10Y: Inflation Could Creep Back Up as Seaborne Trade InterruptedCBOT: Micro 10-Year Yield Futures ( CBOT_MINI:10Y1! )
Maritime transport is the backbone of international trade and the global economy. Over 80% of the global trade volume in goods is carried by sea, according to the UN. Therefore, whenever a major trade route is blocked, shipping time would be lengthened, which pushes up freight cost, and ultimately, the prices of merchandise.
Suez Canal Blockage, March 2021
Traffic jams at sea are not rare. On March 23rd, 2021, a 400-metre-long container vessel, MV Ever Given, got diagonally stuck inside Egypt’s Suez Canal. Transport was completely blocked in the all-important 193-km narrow waterway for six days.
Suez Canal is one of the world's busiest shipping channels for oil, refined fuels, grain, and other trades linking East to West. It moves about 12% of the global trade. Holding up traffic there could cost $9 billion per day, according to data from Lloyd’s list.
Direct impact: The Baltic Dry Index (BDI), a benchmark for the cost of shipping goods worldwide, traded around 2350 before the blockage. It shot up to 3170 (+35%) by May and peaked at 5530 (+135%) by October. While canal blockage was not the only cause, it exposed weaknesses in global trade and triggered a chain reaction in price hikes.
Influence: In February 2021, US CPI was well under control at a 1.7% annual rate. It jumped to 2.6% in March. By the time BDI peaked, CPI was at 6.2% in October. But it did not stop there, US CPI topped 9.1% in June 2022, 15 months after the blockage.
Panama Canal Drought, August 2023 to Present
The 65-kilometer-long Panama Canal connects the Atlantic and Pacific Oceans and is a key shipping hub for trade between North and South America to Asia and Europe. It links about 5% of global trade. In 2022, more than 14,000 ships passed through the canal.
The Panama Canal is experiencing a severe drought now, resulting in a shortage of fresh water for the operation of the locks. This forced officials to slash the number of vessels they allow through and has created expensive headaches for shipping companies. Before the crisis, 38 ships a day moved through the canal. It’s now down to only 22.
Canal authority now hosts special auctions to allow winner to cut in line and move his ship ahead in the queue. It is reported that shipping companies paid up to $2 million for this privilege, which is on top of the regular canal fees they paid.
Direct impact: Unlike the Suez fiasco, drought would last for months. It’s estimated that daily passage could move up to 24 by January 2024. The canal would still be running at 65% capacity. This means that global trade could be slowed by as much as 2%.
Red Sea Under Houthi Attacks, October 2023 to Present
The Bab el-Mandeb Strait is between the Horn of Africa and the Middle East. It connects the Red Sea to the Gulf of Aden and the Arabian Sea. This waterway is used by container ships and exports of petroleum and natural gas from the Persian Gulf. Approximately 12% of the world’s trade, which includes 30% of all global containers, move through the Suez Canal. That then feeds through the Red Sea and Bab el-Mandeb.
The Yemen-based Houthi militants have threatened to attack any vessels that have ownership ties to Israel or do business there. Overall, 13 vessels have been attacked at Red Sea since the Israel-Hamas conflict broke out in early October.
On Saturday, MSC, the world’s largest shipping carrier, said that its ships will not transit the Suez Canal due to security risks. Shipping giants Hapag-Lloyd and Maersk also paused travel through the Red Sea a day earlier.
Direct impact: The collective vessel market share of MSC, Hapag Lloyd, and Maersk is approximately 40% of global trade. The decrease in vessel transits by these three giant ocean carriers will be a financial hit to Egypt, which owns, operates, and maintains the Suez Canal. Egypt has already seen a hit in tourism due to the conflict.
Impacts from Panama Canal and Red Sea Crisis
The combined trade volume passing through Suez and Panama canals accounts for 17% of global trade. Any interruption, either man-made or by nature force, could reduce global goods supply and add to the price tag on store shelves.
The long wait time at the canal and the extra weeks it takes for using alternative route both increase overall fuel consumption and other expenses. Even though crude oil price has been falling, freight shipping cost are now on the way up. This is like a tax on the economy. The impact on such a global scale could reverse the trend of cooling inflation.
If recent history repeats itself, we could see US CPI creeping back up in the coming months, following a surge in the BDI.
Trading Opportunity with CBOT Micro Yield Futures
Last Wednesday, the Federal Reserve decided to keep the Fed Funds rate unchanged in the 5.25-5.50% range. While Fed officials put out inconsistent statements about what they would do next, investors overwhelmingly concluded that rate cuts are coming soon.
On Thursday, both S&P and Nasdaq made 52-week high, of 4,738.57 and 14,855.62, respectively. The Dow reached a new all-time-high record of 37,347.60 on Friday.
According to CME FedWatch Tool, the first rate-cut could occur in March, with a 69% probability. By the end of 2024, there is a 98% probability that the Fed Funds rate would be 4.25-4.50% or lower, indicating investor expectations of 4-7 cuts of 25 bps each.
(Link: www.cmegroup.com)
In the Treasury spot market, 10-Year yield was quoted 3.928% on Friday. This represents 132 bps below Fed Funds, and a 10Y-2Y spread at -51 bps. In the futures market, CBOT Micro Yield futures ($10Y) January 2024 contract (10YF4) was settled at 3.927 last Friday, in line with the spot market.
