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Cocoa outlook improves as El Niño StrengthensCocoa continued its upward price trajectory, rising 3% over the prior month (22 May to 23 June 2023). The International Cocoa Organization (ICCO) has corrected its forecast for the supply deficit on the cocoa market in the current crop year up from 60,000 tonnes to 142,000 tonnes as production is expected to be lower and grinding higher than previously expected. The production estimate was lowered by 37,000 to 4.98 million tonnes, while the grinding forecast was revised higher by 45,000 to 5.07million tonnes. The revisions are largely due to Ivory Coast (the world’s largest cocoa producing country) where the crop is set to be 30,000 tonnes lower than the prior forecast, but still 79,000 tonnes higher than last year, resulting in a minor downward revision given the considerable year-on-year shortfall in cocoa arrivals at the ports. On the other hand, 35,000 tonnes more cocoa is set to be ground in Ivory Coast than previously predicted by the ICCO. The higher deficit is likely to push global stocks down to 1.63 million tonnes by the end of the crop year, which equates to a good 32% of annual grinding. The last time the stocks-to-grinding ratio was any lower was 38 years ago. The cocoa price remains well supported against this backdrop. El Niño is now once again a source of concern, as prospects for the new season starting September are not bright due to the threat of dryness. In addition, recent heavy rains have been reported in major producing countries, slowing down mid-crop harvest in top supplier Ivory Coast and elevating fears of disease outbreaks. The front end of the cocoa moved more deeply in contango, with the negative roll yield of -2.5% weighing on performance. This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
NYMEX:CJ1!
by aneekaguptaWTE
Navigating The American Debt Ceiling DramaSome people create their own storms. And then get upset when it starts to rain. US Debt Ceiling drama is akin to a soap opera that never ends. Debt ceiling issue is not new. Why bother now? Political polarisation in the US has got to unprecedented levels. The showmanship could tip over into a political nightmare. It could send economic shockwaves with impact deeply felt both within US and well beyond its shores. Many politicians seemingly are so pulled away from reality that their fantasies aren’t working. Wishing away a problem out of its existence is not a solution. The Debt Ceiling is here. US defaulting on its debt is highly unlikely. Scarily though, the probability of that occurrence is non-zero. This paper looks at recent financial history surrounding prior debt ceiling episodes. Crucially, it delves into investor behaviour and their corresponding investment decisions across various asset classes. When uncertainty looms large, straddles and spreads arguably deliver optimal hedging and investment outcomes. A SHORT HISTORY OF DEBT CEILING. WHAT IS IT? HAS IT BEEN BREACHED BEFORE? The US debt ceiling is a maximum cap set by the Congress on the debt level that can be issued by the US Treasury to fund US Government spending. The ceiling was first introduced in 1917 to give US Treasury more flexibility to borrow money to fund first world war. When the US government spends more money than it brings in through taxes and revenues, the US Treasury issues bonds to make up the deficit. The net treasury bond issuance is the US national debt. Last year, the US Government spent USD 6.27 trillion while only collecting USD 4.9 trillion in revenue. This resulted in a deficit of “only” USD 1.38 trillion which had to be financed through US treasury bond issuance. This deficit was not an exception. In fact, that’s the norm. The US Government can afford to and has been a profligate borrower. It has run a deficit each year since 2001. In fact, it has had budget surplus ONLY five (5) times in the last fifty (50) years. If that wasn’t enough, the deficit ballooned drastically from under USD 1 trillion in 2019 to more than USD 3.1 trillion in 2020 and USD 2.7 trillion in 2021 thanks to massive pandemic stimulus programs and tax deferrals. This pushed the total US national debt to a staggering USD 31.46 trillion, higher than the debt ceiling of USD 31.4 trillion. The limit was breached! So, what happened when the ceiling was broken? Not that much actually. When the ceiling is broken into, the US