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Myth-busting: top 6 misconceptions about commoditiesWisdomTree has long-standing expertise in commodities, and this asset class constitutes a core part of our business. We aim to debunk several myths that surround commodity investing1. Myth 1: Commodities are only a tactical instrument Some believe that commodities trade in a range and do not outperform over the long term. Furthermore, they think commodities only outperform in an ‘up’ phase of a commodity ‘super-cycle’. Physical commodities are the fundamental building blocks of our society. Therefore, it is no surprise that their price movements largely explain inflation and tend to at least match inflation over the long term. Furthermore, commodity investors most often invest in futures contracts, not physical commodities. Futures contracts have been designed as hedging tools to allow commodity producers and miners to hedge their production forward, making their businesses sustainable and allowing them to invest because they are insulated from the commodity prices’ short-term volatility. Producers are willing to pay for this hedge, just as they would pay for insurance. Therefore, investors who provide this hedge by buying futures contracts receive an insurance premium that allows them to beat inflation over the long term. This ‘insurance’ is a permanent feature of commodity futures and doesn’t fall away through economic cycles. Thus, commodity futures are suitable for consideration as a strategic investment, not just tactical investments. Commodities futures provide a positive risk premium, driven by their intrinsic link to inflation and embedded ‘insurance premium’. While upward phases of commodities’ super-cycle are historically advantageous for commodity investors, future-based broad commodity investments can deliver a risk premium in any part of a super-cycle. Myth 2: Losses are guaranteed when commodities are in contango Contango (negative roll yield) and backwardation (positive roll yield)2 are used to describe the state of the futures curve. It describes the relative position of the current spot price and the futures contract price. Drivers of roll yield include storage costs, financing costs, and convenience yield. Backwardation is often associated with demand strength when people are willing to pay more for immediate delivery than lock into a contract for later delivery at a cheaper price. Some believe that, because contango is the opposite state of backwardation, losses are guaranteed as a corollary. The fact that Keynes’ theory is called ‘normal backwardation’ has caused some terminology confusion. However, what is described by Keynes is that futures contracts are generally priced at a discount to the expected spot price at expiry. It has nothing to do with the current spot price. In other words, the curve can be in contango, and the future price can still be at a discount to the expected spot price at maturity, that is, be in normal backwardation as well. Using a numerical example, let’s say that WTI Crude Oil is worth $50 today. The market expects WTI Oil to trade at $55 in a month (expected spot price) because of storage and other costs. Keynes’ theory hypothesis is that the 1-month futures contract will be priced at a discount to $55, let’s say $54, to incentivise speculators to provide the hedge to producers. In this situation, the curve is in contango ($54>$50), and the expected risk premium is still positive at $1. So, a curve in contango and a positive risk premium can coexist. While the shape of the curve has an impact on the performance, it is not a good predictor of future performance. Myth 3: Commodities are riskier and more volatile than equities. There is a common perception that commodities are riskier than equities. Equities and commodities are similar asset classes statistically. Their historic returns and volatility are quite close. Historically, commodities have exhibited higher volatility than equities in 42% of the 3Y periods since 1960. However, in a larger number of periods (58%) equities have shown higher volatility. More importantly, the two assets’ distributions differ from a normal distribution with a significantly higher skew. But commodities have the advantage. They exhibit a positive skew (a tendency for higher-than-expected positive returns), when equities are known for their negative skew (their tendency to surprise on the downside). Commodities have exhibited lower volatility than equities in 58% of the time rolling 3-year periods we studied and benefit from positive skew. Myth 4: Commodities stopped being an effective diversifier after the 2008 Global Financial Crisis presented a structural break in commodity price relationships Markets are becoming more and more efficient. With those changes, assets have become more correlated. It is clear that commodities have been more correlated to equities in the last 10-20 years than before. However, this is true of most asset pairs as well. US equities are more correlated to global equities. Equities are more correlated to high yield bonds. In a globalised world where correlations are more elevated, commodities still stand out for their lower level of correlation. Note, commodities have continued to provide a cushion against equity and other asset crises in recent periods. For example, in 2022, commodities rose 16%, while US equities3 fell 18% and bonds4 fell 16%. While 2008 marked an all-time high for the correlation between equities and commodities, their correlation has always oscillated. There have been earlier spikes of similar magnitude in the 1960s and 1980s. In 2020, we saw a similar spike in correlation, but correlations have more than halved since in 2023. Commodity vs equity correlation tends to oscillate and has remained