Month End Summary of Commodity Futures and Options

The inauguration of Donald Trump came and went without a hitch. The new President wasted no time in undoing a raft of executive orders that were inherited from regimes past. Will the new administration succeed in its lofty ambitions? Aim for the moon and if you miss it you’ll hit a star seems to be the mentality of the new administration. Since our crystal ball is in the shop, we’ll have to wait to see how things turn out. The problem, strategically, with the agenda is that the pain is upfront and the gain occurs (if it does) in the long run. This is not the modern American way, where quick thrills are paid off over years.

One early stumble has been the “AI” initiative. After an American press event hyping a massive “Stargate” project to be built cooperatively between OpenAI, Oracle and other tech giants, Chinese researche rs revealed an open source project that purports to best OpenAI’s algorithms. Moreover, the Chinese version is entirely open sourced and could be run on relatively cheap hardware. Your writer, as someone who has spent over two decades in statistical and numeric al algorithms, was not surprised. With no inside knowledge of the specifics or internals, the OpenAI and NVIDIA cooperation seems like a symbiotic marketing scheme to win higher valuations for OpenAI and sell more NVIDIA cards. It is our decade’s “Intel Inside” slogan. In statistical and high performance computing, there is rarely “one way” to do things. A successful system is a complicated mixture of compute resources, the algorithms which are appropriate to the computing landscape and the symphony of pre-processing that one applies to the training data. If one aspect of the environment changes, it often results in a radically different system. We see this with Deepseek. The cast of characters assembled into the “Stargate” project was an assurance that the mechanism would be big and extremely costly. A similar cast of characters has already sold the world on a costly albatross, the cloud. Why not do it again? Disruption has disrupted these disruptors! NVIDIA’s share price stumbled, but these things rarely succumb to the effects of the first magic BB pellet to hit them. It is more likely that Deepseek causes more such projects to show up, each with a slight variation giving them an edge in some nuance of the general problem. Over time, like sand in the gears of a machine, each of these approaches will erode OpenAI and NVIDIA’s position.

Disruption is also being unleashed on financial markets. First, the new President’s enhanced usage of the tariff as a soft/hard lever against neighbors and foes is injecting all sorts of volatility into forex markets. The fickleness of who is painted with the bullseye at the moment must be giving traders ulcers. The secondary issue with these tariffs is their knock on effects on prices in the real economy. A tariff on Mexico will have secondary effects for corn (at least in the short run). We think the advisors to the President understand this. They also understand that it sets up a prisoner’s dilemma problem. The first states to “cut a deal” with the US will become transshipment nodes. They will benefit as intermediaries between the US and the outer ring of sanctioned/tariffed countries. This is similar to the Turkey or India when it comes to trading and washing sanctioned Russian oil or gas. The inner ring receives a great amount of the premium that the sanctions create. The current targets of the President’s ire are Canada and Mexico. We’ll see them again in the forex section.

We now proceed to our dive into the different market segments and our observations.

Bitcoin continued to rally this month. Ethereum did not follow suit. It is odd that a currency built to counter the `failing traditional finance world` rallies strongly when a member of the Old Boy's Club expresses more of an interest in crypto. You don't typically see Dracula in sunlight sprinkling Holy Water on himself. The carnage in FX is Biblical though. We had to validate our calibration algorithms (for implied vol) when we saw the Peso move. The Canadian dollar vol was also not too far behind. Vol in the other currencies is breathing a sigh of relief. It brings to mind the old age, `If a bear attacks, you don't have to be faster than the bear as long as you are faster than your friend...` The volatility in currencies is likely to remain. Whether it is the threat of tariff, or the US's need to goose exports, FX will figure prominently. Classical economic textbooks argue that smaller countries gain more from trade than do larger countries. Perhaps, in reverse, this is what the current administration is using as leverage. A tariff against smaller countries can ruin their economies. In the case of Mexico, pressure on exports and a tight northern border can lead to all sorts of internal political problems.

Rates backed off again this month in the Treasury contracts. The front month SOFR rates were a bit weak. The FED met and punted. They are not willing to cut or signal one. The broader economic picture is murky. To the extent the tariffs bite, there could be a reduction in economic activity and downward pressure on rates. Alternatively, the current account deficit with many of these nations means they are net investors in the US. A loss of these sums from the capital account will put upward pressure on rates. With the 10 Year rate hovering at 4.5% and the average new mortgage at 7%, real estate still seems to be muddling through with the NAHB showing increased sales. Commercial real estate, on the other hand, is on life support. It will be interesting to see if the back to the office trend reverses this. Trump's return to office mandate will certainly be another reason for more employers to mandate office work. This might arrest some of the fall in office rents and attractiveness. The work from home craze also ignited demand (for residential real estate) that was off the beaten track. The move back to the office in earnest will put pressure on certain parts of the residential markets.

Equity markets exist on some plane of reality in which there is never a cloudy day. Except for the Dutch AEX, our coverage shows indexes higher and vol lower. Earnings that have dribbled out are mostly okay. However, with valuations at all time highs, we'd want to see blowouts. Next, the fact that the OpenAI+NVIDIA partnership might not have a monopoly on LLM should also engender some aversion. It hasn't. Finally, the tariffs and the Federal Government's rationalization attempt (shutting down frivolous spending), while we believe good in the long run, is bound to result in some displacements in the short term.

Tariffs, again. There was talk about imposing tariffs on aluminum and other industrial metals. With the notable exception of LME aluminum, there was a general strong increase in prices. Silver was up strongly on a massive bump in vol. Platinum and palladium, both sourced heavily from Russia, spiked hard. The COMEX/NYMEX contracts all showed bumps in vol. LME is much more muted.

Tariffs figure prominently here as well. Vol rallied in corn, wheat and beans. Meal and oil sat is out. Prices were up strongly for the entire ags complex, with milk, rapeseed and soy meal the only contracts down. The tariff was one stimulus to the market. There were also reports of foreign material in ag shipments from Brazil. The last thing, in the current environment, that an exporter wants is to be strung up on food quality issues at ports. Rising input prices will also not help the inflation felt. Again, a strong run for ags will be seen in staples people buy. It is hard to see rate cuts under that scenario.

With something like peace breaking out in the Middle East, it is no surprise that oil prices were weak. The surprise is that RBOB vol is not zooming. A widely known aspect of the US refinery infrastructure is that it requires imports of heavy oil. Historically, these have been imported from Canada, Mexico, Venezuala and Russia. The move by Venezuela and the US to bury the hatchet might be the safety valve the market senses. It is questionable how much capability Venezuela has to supply the US. The cold snap that gripped the country and sent natural gas prices and vols to the moon, seems to have abated a bit quicker than expected.

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