Ukraine
What commodities will move in the 2nd year Russia-Ukraine War Russia-Ukraine War entered the second year. Most of the commodities skyrocketed after the invasion had returned to or below the pre-war level. Energy is the market focus but the price dropped below the pre-war level and might not have enough geopolitical moment to rebound unless the war fully escalates and spreads to other countries. The weakness of wheat price might reverse if Russia refuse to renew the export deal.
Energy products are the main focus in this war since Russia is the world’s key energy exporter. NYMEX WTI crude oil price started from USD92.10 as of the close of 23 Feb 2022, and reached an intraday high of USD130.5 per barrel in March. NYMEX Natural gas is even more volatile, jumped from USD4.623 per MMBtu to reach over USD10 in August. However, despite the sanction and price cap imposed by western countries, the energy exports from Russia maintained at high level, and European winter weather is relatively mild together with the effort to secure supply from non-Russia energy sources, the supply and demand situation is much less bad than many had feared, and the energy price retreated significantly and dropped below pre-war level. As of 24 Feb 2023, NYMEX Natural gas closed at USD2.548, while NYMEX WTI crude oil closed at USD76.32.
Assuming the war are restricted in Ukraine and haven’t spread to other European countries, the war will no longer have a material impact on energy price. Western countries don’t want to shut down Russia’s energy supply completely, they just don’t want Russia to make a lot of money from energy exports to finance the war. The ideal situation is Russia selling cheap oil and gas to global market. In fact, Russia is still exporting a lot of their energy products to China and India, and the reduced demand from them in the global market pressured the price. I can’t predict the outcome of a war, but a win by Ukraine might further pressure the energy price since Russia might probably need to aggressively sell their energy for war compensation and rebuilding the country. Even the war maintains the status quo for an extended period of time, it will not stimulus the energy price like last year since many countries had already reduced the reliance on Russia’s energy.
What I worry more is grain price. Russia and Ukraine together are supplying one third of global wheat. Many of the Ukrainian grain planted in the Southern and Central part of the country, that had been seriously affected by war. Ukrainian grain exports dropped nearly 30% in the last marketing year. Not only the plantation area will be affected, all the input including labour, fertilizer and chemical supply are also affected, not to mention the harvest and the logistic to export the grain. Grain export deal with Russia is expiring on 19 March, whether Russia will renew it could be a catalyst for market movement, and the lower price of Ukrainian grain because of this uncertainty might also reduce farmer’s willingness to plant wheat.
Russian grain production hasn’t been affected yet; in fact, the harvest of wheat is pretty good. When energy crisis didn’t realize, whether Russia will weaponize grain will need further monitor. At this moment, grain export is not targeted by western countries, so Russia might try to export as many grains as possible to improve their financial situation, but if the war situation turned sour, I can’t rule out the possibility of some form of export ban which might make the inflation situation in western countries more complicated.
CBOT wheat price started from USX 884.75 as of the close of Feb 23, and reached an intraday high of USX 1363.5 per bushel in March. As of 24 Feb 2023, it closed at USX 721.75. Of course, the weakness could also be explained by bumper crop from Australia and an expected high US production in the coming year. Technically USX 712.5 is an important support, and RSI is approaching oversold level. We might consider a long position @ 715, stop loss @ 680, target @ 800.
Disclaimers
Above information are for illustration only and there is no guarantee on the accuracy of the information. They should not be treated as investment recommendations or advices.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs www.tradingview.com
Rheinmetall bullish ascending triangleThe ascending triangle points to a potential increase in the value of Rheinmetall's stock. These indicators include a bullish trend in the stock's price over the past several months, positive momentum, and strong support levels. Additionally, historical data shows that Rheinmetall's stock tends to perform well during times of military threats or escalations, which may indicate that current global events could be contributing to the stock's upward trend.
Hopefully, the war in Ukraine will come to an end, but Rheinmetall is still looking strong, possibly indicating an upcoming real-world event.
It is important to note that technical analysis is not a guarantee of future performance and should be considered alongside other forms of analysis such as fundamental and news analysis. Additionally, it is also important to consider the company's overall financial health and any recent company-specific news or announcements.