Congress must pass legislation to raise or suspend the ceiling. Congress has raised the ceiling not once but 78 times since 1970. The decision is usually cross-partisan as the ceiling has been raised under both Republicans and Democrats. It was last raised in 2021 by USD 2.5 trillion to its current level. Where consensus over raising the ceiling cannot be reached, Congress can also choose to suspend the ceiling as a temporary measure. This was last done from 2019 to 2021. Since January, the Treasury has had to rely on the Treasury General Account and extraordinary measures to keep the country functioning. Cash balance at the Treasury remains precariously low. Its operating balance stood close to nearly USD 1 trillion last April but now hovers around USD 200 billion. Such reckless borrowing! Yet US continues to remain profligate. How? Global investors have confidence in the US Government's ability to service its debt. Despite the increasing debt, the US Government continues to pay investors interest on its bonds without a miss. Strong economic growth and its role as a global economic powerhouse assuages investor concerns over a potential default. Additionally, where Treasury does not have adequate operating cash flow, it leans on a credit line from the Federal Reserve (“Fed”). The dollar’s strength and reserve status contribute to the US Government’s creditworthiness and vice-versa. The Fed is also the largest holder of US government debt. It holds USD 6.1 trillion as of September 2022 (20% of the overall debt). The share of government debt held by the Fed surged to current levels from just above 10% during the pandemic due to massive purchases of treasury bills by the Fed as an emergency stimulus measure. GROWING US DEBT IS BECOMING A SOURCE OF CONCERN US debt has ballooned during the pandemic. It is deeply concerning for multiple reasons. Key among them is the risk of default. Although debt has increased significantly, GDP growth during this period has been tepid due to pandemic restrictions stifling economic activity. As such the ratio of national debt to GDP, a measure of the US’s ability to pay back its loan has also skyrocketed. This increases the risk that the US Government may fail to service its debt. A US Government default would lead to surging yields on treasury bonds and crashing stock prices. It would also call into question its creditworthiness limiting future borrowing potential. A default will also have far-reaching economic consequences threatening dollar hegemony which is already being challenged on multiple fronts. Another concern is the rising cost of servicing the debt. Servicing the debt is the single largest government expense. Interest payments on debt this year are expected to reach USD 357.1 billion or 6.8% of all government expenditure. Additionally, with the Fed having raised interest rates with no stated intention of pivoting in 2023, the interest rate on US public debt, which is currently at historical lows, will also rise. DEBT CEILING BREACH AGAIN. SO WHAT? LOOKING BACK IN TIME FOR ANSWERS. There has been more than one occasion when political disagreements resulted in Congress delaying the raising of the debt limit. In 2011, political disagreements pushed the government to the brink of default. The ceiling was raised just two (2) days before the estimated default deadline (the “X-date”). Despite the raise, S&P lowered its credit rating for the United States from AAA to AA+ reflecting the effects that political disagreements were having on the country’s creditworthiness. This played out again in 2013 due to same political disagreements. Thankfully, for investors, the effects of the 2013 crisis on financial markets were not as severe. Flash back. Equity markets initially dropped after the debt ceiling was reached and investors worried that the disagreements would not be resolved in time. In July 2011, markets started to recover as both parties started to work on deficit reduction proposals. Then on July 25th, just eight (8) days before the borrowing authority of the US would be exhausted, Credit Default Swaps on US debt spiked and the CDS curve inverted as participants feared that a deal would not be reached in time. This led equities sharply lower. On August 2nd, a bill raising the ceiling was rushed through both the House and the Senate. Following this S&P lowered US credit rating from AAA to AA+ citing uncontrolled debt growth. Equity prices continued to drop even after the passage of the bill. Commodities showed similar price behaviour heading into the passage of the bill. However, unlike stocks, gold and silver prices rallied after August 2nd. The USD weakened against other currencies before the passing of the bill but recovered after August 2nd. Treasury yields trended lower but spiked during key events during this period. Short-term treasury yields remained highly volatile. Following crisis resolution, yields plunged sharply. US DEBT CEILING CRISIS AGAIN. WHAT NOW IN 2023? The US reached its debt ceiling again in January 2023 and yet another debt crisis. 