Cattle prices have been on a downward trend since the 2014 highs. August feeder cattle, as we’ll discuss specifically, are trading at $143 per hundred weight(cwt), last year they were at $194 and at $182 the year before that. Over the last ten years there have only been two significant periods under our current prices. We’ll examine the placement and marketing numbers as well as the choice vs select spread as it relates to the domestic demand we believe will drive prices seasonally higher through the end of the summer.
The Brexit vote caused a spike in volatility by creating an instant, “risk off” trade. The ensuing sell-off appears to have created a buying opportunity in unleaded gas futures that should continue to be supported by growing domestic demand through the summer vacation season.
This Week in Geopolitics
Is Brexit the End of the EU?
By George Friedman
June 27, 2016
The vote has come and gone. A major European nation has chosen to leave the EU. The markets have had their obligatory decline. A weekend has passed. It is time to think about what exactly has happened… and what it means, if anything.
The late summer weather is a major variable in the natural gas market as North America heats up and more electricity is generated by natural gas to power the air conditioners. This year seems to be making up for lost time since El Nino played its predicted part in a long cool, spring. The National Oceanic and Atmospheric Administration (NOAA) has officially declared this record setting El Nino event, over. This is important as we are currently at the seasonal peak for natural gas and we’ll show that we believe natural gas prices will soften in the near term. However, the transition from El Nino to La Nina will be in full effect this fall and we’ll discuss the trouble that has come with it in the past.
Our trading is focused on the thesis; “No one knows the value of his markets like those who pull it from the ground.” While individual companies or operations may be prone to mismanagement or other bad decisions, the collective actions of the companies within a given sector are rarely wrong. The tug of war between those who pull it from the ground versus those who process it determines true price discovery within the commodity markets. These are the elephants bulldozing the macro moves while the speculators compete for the remnants with the dung beetles. Recently, large speculators have been stocking up on gold futures at a record pace and the gold miners are selling all the forward production they can lock in above $1,220 an ounce. This could lead to quite the washout as speculators are forced to take losses under $1,280.
This week’s piece will be short, sweet and data driven. Soybeans have rallied more than $3 per bushel in as many months. Much of this has been based on expected declines in South American production as El Nino has wrought havoc on Argentinian and Brazilian farmers. However, the USDA numbers don’t justify recent price gains while either viewing the recent Supply and Demand report on it’s own or, within the context of tracking the USDA’s actions since the market got rolling in early March. Therefore, we’ll do the calculations and explain the current premium between the USDA’s forecasted prices and where we’re currently trading.
Last week, we noted that the declining volatility of option prices ahead of this Wednesday’s FOMC meeting was curious, to say the least. As we dug in, we noted the broader scope of this trend towards declining option volatility. Today, I’ll show you another way of using the Commitments of Traders report to track investor sentiment and in this case, why the correspondingly bullish put/call ratio via the large speculators is probably bad news for the stock market.
The S&P 500 is making all-time highs ahead of the triple witching expiration of the underlying futures, futures options and cash options next Friday, June 17th. While this combination can be precarious in its own right, the fact that it comes two days after one of the most highly anticipated Federal Open Market Committee (FOMC) meetings in recent history could make it truly pivotal for the remainder of the year. This week, we’ll focus on the S&P 500 and a combination of factors that could sustain a breakout in either direction based on the FOMC’s actions or, inaction.