No doom, gloom or pivot. Just one aliens TA.An alien trader landed on earth and was given a chart of the combined** US indices (futures). Luckily, and not coincidentally, he knew TA.
He had never heard of people like J.Powell and J.Cramer, or places like China, Ukraine and Russia.
this is what he saw:
Bullish:
- Broke out 'above' the main diagonal trend (bullish)
- Made a Higher High (bullish)
- Note that, on a VERY high TF, the Bull market rides on and up (see "Higher Range Frame" box)
Neutral
- Has arrived at the key POC (neutral) and is sandwiched between zones of lower past volume (LVN's)
- The 100MA/400MA was moving towards a "neutral cross" (the midpoint between the MA's is flat and not changing)
Bearish
In higher time/range frames the index has not made a new swing high. (see "Higher Range Frame" box)
NOTES
**There are multiple ways to merge ES, NQ and YM, as well as alternative indices like $NYA and Wilshire 5000. The *best* option depends on what it is used for (ex. a sphere is a good model of the earth for the astronomer, but not for the mountain climber). A simple average (ES + NQ + YM)/3 is ruled out because one point has a different value for each index. To address this, each index is weighted so that a 1 point change will imply the same change in $ terms (For weights see www.barchart.com
Alternative criterion for weighting include capitalization, number of stocks and beta weighting.
[i Epilogue - After watching a TA channel on You Tube for 5 min. he departed abruptly pausing only to grab a clean towel. He is believed to be following in the dolphins footsteps.
Dow Jones index Trump vs BidenUsing the largest market index to show comparison of data mainly the % market gains and growth differences between these particular 2 presidents. Some people im sure would like to know where their hard earned savings went that have invested into the markets. Its simple if you follow the money trail and as it stands currently the total U.S. security assistance to Ukraine to approximately $3.8 billion in arms and equipment since Russia launched its brutal and unprovoked full-scale invasion of Ukraine on February 24 a country that is not even a part of Nato. Further immediate military assistance to Ukraine, valued at up to $150 million worth of additional arms and equipment from U.S. Department of Defense inventories. These stats are from a press statement may 6,2022 state gov website. No links cause I was reprimanded by trading view moderators previously. At the same time the fed raises rates asking for more money and not using the funds to fix our own debt issue.
The West Takes Aim at Russian Oil MarketsAs tensions continue to escalate between the West and Russia, a new development has emerged in the ongoing struggle over oil shipments. The West has been using shipping insurance as a tool to put pressure on Russia, but this strategy has had limited success so far. Insurance is only available for shipments valued at less than $60 a barrel, and as it happens, Russian oil already trades just below this cap. As a result, it's not yet clear how much of an impact this will have on oil prices.
But this raises an interesting question: why would the West set the cap at this level? The answer, it seems, is that they've calculated it in such a way that it provides just enough incentive for Putin to keep pumping oil. This is because the West is understandably concerned that Putin might choose to remove Russian oil from the international market, causing prices to rise significantly. And if global oil prices do rise much above where they currently are, the situation could become much more heated.
This is just one example of the complex dance that goes on between petronations and the West. On the one hand, the West has the ability to put pressure on petronations by limiting their access to the global market. But on the other hand, petronations have the power to put significant pressure on the West via energy prices. So it's a delicate balancing act, and it's not always clear who has the upper hand.
But what does this mean for the future? Well, it's difficult to say for certain, but it's clear that the West is trying to find a way to put pressure on Russia without causing a major disruption in the global oil market. And if they're successful, it could have significant implications for the ongoing struggle between the West and Russia.
Of course, there are many other factors at play here, and it's impossible to predict exactly how things will unfold. But one thing is clear: the discussion around this issue is only going to become more heated as global oil prices continue to fluctuate. So it's definitely a topic worth keeping an eye on in the coming months and years.
US PPI data and wayward projectiles affecting EUR/USDThe Euro has lost some ground against the US dollar after reports that Russian missiles had struck inside the Polish border killing two polish citizens.
