Month End Summary of Commodity Futures and Options

If you thought the fireworks would be short lived, February provided some interesting watching. It is a good thing corn is down, because our tub of popcorn needs to be topped up. Oil moved because the new administration started its peace initiative for the Ukraine-Russia conflict. Moreover, there are signs of European firms beginning to plan (dream?) for resumption of trade with Russia and a cheaper (and consistent) supply of hydrocarbons.

The US President offered the Ukrainians a 'deal'. The on-off-on agreement discussion around this deal culminated with Friday’s jousting in the Oval Office. It is hard to understand how much of this is real and how much of this is an effort to remove Zelensky and continue the conflict under Zaluzhny or some other dark horse (see the US’s treatment of South Vietnam’s Diem). The US led Europe in its zeal to prosecute the operation to make the Ukraine a battering ram against its larger neighbor. It is possible the current administration is fed up with Obama’s miscarriage and is realistically looking for an exit (as Biden did with Afghanistan). However, it is also clear that Trump enjoys painting himself as Ukraine’s benefactor, 'Obama sent sheets, I sent Javelins.' Our view is that Trump has passed the losing hand to the Europeans. If the Ukraine prevails, great, but it will be expensive for Europe. They will come back to the US. If the Russians triumph, Europe will come back exhausted, hat in hand ready for Trump’s terms. The risk of broader war is probably increasing. The European leaders seem to believe they can conjure weapons and troops out of the ether. Unlike WWI, the US may not rush in to save Europe’s chestnuts. From the Russian point of view, a strike against a NATO country becomes a better risk/reward proposition.

Beyond the drama in the foreign policy realm, there were fireworks in commodities. The gold rally continued unabated for most of the month. Futures were actually down on the month, while spot was up. The social media world was on fire with speculation that gold was being cleared out of London and heading to New York. There is also a push to 'audit' the gold depository at Fort Knox. The gold bugs allege there is no gold, but an alternative theory is circulating that there might be more gold in Fort Knox than the official bar count. Silver sat this month out in futures, but was up in spot markets. Perhaps this is the 'one' and we are witnessing the end of the exchange system. What’s also interesting is that platinum and palladium are down. More likely, this suggests a retail mania. Perhaps after running retail money through same day options, NFTs, crypto and Nvidia, the market is shunting the retail buying to gold.

Secretary Bessent commented that in 6-12 months, the current administration will “own” the economy. He means that economic performance in the US will be associated with the current administration and not the previous. There is a lot of bad news trickling into the economic data releases. US consumer confidence was down, GDP was revised down and personal spending was also revised down. Most of the jobs created during the Biden era seem to have accrued to foreign born members of the US workforce. It makes sense for the current administration to frontload the bad news. However, there are underlying trends which preceded this administration, which will bedevil it nonetheless. Interest rates at or near 7% on residential real estate will be a big headwind. Notwithstanding the pennies recovered by the DOGE initiatives (and the endless entertainment the exposes of government waste provide), the Republican led Congress was set to approve another spendthrift budget. The government and private borrowers want rates to come down, but with so much incremental borrowing (and the gloomy stories of waste coming from DOGE), it is unlikely that rates will come down. The tariff machinations, to the extent they diminish the current account deficit, might put upward pressure on rates as the Chinese will have less need to park their surplus in Treasuries.

Most of the major equity indexes were down this month. Even NVIDIA’s good earnings report was not enough to arrest the decline. Moreover, there is rumbling in the background. Aside from a handful of highly sought after datacenters, most cannot find tenants. The hubbub of AI and the untold wealth it will create seems to be running into the reality that there are risks. We witnessed the 1999 internet bubble and crash. The bubble continued in spite of the first crop of bankruptcies and broken deals. The bankruptcy of Pets.com didn’t kill Sun Microsystems immediately, but it eventually led to its demise and a cratering of Cisco and other high fliers. The investing world underestimates the amount of stranded costs there will be in AI and other formerly darling investment programs like DEI and Green projects. All of this will begin to waft out in a flurry of one time adjustments. It wasn’t that long ago that BP touted its new logo, “...Beyond Petroleum”.

We salute the brave reader who made it this far. We believe that healthy risk management has never been more important than it is now. Tariff policy, economic policy, domestic attitudes and foreign policy are in major flux. With that admonition, we continue to our review of major commodity segments.

Crypto was destroyed this month. Bitcoin futures were down 17% and Ethereum was down 18%. Oddly enough, vol was down relatively significantly. Perhaps this is indicative that the blow off rally is over. There is much gloating over this implosion. The mocking of Sailor is increasing readily. Perhaps future generations will identify the high water mark for crypto was when Blackrock expanded its presence. It is ironic that the alternative currency achieved its heights when establishment firms decided to get involved. Among traditional currencies, the dollar seems to have lost ground. Vol was down rather aggressively across the board. Perhaps there is Trump fatigue in these markets.

Futures were up across the board. The weakness in the real economy seems to be driving expectations of lower rates? There are many reasons for arguing for lower rates. The federal government needs lower rates. The private consumer and real estate buyer needs lower rates. The Fed may cut. It is, contrary to their protestations, a political entity. Jerome Powell is not Paul Volcker. However, the pace of borrowing is still massive. The natural buyers for US Treasuries are fading. The Fed cannot be the marginal buyer. It will translate into ever increasing inflationary expectations. Recall that the previous two rate cuts have resulted in higher 10 Year rates. We don't see any reason why this time is different.

Equity indexes tasted a rare down month. The biggest loser was the Russell2000, followed by the Nasdaq100 futures. Vol was up modestly for the entire US Equity Index complex. Is this the end of the rally? It is too early to say. Bull markets can last a lot longer than anyone anticipates, but if the Trump administration is frontloading the bad news, we might expect a few more stumbles and a stronger bid in vol. There is a risk that any stumble causes the economy to fall flat on its face. Our view is that there is so much stranded investment and bad investment that this is a real risk.

Tariffs, again (again!). Base metals are on fire. Aluminum alloy in USD was up 9%, copper was up between 3 and 5%, lead was up, tine was up 4.6% and hot rolled steel rallied dramatically. Gold showed an increasing call skew (call vol bid over put vol). Copper vol was up 7-8%. Gold vol was down, with most of the vols were offered (lower).

Tariffs moved much of the ag complex. Mexican tariffs, for example, sends corn into a tizzy. For the month, corn ended down 4% and vol was offered. Matif corn was bid, but modestly so. Lumber has a strong month. Given the weak permit data, it is hard to understand what is going on. Perhaps the building season started early this year, or this is fallout from the tariff talk directed at Canada. Feeder cattle was up. Lean hogs were offered, but vol seems to have exploded. The front month skew was bid across the board. The only news hitting the wires is an old story about foot and mouth disease in hogs, and another one about limited Chinese demand for US pork. Overall, however, vol is down. This makes limited sense given the tariff and global drama. Markets have a mind of its own.

Both Brent and WTI crude prices fell. There is some tenuous peace in the Middle East and the peace overtures in the Ukraine-Russian crisis seem to be removing whatever risk premia existed. Vol is down on both products by 9-10% or approximately 280bps. It is our view that the Ukrainian-Russian conflict is far from over. There are many hurdles to the resumption of direct Russian gas deliveries to Germany. Natural gas rallied on falling vol. In the past, vol rallied with the futures. The cold snaps across the country have fueled dreams of $10 natural gas. Oddly enough, heating oil was also offered.

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