Month End Summary of Commodity Futures and Options

We are pleased to welcome you to our November 2024 month-end report.

The most consequential election in history, ever, came and went. The equity markets and more than half the country cheered the ascendance of Trump to the Presidency of the US. Democracy may or may not have been saved, but the bull market certainly was preserved. On the one hand, the rally is in full effect. However, the tariff talk from the incoming President is sure to be destabilizing. The threats to cut off BRICs countries should they participate in a dollar replacement effort is probably bluster. Oddly enough, a sober review of US government policy would suggest that it is the biggest factor in the move of countries to bilateralize trade. The confluence of vicarious sanctioning of foreign actors and reporting requirements most certainly make dollar transactions more troublesome than they have been. The presumed tariffs and potential uncertainty in trade add to the uncertainty in the world. In the long run, trade barriers will facilitate all sorts of transshipment games. Is it a Chinese good if the components are assembled in Vietnam? The net result will be more expensive finished goods for consumer nations. The renewed interest in the decline of American and Western manufacturing is a long term positive. Perhaps the tariff madness will help people think about why so many industries continue to leave their home countries. We hold the position that wage gaps, after accounting for extra management costs and time lags, long ago ceased to be material enough for the move of industries away from the US. One cannot ignore the effect of hostile legal and regulatory environments in the West. The DOGE initiative featuring Elon Musk and Vivek Ramaswamy might be a step in stopping the growth of the regulation state. The incoming administration has many audacious goals. Construed in the broadest terms, these goals amount to a repudiation and rejection of the entire arc of the BushII-Obama-Biden policies. Many of the incoming administration's goals are internally in conflict with themselves. Less regulated trade does not, for example, mesh well with increased tariffs and restrictions. Making real changes will also entail expenses. You cannot prune the government's labor force and expect them to be immediately assimilated into private sector work. Musk, when he purchased Twitter, reputedly fired 80% of his staff and still managed a re-write of the software stack. While this was wonderful for Twitter/X, could the country survive a similar culling of the sectors of the economy that have blossomed in the past 20 years? Optimism is the default mode, but a small degree of risk aversion strikes us as prudent. A small rally in equities and yields might have been a good thing. The country escaped the horrid outcome of a contested election. Many controversial societal movements are finally being challenged. However, plumbing new highs ever more boldly might be over doing it. There are many shoes that will probably drop after the new administration comes into office. None are likely to be positive.

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

Trump is the man for all seasons and all currencies. On the one hand, the nosebleed move in BTC and ETH was based on the widespread belief that Trump was open to crypto, unlike Harris. The Trump victory and Microstrategy's Saylor have pushed BTC to dizzying heights. The front month futures rallied 41%. ETH futures were no slouch, moving up 45%. ATM vol in ethereum was up, but down slightly in BTC. The futures in other currencies were mixed and marked with moderate moves. Implied volatility was down across the board. A strong dollar would seem to work against American exports and would be internally inconsistent with the attitudes of American business. Add this observation to the pile of things that the incoming administration has two minds on. The strengthening dollar coupled with higher returns of US Treasuries would seem to argue for more capital inflows and a current account which grows (it will be cheaper and more efficient for Americans to buy abroad). The move in implied vols is also a little hard to understand. The Trump victory in the US may spark similar types of candidates in Europe. There are signs of a desire for German-Russian rapprochement initiated by the Germans. Apparently, buying high priced LNG at uncertain spot prices is not as beneficial to their economy as cheap Russian gas under 10 year formulaic contracts. Our view is that Europe will not make many changes, but a cold winter and continued economic stagnation might change the calculus. More interestingly, the outgoing US administration has seen it fit to agitate the Russians by providing targeting assistance to its Ukrainian allies. Russia responded with a demonstration strike delivered by a new class of missile. The widespread belief that the incoming President can coax peace in the Ukraine is most likely wishful thinking. There isn't much that can be offered to the Russians, while not alienating the Ukrainians. The specter of a non-nuclear strike by these missile complexes puts pressure on the assumptions of peace cemented by Mutual Assured Destruction. What happens with a Russian strike on US 'Aegis On Shore installations' in Poland and Romania? Nassim Taleb points out that it isn't the thing in the belly of the distribution that typically kills you. It is the small probability, large consequence outcome that does it.