The reason for the drop in the Euro is because Poland is a NATO member and the potential results of this, yet unverified report, is a retaliation from Polish and/ or NATO forces. Poland has previously noted that they are ready to defend their sovereignty in the face of accidental or purposeful attacks within its borders which could induce NATO forces to join in on the conflict too. NATO and US authorities are currently investigating the report before commenting publicly. It could be that markets wait for confirmation from these two authorities before considering their risk appetite for the Euro the rest of this week.
The Euro is still up against the greenback but was registering greater gains before the missile report hit the news flow. The reason for the strength in the Euro is due to the US Producer Price Index (PPI), a measure of wholesale inflation, coming in softer-than-expected. October’s PPI rose +0.2% month-over-month in October of 2022, below market forecasts of +0.4% adding fuel to the theory that inflation in the US has peaked and is now slowing. The EUR/USD was heading toward 1.0500 before investors were spooked by the missile report, sending it as low as 1.0280. It has since recovered to close to the 61.8% Fib level between this recent high and low
Previously, the EUR/USD rallied after the release of the US consumer inflation data (on November 11th) which was the first indicator that US inflation has reached its peak. The EUR/USD is still up 2.7% over the week.
DXY with BTC historyHere you can see that the 4 year BTC cycle lines up well against the oposite corelation against DXY. So much history in 20 years with some important major events to gander at.
Why does the DXY drop when FTX files bankruptcy? So many questions about why the DXY moves the way it does.
Is this the Bitcoin bottom? Not according to the 4 year cycle. We could be headed into a bull trap in the next 4 months.
How far will it go?
50k is possible if you take a symmetrical triangle.
38k is highly likely if you are using the Fibs,
30k is an absolute if you take into count the BTC LONGS have to have to exit their liquidity.
The break even point for the millions of long positions put in is around 30k to break even.
When LUNA was hacked that is when a massive amount of longs went in. When Celsius got hacked another set of missive longs were added.
Whats the next all time lows?
10k, there is 1 open CME gap on the daily that hasn't been filled yet
7.5k, This is the last lowest trend line as well as the .886 fib which would conclude our "90% drop from all time highs"
Whats the next all time high?
hard to tell. I'm guessing 124k from that 7.5k, then a drop 50% back down to 70k, then up to 224k.
Check this chart in Dec of 2024 to see if 124K is then next BTC top
AUD/USD eyes job dataAUD/USD is considerably lower today, trading at 0.6273, down 0.57%.
Australia releases employment data on Thursday, with the markets expecting that the report will show that the labour market remains robust. The economy is forecast to have created 25,000 jobs in September, following the 35,000 gain in August. Unemployment is expected to remain at 3.5%. The strong labour market has enabled the RBA to continue its sharp rate-tightening cycle, with the cash rate currently at 2.60%. The central bank plans to continue raising rates, as the focus is on curbing inflation, which came in at 6.8% in August. The October inflation report will be especially significant, as it will be released just days before the RBA meeting on November 1st (in addition to the quarterly CPI report, Australia has started releasing a monthly inflation release, but it covers only 70% of goods and services).
Higher rates will curb inflation eventually, but the cost could be an economic recession. Already, households are straining their budgets as inflation remains red-hot and higher interest rates are increasing borrowing repayments. This will likely dampen consumer spending, a key driver of economic growth.
The Australian dollar has hit hard times. Since August 1st, AUD/USD has plunged 550 points, as risk sentiment has taken a beating and the Federal Reserve's aggressive tightening has boosted the US dollar. China's economy has been struggling and the escalation of the Ukraine conflict, with no end in sight, has sapped the appetite for risk-related currencies like the Australian dollar. With the Fed likely to deliver more oversize rate hikes and China and Ukraine likely to remain hotspots, the outlook does not look bright for the Aussie.
AUD/USD faces resistance at 0.6331 and 0.6460
0.6250 is under pressure in support. Below, there is support at 0.6121
LMT Lockheed Martin Options Ahead Of EarningsLooking at the LMT Lockheed Martin options chain, i would buy the $405 strike price Calls with
2022-11-18 expiration date for about
$9.50 premium.
Looking forward to read your opinion about it.
Taf's Gun to the HeadLooking buy Nat Gas on the backdrop of a strong daily support holding.There is also a potential bullish inverse Head and Shoulders forming.
