DXY Fails to Rollover
I find myself saying these 4 words over and over again every few weeks! Does the recent data from the US to Europe and afar say it all? Just a few headlines that have hit the tape in the last 24 hours:
“Dollar strengthens as ECB sounds dovish” (Barron’s)
“Dollar climbs as Fed expectations remain intact after CPI” (Reuters)
“DXY rises with August’s core inflation spike” (FX Empire)
Today’s look at the DXY – something tells me it’s not going to rollover like Clemson did with Duke 2 weeks ago
Source: Bloomberg
UAW strike
We have been talking about this Auto strike for the last few months, more recently the past week-plus. @Michael Lovecchio has touched upon it day in, day out in his blasts over Bloomberg and in his notes over email. When will the US politicians get involved in a larger way? How long will CNN, FOX and other news outlets carry the story? When will weakness in *US HRC STEEL* and *ALUMINIUM* be bought into with conviction? How are raw material inventories at the auto factories – is there 2 months of inputs on hand, less or more? Lots of questions!
“Workers at 3 plants in 3 states launch historic action against Detroit Three” (Detroit Free Press)
“The last UAW strike lasted 40 days and cost GM $3 billion - things are looking very different this time” (Business Insider)
“The car shortage is finally easing – the UAW strike could change that” (WSJ)
Copper’s wedge
**COPPER = a month ago we were looking at the chart and a majority of participants were convinced of a nasty $500+ break on the front burner with the end of August summer vacations on the front burner. We observed good size *PUT* options interest in the mix (as noted below) which made me think “if we continue with the offered tone, we’ll probably find support at $7500/t instead, just because”…
500x Oct $7000s
1700x Nov $7000s
400x Nov $8300/7900 1x1s
200x Nov $9000s (calls) vs 7000s
Well… that didn’t happen! The wedge support kicked-in! Of course it did… and more recently aka last week, trendline support from the 2020 and 2022 lows prevailed once more. At the present, the wedge in *COPPER* is narrower today than it has been in prior sessions (clearly). Could the $500 break arrive as LME Week kicks off, Oct 8-13…? Second month rolling ATM vol which correlates to Nov expiry today = 17.75% mid. The recent low has been 16.5% and we have come a long way down from 25.5% at the end of May. Shall we utter the words… VALUE here?
LME 3M price action, weekly basis, $/t – which way do you lean?
Source: Bloomberg
Is this the quote of the day which would fit in well to what has been happening in the *COPPER* market amongst other metals? "What's interesting about risk premium - when something gets really low, it gets mouth-watering cheap. You have to respect that it was brought to that level by a certain set of conditions that made the previous trade so unprofitable, so loss-making, that you have to think it can get worse still. Sometimes these things feed on themselves."
Generic 2nd month LME copper, ATM implied vol – going back 10 years on a weekly basis, % (pts) on the right axis
Source: Bloomberg
Which then brings me back to a conversation I was having with my colleagues who run the LME/CMX options book. They were saying that they don’t really believe in seasonality for vols aside from the usual January selling pre-festive periods but thought this table I put together was rather interesting. Look how poorly vol has performed in the *COPPER* market for anyone that has had length on a YTD basis, particularly in August, which has been odd in the context of higher interest rates (we are surprised by the dynamic).
Generic 2nd month LME copper, ATM implied vol – seasonality comparison – net change month by month
Source: Bloomberg
Iron ore’s mission in relation to China’s military activities and…
Imagine returning from a 3+ month sabbatical which began at some point in May when those famous words landed in your email inbox over a few consecutive days regarding the *IRON ORE* market and various other commodities à Sell in May and go away… You would definitely be scratching your head after looking at the screen. $122 for 62% Iron Ore…. Say what? The game plan was loud and clear from the top Analysts at the leading Commodity banks, that of "Bearish H2" and “To meet steel capacity requirements in place in prior years, production has to be cut in a meaningful manner in H2”, us included on the later. Thankfully, the related equities have finally started to take notice with VALE +5% yesterday and RIO/BHP +4%. FWIW, I will dig back into that black box that I have mentioned over the years… Is China’s *STEEL* production being directed by Beijing for major military needs?
Which you know is extremely difficult to track, which brings me to a subject very few are asking us about...
Taiwan!
My colleague's family spent a month in Fujian province this summer. The military presence was astounding. His son was in awe. Soldiers, tanks, trucks, artillery, small boats, etc. Confirmation in the last 24 hrs in the press:
"China conducts major military exercises in western pacific"
"PLA's latest air & sea drills near Taiwan could signal surprise attack strategy"
"New outline aimed at greater Fujian-Taiwan connectivity, integration"
"China woos Taiwanese to live in Fujian, but not all are convinced amid military threats"
So many trades to discuss if military action arrived sooner rather than later – find us on the desk to discuss.
Finally, the FED and sticky inflation – you have heard it from StoneX since 2022!
As Chief Market Strategist, @Kathryn Rooney Vera published yesterday: ‘No Landing’ and 2% Core Inflation a Challenging and Historically Improbably Event… I find it difficult to go against her thesis and believe in what she has been discussing, and I quote – “that the recent data do not change the trajectory of the Fed in the near term. No hike in September. Good change of 25 bps in November to get to my long-held call of a 5.5% terminal rate. Inflation could be sticky in the coming year.” Please see the attached piece for a thorough review. If you cannot access the link, contact us and we can assist with getting onto her distribution list.
Further, you will hear from Kathryn individually and as she moderates a dynamic panel for the Macro session which will kick-off our returning event in NYC on December 7thà StoneX Natural Resources Day 2.0 = weblink follows for registration and more information = https://stonex.cventevents.com/NaturalResourcesDay2023
Alongside Kathryn will be:
- Shehzad Qazi, COO & MD, China Beige Book International
- Ellen R. Wald, Ph.D., Co-founder of Washington Ivy Advisors and author of “Saudi, Inc.: The Arabia Kingdom’s Pursuit of Profit and Power”
- Matthew McManus, Deputy Director for Policy at Bureau of Energy Resources
I hope you enjoy your weekend and as always (at this time of the year), #GoBlue #FreeHarbaugh #JJForHeisman and #CorumForHeisman aka #BlakeTheGreat
All the best,
Mike
