Month End Summary of Commodity Futures and Options

The policy gamma generated by the current President shows no signs of ebbing. The back and forth between the executive branch and the legislative branch over tariffs seems to have culminated in a stark reduction of the tariff bite. In the 1830’s in response to an unfavorable ruling from the Supreme Court, President Andrew Jackson said, “John Marshall (Chief Justice) has made the decision; now let them enforce it!”. Commentators express the hope that President Trump would take the judicial setback and walk back the tariffs. What is forgotten is that there are multiple avenues, using administrative rules, to slow down trade from any country. There are all sorts of USDA inspections that can be made more stringent, for example, for some countries. While the President changes his mind more often than most people change their clothes, the TACO (Trump Always Chickens Out) acronym is likely to sting and make a retreat on tariffs emotionally unpalatable for the irascible president.

Looking at equity markets, we see a market that is close to its highs. Here is the SP500 courtesy of Fred:

If you snoozed, you missed the bear market. Fundamentally, the risks at the lows, are still present. In some sense, the situation is much worse because you have an administration that isn’t making the progress it had hyped. The news is still quite good. NVIDIA made its number. The diabetes drugs are selling like tictacs.

The troubling thing that the market commentators seem to be ignoring are the (relatively) high interest rates. Make no mistake about it, the rates aren’t themselves the problem, government borrowing and uncertainty are. You have to go back 20 years to find mortgage rates at current levels.

We have repeated this as our mantra for the past 5 or so updates, residential real estate was priced for 1% rates 3 years ago when rates were in the 3% range. 30 Year rates are now nearly 7%. The levee will break at some point. Everyone is still singing about the rate cuts in “the next six months”. Getting back to 3% would imply some sort of massive rate cut. On what basis do we see a return to the “deflation” arguments of the early 2000s that justified the low rates? The tariffs and uncertainty about the dollar as the world’s reserve currency make it unlikely we will see low inflationary expectations. The current “Big Beautiful Spending” bill will also do nothing to alleviate government borrowing. In the best case, we can expect these rate levels longer. Given the uncertainty, we are surprised rates aren’t higher. The other palliative to high interest rates is growing personal income. We are not aware of any data which shows accelerating growth in personal income.

The 10 Year vol has come off. This is hard to understand considering the absolutely horrific budget that will be passed.

The President’s other initiatives are also languishing. The President seems lukewarm on new sanctions on the Russians, even as the Europeans are trying to lower the price cap on Russian oil. The Europeans are moving forward with their stated support of Ukraine. The German Prime Minister, Merz, seemed to agree with the usage of the Taurus missile for deep strikes into Russia proper. This was later walked back by the Germans, but the damage has been done. It has broken that fourth wall of diplomacy and hybrid war, plausible deniability. Germany seems to have taken the role of a co-belligerent. Much has been made about the treaties prior to World War I reducing the ability of diplomacy to operate and generate a nonviolent accommodation. The current warlike speech from the officially neutral Germans, French and British are putting Europe in a similar position to 1913. A regional squabble is likely to spill over its borders through the blundering of statesmen.

Funnily enough, oil vol is coming off aggressively. The US-Iranian talks have so far yielded no breakthrough. The specter of Israeli action against Iran lurks in the air. Clearly, the energy supply exceeds demand, putting downward pressure on prices. However, it will not take much to change supply dramatically. Europe is exposed to tanker supply-whether that supply originates in Houston or Oman.

There are few safe havens in the current environment, which might explain the ebullient equity markets. In years past, the US Treasuries and short term USD deposits were the unquestioned flight to quality assets. Yes, gold has been in a run as has Bitcoin/Crypto. However, if you look at the performance of the Venezuelan Stock Index (Indice IBC) in the past 10 years, it has been a skyrocket. Has it kept up with inflation and the devaluation of the Bolivar? Probably not, but it is a simple and practical way to keep up, somewhat. Gold, for all of its allure, is not a trivial investment. If the investor holds it directly, there is cost in storage (and ascertaining its quality). If it is held in the form of a unit trust like the GLD, it incurs the same storage cost and is exposed to the broader risks of equity ownership. Bitcoin and crypto are also not simple for the average person. Managing a cold wallet is not easy and crypto exchange seemS to have security problems. Our contention is that the 401K investor has become the new pensioner in American politics. Any force which could cause a sustained drawdown in the SP500 index (and endanger the 401K) draws the ire of the entire political and financial leadership. Broad based equity indexes are the new flight to quality asset.

The cryptos and conventional fx were all stronger against the dollar. It is as if Ethereum decided to catch up to Bitcoin in one month. The futures rocketed and vol was higher. All other vols were down.

Hope springs eternal in the fixed income market. Last month, the expectations were for 100 bps in total cuts spread out over 4 discrete cuts, each 25 bps. Here we are 4 weeks later and the Fed does not seem to be in a rush to cut. As we've pointed out the Fed is not facing the opposite of the go-go 90s and 2000s. Any move they make is perilous. If they cut, peoples' inflationary expectations will grow. If they forgo cuts, they run the risk of a small recession turning into a debacle. The drumbeat of bad news isn't just US based. The Bank of Japan is poised to hike rates to stave off inflation. The trade drama also probably diminishes the need for Treasuries as a place to park the current account surplus. Moreover, the US Government's spendthrift ways mean that the size of the upcoming issuance will be massive, there is at least 200 Billion USD to be issued in the next week or two (at the writing of this update). In any event, vol was offered on all of the at the money vol.

There was no vol left behind. All of the index vol got smacked hard, on average vols were down 21%. The VIX level was down 24% and the vol of vix was also down 23%. The futures were all up dramatically. It is as if the bear market had never happened.

Gold continued higher. Again, if the fear is dollar based, moving to Gold makes sense. The move also extended in Platinum for the first time. Platinum exhibited higher vol. Vol was down for all other metals except the specialty aluminum options at the LME. Copper was higher at both the CME and LME.

Meats were strong again this month. Feeder cattle vol was up strongly, as was hog vol. Corn was down both in Chicago and Paris, with vol offered for both. Wheat was up slightly up. The CBOT Wheat contract vol was down significantly, while European wheat vol was up smartly. Soy meal was up, with vol falling, but bean oil vol was up dramatically.

Oil was up slightly on the month, but vol was absolutely crushed. We understand that perhaps the Houthi risk is diminished, but there are so many other overhangs. Natural gas was offered with vol offered. Of the entire energy structure, only ethanol showed a bid in vol.

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