2013 is repeating itself again as lawmakers disagree over whether to raise the ceiling further or bring the budget under control. The Congressional Budget Office (CBO), a non-partisan organization, has estimated that the US could be at a risk of default as early as June 1st. Republicans disagree with the Biden administration. They seek budget cuts to reduce annual deficits while Democrats want the ceiling to be raised without any conditions tied to it. This crisis is exacerbated by rising political polarisation in the US. Not just metamorphically, the Republicans and Democrats are at each other’s throat. A study by the Carnegie Endowment for International Peace found that no established democracy in the recent past has been as polarised as the US is today. This raises the risk that Congress gets into a stalemate. Moreover, the house is only in session for 12 days in May. After the law is passed in Congress it must also pass through the Senate and the President. The availability of all three overlap on just seven (7) days, the last of which is the 17th of May. This means that lawmakers have just 3 days (from May 12th) to reconcile their differences before the US is put at risk of default. POSITIONING INVESTMENT PORTFOLIOS IN DEBT CRISIS WITH X-DATE IN SIGHT What’s X-date? It refers to the date on which the US Government would have exhausted all its options except debt default. The X-date could arrive as early as June 1st. There is a small chance that it could arrive in late July or early August. The US Government collects tax receipts in mid-June. If the US Treasury can stretch until then it will have enough cash to last another six weeks before knocking against the debt ceiling again. The current crisis has been brewing. Equity markets remain sanguine. But near-term treasury yields have started panicking. Short term yields have spiked. The difference in yield on Treasury Bills that mature before the likely X-date (23/May) & after it (13/June) has shot up. Muted equity markets create compelling opportunity for short sellers. In the same vein, it also presents buying opportunities when debt ceiling is eventually lifted. When up or down is near impossible to predict, an astutely crafted straddle or time spread can save the day. DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Editors' picks
TVC:US01MY
by mintdotfinance
27
Trade Data Confirms Decoupling Well UnderwayCME: Offshore RMB ( CME:CNH1! ), Micro RMB ( CME_MINI:MNH1! ) On April 5th, the Bureau of Economic Analysis reported the latest U.S. global trade data. For the first two months of 2023, total export and import were $328.9 and $489.7 billion, respectively. U.S. international trade balance was $160.9 billion in deficit. Export growth was very strong, at 9.5% year-over-year, while import was up modestly (+0.5%). As a result, trade deficit was reduced by $25.8B from last year period. My analysis focuses on Exhibits 14 and 14a of the report, which detail global trades by trading bloc and country in 2022 and 2023, respectively. Here are what I found: • NAFTA: Canada and Mexico together have total trade (import plus export) of $245.6B. NAFTA is the largest US trading partner with a 30.0% share. So far in 2023, we see trading growth of 8.5% and 1.3% in share gain y/y. • EU+UK: Total trade is $173.9B, up strongly +20.2% y/y. This is the second largest trading bloc with a market share of 21.2%, up 2.8% y/y. • China+HK: Total trade is $98.6B, down sharply -14.5% y/y. Traditionally the largest US trading partner, China is now the 3rd largest, with a 12.0% share, down 2.6% y/y. • India: Total trade $20.1B (-1.1% y/y) with a 2.46% share (-0.1% y/y) • Vietnam: Total trade $19.1B (-3.0% y/y) with a 2.33% share (-0.2% y/y) • Taiwan: Total trade $19.2B (+72.2% y/y) with a 2.35% share (+0.9% y/y) Shifting of Global Supply Chain The U.S. has determined to reduce its reliance on China for manufactured goods. Decoupling aims to shift global supply chain out of China. Where would they go to? • On-shore: moving manufacturing back to the U.S. (Made-in-America); • Near-shore: moving manufacturing to NAFTA partners Canada and Mexico; • Moving to democratic countries with shared values, including the European Union, Asia (Japan, Korea, India, Vietnam, Taiwan) and South/Central America. Based on BLS nonfarm payroll data in March, total employment in manufacturing sector is 12.98 million. This is 600K more comparing to March 2017 level, before the US-China trade conflict. Manufacturing jobs are coming back to the U.S. What does the strong growth in trading with NAFTA, EU and Taiwan tell us? It shows the shifting of supply chain. This growth comes at the expense of China, which is the only major US trading partner that suffered a decline in both trading volume and market share. Implications of Decoupling Shifting of supply chain has long-term implications. Bringing manufacturing back to the U.S. means job creation as well as consumption and taxes. Companies may receive government incentives to offset the cost of relocation. In the long run, getting out of the expensive cross-ocean shipping and the punitive Trump-era tariff would lower the cost of production. Near-shore production in Canada and Mexico also benefits from a more reliable supply chain and lower transportation cost. Southeastern Asian nations have average labor cost at 1/3 or less comparing to workers of similar skills in coastal China. Vietnam and India prosper in recent years by taking production of clothes, shoes, toys, and low-end electronics away from China. What is the implication of trade decoupling on exchange rate? It will result in devaluation of Chinese Yuan against the US dollar. Firstly, currency exchange rate reflects the interest rate differential in the short-term. • US Fed Funds rate is 4.75%-5.00%, and China Shibor is 1.374%; • The Fed could raise rate again, while China’s central bank is easing to support the lackluster growth in economy. The widening US-China rate differential would cause RMB to devalue, holding all else constant. Secondly, exchange rate represents the relative strength between two economies in the long run. Decoupling has a positive impact on US economy, but a really negative one on China. Since China abandoned Zero-Covid policy last November, its economy has not rebounded as previously hoped. Export-oriented industries are seeing the horror of disappearing orders and clients. The housing sector, the bedrock of China’s economy, is suffering from a bust of real-estate bubble. Dedollarization: Fact or Fiction? Rhetoric about the pending doom of US dollar goes viral in recent weeks. While the Greenback is being challenged, no other candidate is capable of replacing it as global reserve currency. According to the BIS, 88% of international trade was settled in US dollars in 2021. The Fed estimates that from 1999 to 2019, dollar settlement accounted for 96% of international trade in the Americas, 74% in the Asia-Pacific region, and 79% elsewhere. IMF reports that the percentage of central bank reserve by currency in 149 countries is: US dollars, 59%; Euro, 20%; Japanese yen and pound sterling, 5% each; RMB, 3%; Others, 8%. A global reserve currency could retain its status for well over 100 years before being replaced by another. British pound was the last reserve currency since the start of 1800s. It wasn’t until the establishment of Bretton Woods system in 1944 when the US dollar became its replacement. At that time, the U.S. has been the largest economy for forty years and held over 70% of the world’s gold reserve. In a worst-case scenario, if an upstart currency were to successfully challenge the US dollar, its downfall would be decades away. If your investment horizon is months or years, this is not something stopping you from owning dollar. Trade Idea CME Offshore RMB (CNH) futures is settled at 6.8516 on Monday. The contract has a notional value of $100,000 and is quoted as the number of Chinese Yuan per $1. The next Fed meeting is on May 2-3. According to CME FedWatch, futures traders are pricing in a 71% chance that the Fed would raise 25 basis points. If the Fed raises rate and China’s central bank does nothing, futures price shall go up by mechanical calculation. Holding or selling 1 CNHUSD future requires HKEX:18 ,500 in minimum margin. If the exchange rate moves 1 tick, or $0.0001, the futures account would gain or lose 10 Yuan. Micro RMB futures (MNH) is 1/10 of the standard size CNH contract with a HKEX:10 ,000 notional. Margin requirement is also 1/10 of the original, at HKEX:1 ,850. 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