within normal historical ranges. Myth 5: Inflation linked bonds are better than commodities at inflation-hedging Some assets are often considered good inflation hedges, such as inflation-linked bonds (TIPS) or real estate. However, it is surprising that more people don’t recognise the superior inflation-hedging properties of commodities. The beta to inflation (US Consumer Price Index (CPI)) of inflation-linked bonds and real estate, historically, is significantly lower than that of commodities (2.45): US TIPS (0), US Equity Real Estate Sector (1), House Prices (0.4). Furthermore, while broad commodities’ average monthly performance tends to increase when the CPI increases, this is not the case for other assets. The performance of TIPS appears to be relatively unrelated to the level of CPI. The performance of real estate, being equities or real assets, seems to worsen when the CPI increases. Real estate suffers from the fact that, while rental incomes are linked to inflation (rents are part of the CPI basket, for example), the capital values themselves are not, and yet have a larger impact on the asset's price. Similarly, inflation-linked bonds are linked to inflation, but their price is also tied to real yields changes (through a duration multiplier) which tends to dilute the relationship to inflation itself. Historically, commodities have been a better hedge to inflation than TIPS or real estate assets. Myth 6: Futures are the best way to access gold for institutional investors Futures markets tend to be extremely liquid and offer very low transaction costs. Therefore, investors assume that, if they can, it is always the most efficient way to implement a trade. However, futures markets respond to their own constraints where banks tend to provide most of the hedging. Recently, banks have suffered from increasing regulation and operating costs that they have translated into their pricing of futures contracts, leading to significant tracking differences with the physical asset. Sometimes futures contracts are the only way to access a commodity, but for precious metals this is not the case. For gold, this cost has, historically, represented 0.9%6 per year on average compared to owning gold bullion. Physically backed exchange-traded commodities (ETCs) have many advantages: limited operational burden, reduced tracking difference, cheap and liquid. It is clear that commodities are a frequently misunderstood asset class, and many misconceptions remain today. For a fuller description of the fundamentals of commodity investing, please see The Case for Investing in Broad Commodities. Sources 1 These myths were all addressed in The Case for Investing in Broad Commodities, November 2021, which takes a deep dive into commodity investing. This blog summarises and updates data addressing several of the ‘misconceptions’ listed in the piece. 2 For more information on contango and backwardation, see our educational ETPedia hub (specifically the ‘Costs and Performance’ tab). 3 S&P 500 TR. 4 Bloomberg GlobalAgg Index (government, corporate and securitised bonds, multicurrency across developed and emerging markets). 5 Source: WisdomTree, Bloomberg, S&P, Kenneth French Data Library. From January 1960 to July 2023. Calculations are based on monthly returns in USD. Broad commodities (Bloomberg commodity total return index) data started in Jan 1960. US TIPS (Bloomberg US Treasury Inflation-linked total return bond index – Series L index) data started in March 1997. US Equity Real Estate (S&P 500 Real Estate sector total return index) data started in October 2001. US House Price (S&P Corelogic Case-Schiller US National Home Price seasonally adjusted index) data started in January 1987. Historical performance is not an indication of future performance and any investments may go down in value 6 Source: WisdomTree, Bloomberg. From 4 June 2007 to 31 July 2023. The Performance of the physical Gold was observed at 1.30 PM Eastern Time to match the BCOM sub-index calculation time. You cannot invest in an Index. Historical performance is not an indication of future performance and any investments may go down in value. 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.
CBOT:AW1!
by aneekaguptaWTE
1
Combined US Indexes slammed furtherPreviously mentioned that the supports are being broken. It gave way after an expected bounce. The dip that followed came with confirmation technical signals as well as a lower low… suggesting that there is downward momentum still. Saving grace lies with a pullback rally to end the previous week just above the support line. However, this appears to be futile, with shallow bullish bounces expected, and a close below the major support line. Thing is this… there should be a close below the line and it needs to hold below for another three weeks to firm up more downside. But a rally back up above that critical support (then turned resistance) would be a good bullish rally to look for, albeit later in the year end/beginning. Next four weeks should see at least two weekly closes below support. In line and in support of this indication, TIPS and TLT, with JNK have led the markets by pushing further new lows of late. Heads up.
CME_MINI:ES1!
by Auguraltrader
1
NVDA Bullish Pump Incoming?!NVDA had a huge sell off over the past few weeks and looks like the bulls are ready to take over for a 3% pump to the next resistance. If we manage to blast though the Golden Pocket 3% away, my next target will be 11% away at the next Golden Pocket. Calculate Your Risk/Reward so you don't lose more than 1% of your account per trade. Every day the charts provide new information. You have to adjust or get REKT. Love it or hate it, hit that thumbs up and share your thoughts below! This is not financial advice. This is for educational purposes only.