Rates backed off this month. This is probably consistent with the sense of relief that the election resulted in a clear direction. The rally in rate futures occurred in the last week of the month. There have been some fireworks around Jerome Powell's tenure as Fed Chairman. Initially, reports suggested that Trump was looking for ways to oust him. Perhaps the market is relieved that this doesn't look possible. While Powell has not cut rates as aggressively as some wanted, he has hinted at rate cuts in the near future. The free fall in commercial real estate seems to be persisting. Many commentators point to recurring downward revisions in economic numbers. A great headline number is then revised downward in subsequent releases. The inflation genie is out of the bottle and isn't going back. The potential disruption in patterns of trade that a Trump tariff regime is likely to engender will not help prices. Unlike previous episodes, squeezing energy prices isn't likely to lead to any major reduction in price levels. As usual, we are skeptical that there are many cuts coming and the ones that come might be delayed a bit. Note also that market rates went up after the last Fed decision to lower the discount and fed funds rates. Markets have a voice in the market price of loanable funds. Looking at our four panel charts, it is clear that implied volatility came out of the market almost immediately after the election. The most interesting feature of the move is that shift from put skews to call skews. That is the price to insure against declines in the futures (or rises in the interest rate) fell, while the price to protect against falling rates rose.

US Equity Index futures continued their tear. SP500 was the laggard, only up 5% this month, with Russell and Nasdaq up closer to 10%. Vol was crushed. The rally has obliterated implied volatility levels in SP500 and caused the VIX index to tumble 8.37 points (38%). It is hard not to view this move as a blow off rally. Optimism is great, but even if all of the incoming President's initiatives are good and enacted, it will take years to see the results. There are all sorts of reasons to suspect the road will be bumpy and involve quite a few switchbacks. There are also persistent rumors around impropriety at Super Micro implicating NVIDIA as well. The tech industry survived Silicon Valley Bank's demise. Would tech and the broader indexes survive any problems at NVIDIA?

Metals, with the exception of Lead and Nickel, were down. Gold had a brief rally last month. Perhaps this was some sort of safe haven buying that evaporated once the election resulted in a clear victor. Perhaps the surge in Bitcoin has siphoned off the gold bugs. Palladium, which was being reviewed for extra sanctions, also declined this month. Vol declined for most of the metals we cover. There are many effects to disentangle. This is most likely a weak season for manufacturing. The world's factory, China, has hard to understand buying and stockpiling habits. Perhaps their metals stockpiles are lingering a bit longer than expected or they've delayed purchases to see what happens in the US process. Are tariffs part of some bluffing exercise or is there a real possibility of trade restriction?

European Corn was up 2% and vol went screaming up. The product moves quite a bit differently from the US counterpart. US Corn was up about 5% and vol came off. Cattle was up. Wheat was down in both the US and Europe. Rapeseed was down in Europe and soybeans were down in the US. The moves in vols were opposite. Rapeseed vol was up while soybean vol was down. Soybean oil was down 10% and vol up 400 Bps.

There is a lot of back on forth on energy related to the incoming administration. The hope seems to be one centered around forcing oil down $10-20 a barrel. This would have many positive results. US Inflation would moderate, though not as much as many would believe. It would contain rivals like Russia, Saudi Arabia and Iran. Oil was down this month. It is remarkable that with the wars and fighting in the Middle East (whether it is Gaza, the West Bank, Lebanon or Syria) and the effective closure of the Red Sea, why prices are so placated. In prior times, Brent would be at $110 with hedgers buying calls at $200. There is an argument to be made that the US should want higher energy prices. It is a highly profitable industry on average, and the swing shale producers would see more marginal wells become profitable. Moreover, higher prices would be a further inducement for capital inflow. You can build a factory in energy-poor Europe, or spend the money in Texas and avoid shipping costs and risks. Implied volatility in both Brent and WTI was down. Biden's decision to drain the SPR has still not had any real consequences. However, an escalation in Europe or the Mid East can change that dramatically. The arrival of a winter storm in the North East has had minimal effects so far. The price of heating oil is down and implied vol is down as well. Natural gas seems to have found its footing after several years of meandering. Prices moved up with vol. There is a lot that is happening. A very strong cold snap in Europe coupled with Russian bombing of Ukrainian storage facilities could be adding to demand for export of US LNG. Additionally, we have winter storms occurring steadily over the past couple of weeks.

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