CME:CNH1!Long
by JimHuangChicago
7
OPEC’s supply cuts pre-empt economic weaknessThe Organisation of Petroleum Exporting Countries and its partners (OPEC+) producers surprised the market with a decision on Sunday 2 April 2023 to lower production limits by more than 1mn barrels per day (bpd) from May through the end of 2023. This decision was announced ahead of the OPEC+ Joint Ministerial Monitoring Committee (JMMC) meeting scheduled on 3 April and was contrary to market expectations that the committee would keep policy unchanged. Over the prior week, OPEC+ ministers were giving public assurances that they would stick to their production targets for the entire year. This cut tells us that OPEC+ is pre-empting weaker demand into the year and was looking to shore up the market. OPEC+ announcement may have caught speculators by surprise It is evident Sunday’s decision caught the market by surprise evident from the commitment of trader’s report which showed net speculative positioning in Brent crude oil futures at -44k contracts were 146% below the 5-year average. Sentiment on the crude oil market had been weak prior to the decision. Demand outlook remains soft amidst weaker economic backdrop OPEC has been markedly dovish on oil demand for some time relative to other forecasters such as the Energy Information Administration (EIA). This cut helps solve the disparity that existed between OPEC and the EIA. OPEC expects oil demand to grow by around 2mn bpd in 2023. A significant portion of this growth (nearly 710,000bpd) is reliant on Chinese oil demand . Given that such a large amount of demand hinges on a single economy poses a risk to the demand outlook as the pace of China’s recovery post re-opening has not been as robust as previously anticipated. At the same time, tightening credit conditions owing to the recent banking crisis is also likely to weigh on growth forecasts in the rest of the developed world. Global Purchasing Managers Indices (PMI) indicators suggest manufacturing activity has contracted since September 2022. Supply outlook will be driven by new OPEC+ cuts Since Russia has been producing less than its notional limit, the reduction on actual production will be less than 1mn bpd. But with Saudi Arabia committing to voluntary reduction of 500,000bpd we would expect the overall decline in OPEC supply to be around 900,000bpd by the beginning of May 2023. Assuming OPEC production holding at the recent 28.9mn bpd for April, our balances would point to an equilibrium in Q2 and a return to a deficit in Q3 and Q4. This deficit is largely a function of OPEC+ cuts as opposed to stronger demand globally. The front end of the Brent crude oil futures curve remains in backwardation with a roll yield of +0.4% OPEC+ producers can also cut without the fear that they will lose significant market share to non-OPEC members. Previously, OPEC+ would be reluctant to let prices rise too high, as it would incentivise a supply response from US producers. However, US producers today appear more focussed on capital discipline and maximizing shareholder returns. The US also has limited capacity to plug the shortfall created by OPEC+ cuts owing to last year’s unprecedented release from strategic US oil reserves (now at a 40-year low). Conclusion In the short term, OPEC production cuts are almost always supportive evident from the recent price reaction Brent crude oil prices have risen (+6.54% ). However, over the medium term, the price response to cuts have been more mixed as they do tend to signal underlying weakness in the supply/demand balance. Either OPEC countries are expecting demand to be significantly weaker or doubt oil production in Russia will decline as sharply as forecasted. So, with speculative positioning at currently low levels alongside further inventory draws expected later in the year, the risks are titled towards the upside for crude oil prices. However, given the uncertainty in the macro environment, we expect the upside in prices to be capped at about US$90 per barrel.
NYMEX:BB1!