Entry:6.729
Target:7.282
SL:6.503
RR:2.45
Disclaimer – Signal Centre. Please be reminded – you alone are responsible for your trading – both gains and losses. There is a very high degree of risk involved in trading. The technical analysis , like all indicators, strategies, columns, articles and other features accessible on/though this site is for informational purposes only and should not be construed as investment advice by you. Your use of the technical analysis , as would also your use of all mentioned indicators, strategies, columns, articles and all other features, is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness (including suitability) of the information. You should assess the risk of any trade with your financial adviser and make your own independent decision(s) regarding any tradable products which may be the subject matter of the technical analysis or any of the said indicators, strategies, columns, articles and all other features.
USDTUAH, Ukrainian HryvnaThe Ukrainian Hryvnia has traded in a range around $40 for the last 3 month.
It is expected the Hryvnia will retest support of the range at $38.88.
Afterwards there should be a breakout of the range in either direction, but the trend is upward and at the moment and a breakout in the upward direction is expected.
RUBUSD - symetric triangleRUBUSD is about to make a move - chances are it breaks up or down - for me chances for down are a bit bigger than up.
Lets see :)
AUD/USD falls to new 18-month lowAUD/USD continues to lose ground and can't find its footing. The Aussie started the week on the wrong foot, with a decline of 1.0% on Monday. In today's European session, AUD/USD is trading at 0.6266 down 0.52%. Earlier the day, the Australian dollar fell to 0.6247, its lowest level since April 2020.
Australia has posted weak numbers this week, adding to the downward pressure on the ailing Australian dollar. The Services PMI fell into contraction territory with a reading of 48.0 in September, down from 53.3 in August, as the uncertain economic outlook is weighing on business activity. Business confidence levels are down, with NAB business confidence slowing to 5 in September, down from 10 in August. Westpac Consumer Sentiment indicated that consumers are also in a sour mood, with a reading of -0.9% in September after a gain of 3.9% in August, which was the sole gain over the past 11 months.
Risk appetite has been dampened by the escalating crisis in the Ukraine war, with Russia annexing parts of occupied Ukraine and firing missiles at civilian targets. As well, the energy crisis is looming over Western Europe, just weeks ahead of winter. This is weighing on the risk-sensitive Australian dollar.
In the US, inflation releases have taken on added significance, as the Federal Reserve has designated soaring inflation as public enemy number one. The US releases PPI data on Wednesday and CPI a day later. Headline inflation has dropped over the past two months, but remains at 8.3%. Unless headline and core inflation both surprise with much lower readings than expected, I don't anticipate any change in course from the Fed. If inflation underperforms, the US dollar could lose ground. Conversely, a higher-than-expected inflation report would be bullish for the US dollar.
AUD/USD tested resistance at 0.6503 in the Asian session. The next resistance line is 0.6607
There is support at 0.6433 and 0.6329
NZD/USD tumbles despite RBNZ hikeNZD/USD started the day with gains but has reversed directions and is sharply lower in the North American session. The New Zealand dollar is trading at 0.5657, down 1.38%.
As expected, the Reserve Bank of New Zealand delivered a 0.50% hike, bringing the benchmark to 3.50%, its highest level since 2015. The RBNZ has now hiked rates at eight consecutive meetings and even discussed a super-size 0.75% increase at today's meeting.
The RBNZ has been aggressive with its rate-tightening cycle, and there's likely more to come. The rate statement noted that "core consumer inflation is too high" and the labour market remains tight, a signal that the central bank will continue to tighten until inflation has peaked. This means that the November meeting will likely bring a rate hike of 0.50% or 0.25%, depending on economic data and the inflation picture. Inflation hit 7.3% in Q2, up from 6.9 in Q1.
One of the dangers of a steep rate-tightening cycle is choking off economic growth and Moody's rating agency said after today's rate hike that a soft land was "increasingly unlikely". The RBNZ might disagree, pointing to a 1.7% gain in GDP in Q2 and a robust labour market. The economy has proven strong enough to bear sharp rate hikes and Governor Orr is looking for a peak in inflation before easing up on rates.