NASDAQ:NVDA
by Navitility
$DXY -Resistances to Watch *D (tf)- Upcoming Resistances to watch for TVC:DXY : -104.707 (Last Lower High + confluencing S/R area) -105.883 (Lower High from 114) (aswell being drawn a Range's Ceiling - The Dollar Index TVC:DXY has experienced lots of tremendous vertical upside during these past two-three weeks. From negative economic news of Chinese CCP report ; to US economy on Sticky Inflation and persistent outlook of Interest Rates being Hiked again, seems as investors, smart money and quite of many retail traders are fleeing in to TVC:DXY given safety. Meanwhile TA speaking, TVC:DXY has been broken Resistance Trendline from 114 High after occuring a FAKE-OUT at the Bottom Support of Range (100.8) level. Price went to close to the Weekly 200EMA, which seems to have provided lots of Support for TVC:DXY by pushing the price higher . TRADE SAFE
TVC:DXY
by Mr_J__fx
Swing Buy opportunity in LTIMEntry only when the 30min candle closes above 5113 TARGET: 5336 SL: 5012 NOTE: This trade is only for Equity Swing buy and not to be considered for options trading. Please do follow Position Sizing and Risk Reward Ratio while planning any trades. Note: This information is for education purpose only and please do your own research and consult your financial advisor prior to taking any action. TO CONNECT WITH ME CHECK OUT MY BIO. If you like this Idea, Please do like my ideas and share it with your friends. check my bio. Please boost my ideas and send cheers as it acts as a motivation to keep posting my analysis. Thank you
NSE:LTIMLong
by rkinspiro1
1
$DXY -Middle Range Warzone (105vs100)- TVC:DXY seems to be wanting a break-out from Resistance Trendline coming from 114 Highs, despite failing to do so. A Resistance Trendline that has pushed the price lower each time price has approached it. Wether that break-out and resumption is bound to happen or not in the short term, it is yet to be seen. Currently, TVC:DXY is in the midst of a Middle Range War-Zone, struggling for direction. For now, Price-Action suggest a Lower High being printed at 104.5 , a Lower High from 114 Downtrend. By Breaking Structure(BoS) of the most recent Lower High (LH) 104.5 would validate the Trendline break-out and suggest furthermore uptrend continuation for TVC:DXY , headed for the the Range's Ceiling at 105.8 and testing the broken macro structure Support Trendline Move towards 105.8 range's ceiling would be quite bearish for overall Financial Market's condition. While a move to the range's bottom at 100 level would be quite promising for other Market Sectors to continue performing well. Very interesting week ahead for The Markets, especially TVC:DXY , which dictates Financial Markets Swings *** TRADE SAFE NOTE that this is not Financial Advice . Please do your own Research before partaking on any Trading Activities based solely on this Idea.
TVC:DXY
by Mr_J__fx
A trader’s week ahead playbook – just roll with it Risky assets continue to climb the wall of worry, but the reality is we’ve seen conditions ripe for equity appreciation. Granted, the global central bank balance sheet is falling but the rate of change is contained, and US bank reserves are not falling as fast as feared. Liquidity is currently not the bearish catalyst for equity drawdown that many thought it might be. Economic data continues to frustrate those positioned portfolios for a recession - US consumer confidence, new home sales, and durable goods all come in hotter-than-expected. At the same time, US core PCE inflation was a touch softer at 4.6%, with softer core inflation prints also seen in Japan (Tokyo), Europe and Canada. It seems good economic news is truly good news for stocks and high beta FX – case in point, on the week, we saw the market’s expectations for the peak fed funds rate (currently seen in November) increasing by 7bp to 5.4%. Amid tighter expected Fed policy, US 2yr Treasuries gained 15bp on the week (to 4.89%) and yet despite the rise in bond yields the NAS100 gained 2.2% - closing out the best first half ever, with a remarkable gain of 39%. We’re also seeing bullish breakouts in the US500, and EU equities, with the SPA35 breaking out, while the skew is risk is that the FRA40 retests the 17 April highs. As we see in the calendar below, there is a heavy focus in the week ahead on the labour market. Unlike recent months, as long as the growth and jobs data stay firm and highlights that a US recession is a 2024 story, and with inflation grinding to target, then the equity (and risk) bulls will continue to buy dips. The risk bulls will want a solid nonfarm payrolls report, but any goodwill will be conditional on average hourly earnings (AHE) holding below 4.3% In FX markets, the USD has been frustrating and just when the bulls we’re hoping for a break of 103.38 