Perspective: Mid-Day Commentary for December 3

By: Arlan Suderman, Chief Commodities Economist

Fri, 03 Dec 2021, 17:34

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

December 3 - Wall Street was poised for a strong day following this morning's monthly jobs report, but the early strength soon waned, with stocks moving deep into negative territory. The tech sector led the sell-off ahead of the weekend, on lingering inflation fears, as well as concerns about what possible Omicron headlines might emerge over the weekend while the markets are closed. The VIX firmed to trade near 31 at midday, reflecting rising anxiety ahead of the weekend. The dollar index firmed to trade near 96.2, while yields on 10-year Treasuries fell to fresh two-month lows near 1.37%, as money moved to safe-haven assets. Crude oil prices are still modestly higher, but well-off their session highs, while the Ags are mixed to lower as early strength wanes here as well. Sinking stocks weighed on the meat markets despite improving cash hog and cattle markets this week.

The VIX is Wall Street's "fear index." It is based on put option premiums for S&P 500 stock futures. The VIX typically trades in the 'teens under normal trading conditions. It has only sustained a move above 50 twice over the years, as shown in the graphic below. Once was when it spiked to 89.5 in the financial crisis of October, 2008, and then it spiked to 85.5 in the early weeks of the pandemic in March 2020. The VIX tends to spike fast, but then trend lower over time, reflecting the typical emotional response of people in the markets. Fear rapidly spikes when people are faced with great uncertainty as the Omicron variant of Covid-19 currently presents itself going into the weekend, but then it takes considerably more time for that fear to ease as people start becoming comfortable with more knowledge about the risk.

The VIX spiked to a fresh 10-month high near 33 this week on those Omicron fears, which it is poised to possibly test again today. An observation I've made over the years is that it's difficult for a commodity to sustain a rally over time when the VIX is above 30. It can, but it has to have a strong story to do so. That's because money tends to flow into the safe-haven assets, such as the dollar and into the securities markets, in times of fear, and out of the so-called riskier asset classes. The energy, corn and soybean markets posted impressive gains earlier in today's session, but they've struggled more to sustain that strength as the VIX rallied above 30 today, while wheat has added to its losses.

The tone for Monday's markets is expected to be set by Sunday night's headlines, with particular focus on the Omicron variant of Covid-19. Headlines that are seen as reassuring to traders would be expected to see them reverse money flow back into many of these markets, while they remain vulnerable if the headlines raise more fears. The primary question at hand revolves around the health of the domestic and global economy going forward, and its perceived impact on the demand for commodities, as threatened by both inflation and by Omicron.

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