September was a disaster for the New Zealand dollar, which plunged a staggering 8.5% and fell to its lowest level since March 2020. NZD/USD has rebounded 2.0% in October, but the currency faces significant headwinds. The escalating conflict in Ukraine, which has seen President Putin annex 15% of Ukrainian territory, and a hawkish Federal Reserve are likely to continue weighing on the New Zealand dollar in the short term.
NZD/USD is testing support at 0.5712. Below, there is weak support at 0.5639, followed by 0.5522
There is resistance at 0.5829 and 0.5902
NZD/USD - All eyes on RBNZThe New Zealand dollar continues to rally. In the European session, NZD/USD is trading at 0.5746, up 0.43%.
The Reserve Bank of New Zealand holds a meeting on Wednesday. The RBNZ has been aggressive with its rate tightening and is expected to raise rates by 0.50%, which would bring the cash rate to 3.50%, the highest since 2015. Governor Orr has hinted that the rate cycle could be coming to a close soon, but that is still more work to do to tame inflation. In Q2, CPI rose to 7.3%, up from 6.9% in Q1. The economy has performed well, with GDP rising 1.7% in Q2, along with a strong labour market and solid wage growth. This means that Orr can continue to raise rates above 4.0% in the knowledge that the economy is strong enough to handle additional rate hikes.
September was a disaster for the New Zealand dollar, which plunged 6.5% and fell to its lowest level since March 2020. With the US dollar taking a breather, NZD/USD has rebounded this week, with gains of 2.70%. The volatility could well continue, and the New Zealand dollar is likely to face more headwinds in the short term.
First, the risk-related currency has been hit hard as risk apprehension has soared. The war in Ukraine has escalated and the energy crisis facing Western Europe could tip many countries into recession this winter. China's economy has been slowing down, which means less demand for New Zealand exports.
Second, the Federal Reserve remains in aggressive mode and is committed to curbing inflation, even if that results in a recession. US Treasury yields have been on an upswing, propelling the US dollar higher against most of the major currencies.
NZD/USD is testing support at 0.5712. Below, there is support at 0.5639
There is resistance at 0.5829 and 0.5902
EUR/USD falls to new 20-year lowThe euro is in negative territory today, after posting six straight days of losses. EUR/USD is trading at 0.9553 in Europe, down 0.41%.
September can't end fast enough for the euro, which has declined a massive 4.8% against the dollar. Earlier today, EUR/USD fell to 0.9536, its lowest level since June 2002. With the war in Ukraine escalating and Nord Stream reporting that its pipeline was deliberately damaged, it's hard to be optimistic about the euro's outlook.
The sham referendums in Russian-occupied Ukraine have ended and predictably, the vote to join Russia was close to 100%. Moscow is expected to declare on Friday that the territories are being annexed to the Russian Federation, sparking fears that Russia could resort to nuclear weapons to defend what it claims is Russian territory.
There was a further escalation in the Ukraine war last week, as explosions at the Nord Stream 1 and 2 pipelines are suspected to have been sabotaged. Nord Stream 2 has been shelved and Nord Stream 1 has been shut down for weeks, and any faint hopes that Russia might renew gas exports through Nord Stream have been dashed. European natural gas prices have jumped in response to the news.
The US dollar continues to rally, and 10-year Treasury yields pushed above 4.00% earlier today, for the first time since 2008. The markets are showing a healthy respect for Fed hawkishness, even after inflation weakened in the past two inflation reports. There is some optimism that the current rate-tightening cycle is reaching its end, with Fed member Evans stating that it will be appropriate to slow the pace of tightening at some point. For now, the US dollar has momentum, driven by an aggressive Fed and weak risk appetite.
EUR/USD is testing support at 0.9554. Next, there is support at 0.9419
There is resistance at 0.9640 and 0.9711
Australian dollar extends lossesThe Australian dollar has edged lower today. Earlier, AUD/USD dropped to 0.6654, its lowest level since May 2020.
Risk sentiment has soured after Russia announced that it is moving quickly to annex territories that it has captured in Ukraine. European leaders quickly denounced the move as a "sham". An annexation would seriously escalate the conflict in Ukraine, as Russia could argue that any fighting in the annexed territory was an attack on sovereign Russian land. President Putin also ordered the mobilization of 300,000 reservists, an indication of how badly the campaign is going for Moscow.