resistance (in the USD index), the sellers reversed the goodwill. We remain on intervention watch in Japan, notably with the trade-weighted JPY falling 0.5% on the week, and well below levels since in Sept 2022, when the MoF bought Y2.8t. We’ve seen clear signs the PBoC has reached its tolerance level on USDCNY and is pushing back. USDCNH remains central to all USD moves. Let’s see if the new month brings a new trend – but knowing that the NAS100 has rallied in the last 15 consecutive months of July, it feels like the pain trade is still to the upside and the odds are skewed for higher levels – an open mind will always serve us well in trading, but for now, I am happy to just roll with it. Tactical play of the week : Long NAS100 (stop orders) above 15,220. A new month, but nothing changes – Ride the momentum, and the strong get stronger. Rearview alpha plays: • G10 and EM FX play of last week: Long NOKSEK (+1.8% last week), long USDRUB (+5.4%) • Equity indices play of last week: Long SPA35 (+3.5%) – to the highest levels since Feb 2020 • Commodity plays of last week – short corn (-16%), long Cocoa +4.6% (strong uptrend) • Equity plays for the radar – Bega Cheese (BGA.AU) – shares have fallen for 8 days in a row. Apple (eyeing $200 with a market cap over $3t). The key event risks for the week ahead RBA meeting (Tuesday 14:30 AEST) – It's hard to recall a time when making a call on an RBA policy decision was so finely balanced. One could make just as good a case to hike, as they could to hold. The economist community are evenly split (14 of 27 economists are calling for a pause), and Aussie rate futures are pricing a 40% chance of a hike. Given this dynamic, the RBA may lean on the path of least regret and hike. On the week I see AUDUSD trading a 0.6750 to 0.6580 range. AUDNZD is the cleanest play on the RBA meeting and relative policy divergence, and on the week, I would look to sell rallies into 1.0950/60. US ISM manufacturing (Tuesday 00:00 AEST) – the market expects a slight improvement in the pace of decline with the consensus set at 47.2 (vs 46.9 last month). We may need a reading above 50 to get the USD fired up, although a read above 50 would certainly surprise. Good data seems to be a positive for risky assets despite the move higher in bond yields, so expect equity to rally on a stronger-than-expected print. US weekly jobless claims (Thursday 22:30 AEST) – The economist consensus is for 245k weekly claims. Last week, we saw a strong reaction to the lower-than-expected claims print, so we know the market is looking at this data point closely. That said, we’d need a big increase/decrease from last week’s print (of 239,000) to move the dial this time around. JOLTS job openings (Friday 00:00 AEST) – the consensus here is for job openings to fall to 9.98m (from 10.1m). A pullback below 10m openings would be further relief for risky assets. A big upside surprise may see US treasuries rally (yields lower) and USDJPY should find sellers. US ISM services (Friday 00:00 AEST) – the market consensus is for slightly stronger growth in the US service sector at 51.3 (50.3). Again, we look for extreme reads vs consensus, but above 52.0 would really push back on the idea of a near-term economic slowdown. US non-farm payrolls (Friday 22:30 AEST) – the marquee economic data point of the week, where the market consensus is for 225k net jobs (the economist’s range is seen between 263k and 124k). The unemployment rate is eyed to fall back to 3.6% (3.7%), with average hourly earnings seen at 4.2% YoY. The form guide suggests the risk is for a number above 200k, having beaten expectations for 14 straight NFP prints. A big upside surprise should see USDJPY rally hard and push the BoJ/MoF a step closer to JPY intervention. Canada employment report (Friday 22:30 AEST) – the consensus is for 20k jobs to have been created, and the unemployment rate to lift a touch to 5.3%. With 13bp of hikes priced for the 12 July Bank of Canada (BoC) meeting, the outcome of the jobs report could influence that pricing and by extension the CAD. There has clear indecision on the USDCAD daily of late, subsequently, I would look to buy/sell a break of 1.3285 or 1.3116. Mexico CPI (Fri 22:00 AEST) – those that sit in the camp that Banxico cut rates in Nov/Dec will be closely watching the CPI print. The market expects a further dip in headline inflation to 5.07% and core inflation to 6.87% (from 7.39%). Carry traders are still drawn to the MXN and happy to jump on any weakness, subsequently, USDMXN seems likely to test the recent lows of 17.0227. Central bank speakers ECB – Villeroy, Guindos, Lagarde (Sat 02:45 AEST) BoE – Catherine Mann (Sat 00:30 AEST), Bailey (Sunday 17:30 AEST) US – FOMC minutes (Thurs 04:00 AEST), Williams and Logan
PEPPERSTONE:NAS100Long
by Pepperstone
1