Month End Summary of Commodity Futures and Options

August began with a glint of peace and a meeting between Presidents Trump and Putin. Ultimately, not a lot has changed. There was a great spectacle in Alaska. There was worried hand-wringing by the European leaders and attempts to subvert President Trump’s efforts. The reported discussion of jointly exploring and developing the Arctic is something which could fundamentally change the tone of the relationship. All in all, it is hard to be optimistic. As we’ve pointed out, the conflict is perceived as existential to both belligerents. A few words about potential deals is unlikely to change this.

There is an interesting schizophrenia that afflicts the West. They rail against the Indians purchasing Russian hydrocarbons, but France and other European countries import massive amounts of liquified natural gas. Moreover, the Indians are large suppliers of diesel to the Ukrainians. The US government is not at all consistent in its stance. Nowhere is this better illustrated than in the difference in message between Vice President Vance, who seems to want to conclude a peace in Europe, and Mr Navarro, the President’s advisor, who was lambasting Delhi in comments this week. You have the ameliorative Mr. Witkoff and the hawkish General Kellogg working on the Ukraine peace process. Perhaps this is some subtle good cop/bad cop act. The risk this approach delivers is that strategic counterparties become confused and play a different game.

International politics and diplomacy have an enormous effect on the commodity world. The price of oil got a solid drubbing on the renewed prospect of peace (or the forestalling of new sanctions). There was some retracement in the latter part of the month, but vol was offered. The good cop/bad cop routine should probably increase premiums across the board in the energy sector and further. The dormant Iranian nuclear negotiations are taking a turn to further confrontation. This would suggest perhaps yet more attempts at hole boring in the Iranian mountainside. The Israeli-Palestinian conflict continues in its gory momentum, capped off by strikes on Yemen. The Middle East seems to be in strategic flux as one time allies Turkey and Israel are engaging in tit-for-tat exchanges. In a sane world, being long some premium in energy or metals would make sense. The experience of the past few years suggests that will be a losing trade.

In yet more belligerence, the ongoing Jihad against Jerome Powell continues. It is our stated position that were the Fed to disappear, we would not shed a tear. However, the assertion the Fed has somehow been too miserly in the creation of credit is absolutely baseless. By any measure of speculation, whether it is the stock market or this gem:

We are still in a speculative phase. Yes, housing is slowing down. However, perhaps none of the VRBO mini-baron model (along with cheap money) in the post COVID period was economically viable. It was always humorous to hear that “cash buyers” were snapping up properties everywhere. The median net worth is close to 200K for Americans. In most studies that net worth is heavily skewed to real estate. The boom in real estate was most likely a sham driven by abnormally low interest rates, COVID stimulus money and some regional shifts (a move from the heavily regulated Northeast to Florida, Tennessee and other Southern US states). If real estate is faltering, it is a good sign. Price discovery is still working. The other dimension of housing and assets in the US is that it is skewed towards baby boomers. It may already be the case that mortality in that group has started to have an effect on home prices. They were the natural buyers of large homes.

People fixate on whatever the media says is the hot button issue. Everyone has been told rates are too high. Let’s review, the US Ten year yield is about 4.2%. If the rate of change in the CPI was 2.7%, year over year, then the real rate is about 1.5%. This is hardly a usurious cost of money. A trip to the grocery store would probably lead anyone to conclude that CPI might be underestimating the actual rate of inflation. Nominally rates are low, and in real terms money is very cheap. The Fed is in a tough spot. It is able to cut the discount rate and put pressure on the Fed Funds Rate. However, the 6-8 year range is in a spot where the government has heavy borrowing needs. Coincidentally, the 7 Year rate is typically a proxy for mortgage rates. With the loss of the Chinese buyers, the only hope for finding organic (non-Fed) buyers of Treasuries seems to be Stablecoins see https://x.com/SecScottBessent/status/1957489664870302091 . The Federal Government needs to roll a lot of debt. We don’t see how this can be done without higher rates in the 6-10 year range. Mortgage rates may not react the way the talking heads want.

The tariff drama continues. Even small packages of low dollar value, which had escaped tariffs, are now tariff eligible. Many foreign postal services have stopped accepting parcels destined for the US. On the last Friday of the month, a US appeals court ruled that the tariff changes overstepped Presidential bounds. Even if this court’s decision is upheld by the Supreme Court, a great deal of damage has been done. To an administration that works on a social media/reality show timescale, even a small hiccup in employment will cause all sorts of knee jerk reactions. The firing at the BLS is just one example of the thrashing that will result. Many of President Trump’s initiatives are good. Rolling back a swathe of the Biden “Green New Deal” regulations is something which will increase economic activity. However, the payoffs are likely to be realized in the long run. This critical mismatch between attention span and the news cycle has always been a unique American problem which seems to have gotten worse with 24 news and online news. It is as if society needs constant stimulus and loses the plot after one week. With that, we turn to our roundup of the action this past month.

Futures rose for all of the traditional currencies. Surprisingly, Ethereum was up sharply while Bitcoin futures were down. Vol was down across the board except for the crypto. Considering the looming budget crises in Britain and France, we are surprised at the market's lackadaisical view. Perhaps the budgetary risks in the Europe is offset by the policy risk emanating from the US.

There was a rally in all US government bill/note/bond futures, except for the 30 year contract and the Ultra contract. We are surprised by the rally in the 10 Year. The upcoming and telegraphed easing will be instructive. If the 10 Year yield does not slacken, look for more pressure to cut. Look also for what happens to the long end of the curve. Only the 30 Year contract showed any signs of a bid in volatility.

We tire of writing the same analysis of equity index futures. They were up again this month! The at the money vol of the S&P 500 is approaching 11.5% for the front month. It is hard to understand the lack of concern about anything.

Copper recovered some of last month's drubbing. Both the LME and Comex products rallied about 3%. Vol was down further for copper. Palladium lost ground, but Silver, Gold and Platinum rallied. Silver and gold vol were quite strong, but the rest of the field was weak.

Cattle might give the equity markets a run for their money. Feeder cattle was up strongly on very strong vol. Live cattle was up, but vol did not follow. Timber has come crashing down on very strong implied volatility. American corn, wheat and beans were quite strong. European corn and wheat were weak. Hog prices were down, but vol was quite strong.

Last month, prior to the Putin-Trump meeting, we were expecting that the Graham-Blumenthal sanctions would start biting. The meeting seems to have put those on hold, though the recent court decision on Trump tariffs might lead to a log rolling between President Trump and Senator Graham. Major energy prices, save ethanol, were all down dramatically. Vol was also strongly offered. Heading into the fall, this is an interesting set up.

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