All eyes are on the Federal Reserve which wraps up its policy meeting later today. The Fed is expected to hike by 0.75%, which would bring the benchmark rate to 3.25%. This move would be significant as rates would move above the neutral rate level of 2.5%, into restrictive territory. There is an outside chance that the Fed will raise rates by a full point, which would unnerve the markets and likely send the US dollar sharply higher.
Aside from the rate hike, investors will be keenly monitoring the Fed's latest quarterly forecasts for the economy. This will include projections for unemployment and interest rate levels. The Fed is expected to remain hawkish and argue that the price of higher unemployment and a further rise in rates is the painful but necessary price to rein in inflation.
The RBA minutes of the September meeting didn't contain any surprises. The minutes reiterated the message that further rate hikes are coming, but the size of the hikes will be data-dependent. At the meeting, members argued over whether to raise rates by 25bp or 50bp - in the end, the Bank went for the latter option, bringing the cash rate to 2.35%. With no inflation or employment data prior to the October meeting, RBA members may again be split over how much to tighten. This should make for an interesting meeting that could trigger volatility from the Australian dollar.
AUD/USD has support at 0.6623 and 0.6523
There is resistance at 0.6769 and 0.6869
Cup And HandleWhat do we have?
1) A pattern beloved by all boomers - Cup and Handle
2) Money printing because of covid and war
3) Mass draft and mobilisation of russian citizens who was serving in the army (90% of them did) happening since today
4) Potential North Korea and Russia Alliance to revenge for Korean War
5) Maximum panic and end of the world in the head of traders is possible, 69% chance
golden week, probabilities in all over the world ?Hi
Can you imagine what happens when the world goes into an undesirable war?
What If Ukraine Wins?When the Russia-Ukraine conflict first broke out, world markets were in a complete shock. Equities fell and commodities rose as geopolitical tension became the dominant price driver.
As fighting dragged on from weeks to months, other important factors took over. Besides the traditional supply and demand variables, we have witnessed a record shattering inflation rate, aggressive rate hikes by the Fed and ECB, and growing worry of a global recession.
While geopolitical risk has been put in the back burner, it never went away. In recent days, Ukrainian forces launched a military offensive and retook Kharkiv, a Russia-occupied stronghold in eastern Ukraine.
Would this be a breakthrough in the 200-day war? How would it impact world markets? Should we adjust previously employed strategies given this new development? To answer these questions, let’s first revisit our Three-factor Asset Pricing Model:
Asset Price = Intrinsic Value + Market Sentiment + Crisis Premium
Where,
• Asset Price – Expected Price of an asset at time t,
• Intrinsic Value – Trader defined fair value. It could be estimated by fundamental supply and demand factors or technical indicators. If you don’t have one, simply use the market price. This is our baseline price.
• Market Sentiment – Bullish or Bearish sentiment. This can be considered the supply and demand of investor money. More buying pulls the price up above the intrinsic value. More selling pushes the price down.
• Crisis Premium – When a crisis breaks out, it could introduce an “Event shock” to the market. It is a dummy variable, with 1 denoting a crisis, and 0 indicating the lack of it.
In our exploration of event-driven strategies on binary outcomes on June 16th ( ), we defined the Russia-Ukraine Conflict by two possible outcomes: War and Peace .
War includes all scenarios that the Ukraine conflict would continue or intensify.
For the second outcome, how could peace be restored? It could come as a Russian victory (Win), a peace deal between Russia and Ukraine (Draw) or a Russian defeat (Loss). The recent Ukrainian military advances raise the possibility of an armistice.
Would we see a reversal of the initial crisis shock if peace is in reach? Let’s examine the following commodities.
Wheat CBOT:ZW1!
In 2021, Russia accounted for 17% of global wheat export, while Ukraine had a 11% share. CBOT Wheat Futures shot up 75% two weeks after the conflict started. The price shock was a market response to “perceived” loss of 28% of global wheat supply in a worst-case scenario. Market panic tends to over-shoot. Irrational price movement could be totally out of proportion of the actual supply loss.
