MES: Ice and Fire Could Blow the U.S. Economy Off its CourseCME: Micro E-Mini S&P 500 Futures ( CME_MINI:MES1! ) #Microfutures
In “A Song of Ice and Fire”, American author George Martin painted a mystical land where dragons spit out flame to destroy a whole city and a winter that last one hundred years. Game of Thrones, the popular HBO TV series, was adapted from Martin’s book.
In 2025, we seem to be reliving these moments. California wildfires have claimed dozens of lives, burnt down thousands of homes, and caused an estimated $250 billion in damage.
Meanwhile, Winter Storm Blair raged coast-to-coast, bringing heavy snow across the Great Plain to Mid-Atlantic. The storms shut down interstate highways, caused thousands of airport delays and racked up 350,000 power outages. At the time of this writing, Polar Vortex is bringing freezing temperature back to the lower 48 states.
These weather perils are very destructive. In my opinion, the forces of nature could cause real damage to the entire U.S. economy.
Firstly, we could see a rebound in inflation
The Bureau of Statistics (BLS) reported that US CPI increased 0.4% in December and went up 2.9% year-over-year (YoY). Of which, the energy index decreased 0.5% YoY with energy commodities gasoline and fuel oil falling 3.4% and 13.1%, respectively. In contrast, energy services such as electricity increased 2.8% and natural gas (piped) rose 4.9% YoY.
The chart shows a correlation between CPI and natural gas prices. The underlying logic is the U.S. economic reliance on natural gas. According to the Energy Information Administration (EIA), about 43.1% of the electricity in the country was generated by natural gas.
In “Nat Gas: Trading the Weather”, I explained how cold temperatures increase natural gas demand for generating electricity and heating up homes.
Higher natural gas prices affect not just the storm-hit regions, the entire country also bears a higher cost for energy services. Larger utility bills raise the cost of producing and distributing all goods and services.
A leading indicator: When natural gas prices rise, inflation will likely go up.
Conclusion: As natural gas went up sharply, we could expect a higher CPI for January.
Secondly, we could see economic slowdown and higher unemployment
Many businesses in the passage of winter storms suffered loss of sales. People in parts of Los Angles were evacuated. The total cost for insurance payout, loss of revenue, debris cleanup and rebuilding amounts to hundreds of billions of dollars. Total US GDP was $28 trillion last year, or about $2.3 trillion per month. A quick calculation shows that the weather perils could shave off 1/10th of the US national output for the month of January!
Many S&P 500 companies are based in California or in the storm-hit regions. The actual damage to them will be revealed when they report quarterly earnings in April and May. The Bureau of Economic Analysis will report Q1 GDP on April 30th.
US unemployment has been on the rise since mid-2023. In my opinion, the A.I. driven technological revolution is responsible for many High-Tech layoffs. On January 10th, the BLS released its nonfarm payroll report and showed that unemployment in the Information sector was 98,000 in December 2024, up from 86,000 a year ago.
December is the busiest month for the Retail sector. However, retailers report total unemployment of 897,000 for the month, up 87,000 or 11% from December 2023.
When the BLS updates its payroll report in January, I expect to see higher unemployment data. The month-to-month data could be even worse, as January is usually a slow month after the December holiday season. In addition, winter storms and wildfires would push more businesses to shut down and lay off employees.
Finally, the uncertainty around economic policies under the new administration
I expect President Trump to raise “ice and fire” on his own. If his first term is any guide, we would see plenty of drastic policy changes impacting various industries. Uncertainties are not well embraced in the world of investment. Any new policy initiative could bring the market to chaos when the news breaks, regardless of its long-term effect.
During the first term, important policies (such as new tariff) were usually announced from Twitter tweets. This time around, they would likely come out of Truth Social tweets.
Trading with Micro E-Mini S&P 500 Futures
In my opinion, the U.S. stock market will face more volatility in the coming months. Key economic data could be disappointing for investors.
• When the January nonfarm payroll report is released on February 7th, monthly employment data could trend lower, while unemployment rate ticks up. Signals of economic weakness could send the stock market lower.
• When the January CPI data is released on February 12th, the headline inflation could move higher. If this is the case, the Fed is less likely to lower interest rates. The stock market will face downward pressure.
• The Fed will meet on January 29th. According to CME Group FedWatch Tool, the futures market prices a Fed decision of no-change at 97.9%. However, the market consensus shows that Fed Funds rates could drop to 3.25-4.00% by December, indicating 1-4 rate cuts in 2025. The Fed has not committed to any further rate cut.
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Given these scenarios, a trader could explore short-term opportunities by shorting the S&P 500 prior to the Big Report Dates.
The CFTC Commitment of Traders report provides further support to this thinking. The latest data shows that, as of January 14th, Leverage Funds hold 151,543 long positions and 448,908 short positions for E-Mini S&P 500 futures.
Despite the S&P nearing its all-time high, “Smart Money” already turns bearish. Shorts outweigh longs by a 3-to-1 ratio.
• They are also bearish on Nasdaq 100, by a 1:2 long-short ratio (43,254 vs. 82,724)
• This contrasts with the Dow contracts sharply. Leverage funds own Micro Dow by a 3:2 long-short ratio (17,591 vs. 10,051) during the same period.
The MES contracts offer smaller-sized versions of CME Group’s benchmark S&P 500 futures (ES) contracts. Micro futures have a contract size of $5 times the S&P 500 index, which is 1/10th of the E-Mini contract.
Micro contracts are very liquid. CME Group data shows that 1,095,979 contracts were traded on Thursday, January 16th. Open Interest at the end of the day was 129,228.
Buying or selling 1 MES contract requires an initial margin of $1,525. With Friday closing price of 6,040, each March contract (MESH5) has a notional value of $30,200. Compared with investing in stocks, the futures contracts offer a built-in leverage of about 20 times (=30200/1525).
Hypothetically, if S&P futures price falls 10% to 5,436, the price change of 604 points (6,040-5,436) will translate into $3,020 in profit for a short position, given each index point equal to $5 for the Micro contract. Using the initial margin of $1,525 as a cost base, the trade would produce a theoretical return of 198% (=3020/1525).
The risk to short Micro S&P is that the US stock market continues its spectacular rally. To limit the downside risk, a trader could set up a stop-loss when entering a short position.
For illustration, a short trade executed at 6,040 could be combined with a 6,200 stop. If the S&P goes up to 6,500, the trader’s position would be liquidated well before that. The maximum loss would be $800 (= (6200-6040) * $5).
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
