatile emotions of, “We’re in the Money” on Monday and “Stormy Weather” on Tuesday. Today’s markets are the modern day “bruised reed” that if one leans on it will pierce him.