As the conflict continued, Russian wheat found new markets in China and Iran, despite an international sanction in place. In August, Ukrainian grains resumed shipping through the Black Sea thanks to a Russia-Ukraine deal brokered by Turkey.
Wheat price pulled back to below $8 a bushel as investor realized that this big portion of wheat supply is not totally wiped out even the fighting never stopped.
CBOT Wheat is quoted at $8.69 a bushel last Friday, almost at the same price level when the conflict started. Where will it go next?
• If fighting intensifies (War), wheat price could possibly go higher on the back of high energy price and high interest rate.
• However, if a peace deal is struck (Peace), release of huge supply from both Russia and Ukraine could send wheat price sharply down.
We employed a Strangle Option Strategy on CBOT Wheat Futures in June, which carried an out-of-the-money (OTM) Call option and an OTM put option. We expected a big price move as imminent, but its direction uncertain. It appears that we are in a similar situation again.
Natural Gas NYMEX:HH1!
NYMEX Henry Hub Natural Gas Futures was trading at approximately $4.50 per MMBtu before the conflict. It went up 70% in the following two months and was more than doubled to $9.2 by early June.
After recession fear sent natural gas price down to $5.5, it has come back up above $8.00 as Russia cut off natural gas supply from the Nord Stream 1 pipeline. This triggered a major energy crisis across Europe.
What would happen next?
• War: Natural gas price will surge higher. Liquified natural gas from the US is more expensive, and not adequate to replace the Russian supply. Europe will be looking at an extremely cold winter.
• Peace: Sanctions will be ended. The huge oil and gas supply from Russia would flow back to global market, sending energy price sharply down.
Similar to CBOT Wheat, we may consider a Strangle Option Strategy on NYMEX Henry Hub Natural Gas Futures, and to buy OTM call option and OTM put option simultaneously. This trade is based on our expectation that a big price move is imminent, but its direction is uncertain.
Euro-USD Exchange Rate CME:6E1!
Interest rate parity (IRP) states that the interest rate differential between two markets is equal to the differential between the forward exchange rate and the spot exchange rate. As Federal Reserve started raising interest rates in March, Euro has seen the biggest depreciation against the dollar in 20 years.
The battle between USD and Euro may also be viewed as a game of relative strength.
• US could raise interest rates faster than Europe;
• US could control inflation better than Europe;
• US unemployment could be lower than Europe;
• US economy could perform better than Europe, soft landing vs. hard landing;
• Energy crisis could worsen in Europe as winter approaches.
A peace deal could change everything. It would validate the strength of European nations in support of Ukraine. Market confidence and bullish investor sentiment would be powerful enough to reverse the steady decline of Euro currency.
Peace, Euro up. War, Euro down. It looks like a Strangle option strategy to me again.
The Equity Market CME_MINI:ES1!
Up to this point, I have been fairly bearish about US Equity Indexes. Based on the Discounted Cash Flow (DCF) asset pricing model, I expect Fed Rate Hikes and High Inflation to suppress stock valuation.
• High interest rate increases the discount factor WACC (Weighted Average Cost of Capital), the denominator of the DCF equation
• High inflation increases production cost and reduces sales volume, which results in smaller free cash flow (CF), the numerator of the same equation
• The combined effect is a lower stock valuation
Small-cap stock indexes such as the Russell 2000 could be in a dire situation when the fear of recession becomes a real one. Smaller companies tend to have higher cost of capital and could suffer bigger profit loss compared to the Blue Chips.
New developments in Ukraine could mean an end of the war. In our three-factor model, the crisis premium could go to zero.
Typically, only one factor dominates the market at any given time. In this case, a bullish sentiment could take over. It could drive stock price higher. Investors in a celebratory mood simply discount all the bad news for a while.
Geopolitical dynamics is a game changer that investor can’t afford to ignore. Recent development in Ukraine has put a new layer to the series of discussions around “The Great Wall Street Repricing”. If you have made directional bets, this may be a good time to take cover.
Financial market is extremely volatile this year. Getting an information edge increases your odds of success in managing risk. I suggest leveraging real-time market data for a better gauge of market situation. Tradingview users already have access to delayed data. A Pro user could upgrade to real-time CME market data for only $4 a month, a huge discount at the time of high inflation.
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.