by aneekaguptaWTE
SPX - Federal Tax Receipts - Deficits Set to Explode! TL;DR: What this means, in simple terms, is that the US debt is already at nose bleed levels and has been PRIOR to the global shutdown, the shutdown just making it worse and is impacting the stock market, which is a big driver for US receipts, this in turn with push the deficit higher, i am anticipating deficits that are at levels seen in the GFC (10% or higher) and i expect those to continue for quite some time. To better understand why the Fed and the US government are pulling out all the stops to "save" the markets, one first must first begin to understand the incestuous relationship between the financial markets and the US government. Now, that is a long, long story, far too long for here and certainly not on this medium. But, this chart summarizes the relationship quite nicely: This is the SPX (blue line) overlaid with the US federal receipts (US income) and the lower baseline chart is the surplus (green) or deficit (red) expressed as a percentage of GDP. As you can clearly see, US receipts are currently very correlated with the stock market stock market, however, this was not always the case. US receipts and SPX (log scale) It is when the market and indeed the economy started to become "financialized" i.e. moving money around became a segment of the economy, that this relationship really took off. This is most likely due to governments preferring to opt for "easy" money rather than encouraging productive labor and real economic growth (harder to fudge that it seems). Back to the chart at hand The other point of interest is the surplus/deficit as a percentage of GDP, you will note that each financial crisis, the tech wreck, GFC and undoubtedly the global shutdown when that data is made available, the deficit never was able to "normalize" it was always started from a higher low, in other words, the deficit is in an uptrend. This leads to the obvious conclusion that if the deficit was 10% in the GFC, then what will the deficit be when the entire global economy is shutdown for a period of weeks or even months? Also, the astute of you will notice the period of "surplus" and whilst it is nice to think warm and fuzzy thoughts about a time when the US wasn't spending money like a drunken sailor, when you look at the Federal debt over the same period, you will notice an INCREASE, not a decrease, i.e. there was no true surplus that paid down debt. There was NO surplus What makes this truly terrible however, is when you look at the overall level of debt that the US has. US Federal Debt as a Percentage of GDP We are already well over 106% So much for the "best economy ever" What this means, in simple terms, is that the US debt is already at nose bleed levels and has been PRIOR to the global shutdown, the shutdown just making it worse and is impacting the stock market, which is a big driver for US receipts, this in turn with push the deficit higher, i am anticipating deficits that are at levels seen in the GFC (10% or higher) and i expect those to continue for quite some time. This is not even touching on the issue of confidence in the US monetary system, or the fact that the US is now officially dependent on artificially low interest rates to service it's current debt load, notwithstanding the added burden from the shutdown. This is one of the key reasons that the stock market MUST be re-inflated, at all costs. The government and the Federal Reserve (because they are separate entities) both know that main street is f*cked to put it bluntly, the impact from the shutdown is causing small and mid sized businesses to bleed, this will crush GDP and exacerbate the debt issues. Sooooo, they will inflate the stock markets, to alleviate some of the pressure on the whole thing, but it will ultimately cause a host of other issues down the line, far too many to discuss at this time. That, and the Fed never misses a chance to bailout their buddies, it is one of the small pleasures that they derive, that and debasing the currency supply for the rest of us. -TradingEdge
SP:SPX
by Profit_Link
BND Trendline Warns of Future DownsideBND bounced off a critical support corresponding to November 29th, 2007, the day that yields spiked after BND dropped and miraculously regained 7.5%. We see a downward trend forming in BND indicating a tendency toward rising rates while debts and deficits continue to set record highs. If the FED is not willing to significantly debase the dollar through record levels of monetary injection, the bond market will continue to drop. We are in the danger zone here, watching the bond market is crucial to timing the coming drop. I do not suggest going short until the following conditions are met: 1. Bond market drops considerably over any time frame (testing that critical level of pre-2008 crash or extreme velocity). 2. Stock market begins to face reality - depends on the velocity of rising rates (faster = sooner).
SP:SPXShort
by Derivati_Capital
1
DATA VIEW (NOT A FORECAST): US BUDGET BALANCE IMPROVING US budget balance suffered a significant blow during the fallout of 2008/9 us mortgage crisis. Government stimulus measures needed at the time to stop the downward spiral in US markets created a huge budged deficit. In addition, government tax revenues fell sharply (as most corporations failed to show profit, thus to pay corporate taxes). Since 2011, however, situation in the budget balance started to improve. Urgent government aid was no longer required and tax revenues started to restore. The chart above is updated once a year, however in order to see that the positive trend is still intact, one can calculate current year-to-year budget deficit by visiting the US Treasury website: www.fiscal.treasury.gov
FRED:FYFSDLong
by Killy_Mel