If our analysis on pending inflation rebound is proven to be correct, the Fed would start cutting rates later than the market expected, and not as much as the Treasury market priced in at the moment.
Each Micro 10Y Yield contract has a notional value of 1,000 index points, or $3,927 at current price. To acquire 1 contract, a trader is required to deposit an initial margin of $320.
If the resurgence of inflation spurred by global supply chain disruption makes the Fed to maintain its hawkish stance and continue tighten the monetary policy, the rates will stay elevated. A trader with a long position will gain if 10Y yield rises.
While a rate hike raises Treasury yield, the postponement of an expected rate cut also has similar effect. The forecasted low yield would now be revised up. As a result, the futures price, which is the 10Y yield, would go up, rendering a profit for the long position.
On the other hand, if 10Y yield continues to fall, the trader would incur a loss of $250 for each 25bps cut.
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
Ratecuts
Rate Cut 1930 - Pattern Recognition: 30s vs Today In 1930, when the Fed cut interest rates, the market crashed further. In today's tutorial, we will be comparing the 30s and today’s market to identify some of their similarities.
Where exactly are interest rates’ direction pointing us?
As we may have read, many analysts are forecasting that there will be a few rate cuts in 2024. Is this the best option?
My work in this channel, as always, is to study behavioral science in finance, discover correlations between different markets, and uncover potential opportunities.
Micro Treasury Yields & Its Minimum Fluctuation
Micro 2-Year Yield Futures
Ticker: 2YY
0.001 Index points (1/10th basis point per annum) = $1.00
Micro 5-Year Yield Futures
Ticker: 5YY
0.001 Index points (1/10th basis point per annum) = $1.00
Micro 10-Year Yield Futures
Ticker: 10Y
0.001 Index points (1/10th basis point per annum) = $1.00
Micro 30-Year Yield Futures
Ticker: 30Y
0.01 Index points (1/10th basis point per annum) = $1.00
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
CME Real-time Market Data help identify trading set-ups in real-time 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
GC: Gold Reaches Record High on Hope of Fed Rate CutsCOMEX: Gold Options ( COMEX:GC1! )
Gold prices rallied to an all-time high on Friday.
Spot gold climbed 1.6% to $2,069 per ounce, up 3.4% for the week. Gold price rose to $2,075 mid-session to beat the previous record of $2,072 reached in 2020.
U.S. gold futures also broke new ground. The February 2024 contract of COMEX gold futures settled at a record high of $2,089.7, up 1.6% for the week. On Friday, gold futures trade volume was 259,889 lots, with open interest standing at 498,685 contracts.
Options on the COMEX gold futures also attracted investor attention. On Friday, total options volume was 92,906, up 112% from the prior day. Open interest was 806,297 lots.
For the lead February 2024 contracts, investors bought 19,565 call options and 6,894 put options. A call-to-put ratio of 2.83:1 indicates that investors are very bullish on gold.
Gold prices have been pumped up on investor hype that the Federal Reserve may have completed its monetary tightening policy and could start cutting rates as early as March. How high could gold price go?
Since last year, I have written extensively about gold on TradingView. Let’s revisit the fundamental drivers of the global gold market.
Gold as an Inflation Hedge
Gold has historically been an excellent hedge against inflation because its price tends to rise when the cost-of-living increases.
The US CPI Index has a base value of 100 set at 1982-1984. Its latest reading in October is 307.7. Over the last 40 years, the cost of US goods and services has tripled on average.
The year-end gold price between 1982 and 1984 averaged $378. As of Friday, the bullion gained 447% for the same period. Over the long run, investing in gold does beat inflation.
Gold as a Precious Metal
As a commodity, gold is negatively correlated to the US dollar. Since gold is priced in dollar, a strong dollar raises the cost for foreign investors who must pay more with weakened foreign currency. This reduces the demand for gold. “Strong Dollar, Weak Commodities” is the general theme in global commodities market, gold included.
A closely related theme is “Higher Rates, Lower Prices”. Higher interest rates and Treasury bond yields raise the opportunity cost of holding non-yielding gold. Unlike other commodities, gold is not consumed or used up every year. Therefore, gold mining output is not a major factor in the pricing of gold.
Gold as a Safe Haven Investment
Gold retains its value in times of both financial chaos and geopolitical crises. People flee to its relative safety when world tensions rise. During such times, gold often outperforms other investments. In the past two decades, gold price peaked during the 2008 financial crisis, the 2010 European debt crisis, the 2018-19 US-China trade conflict, the outbreak of COVID pandemic, the Russia-Ukraine conflict, and the March 2023 U.S. bank run.
Gold as an Investment Class
As an investment class, gold competes for investor money along with stocks, bonds, cryptos and money-market funds. Even at record high, gold gained only 13.2% year-to-date, underperforming S&P 500 (+19.6%), Nasdaq 100 (+46.4%) and Bitcoin (+136.0%).
A False Narrative on Monetary Easing
The recent rise in the stocks and gold is largely shaped by the changes in market sentiment. Investors believe that the Fed is shifting gears from restricted to easing policy.
Looking back in the past two years, market sentiment might not be the most reliable gauge of the Fed’s next step of action. The market has called for the Fed Pivot prematurely and incorrectly multiple times. We will need to wait and see what’s happening next.
In his speech at Spelman College in Atlanta on Friday, the Fed Chair said that “the risks of under- and over-tightening are becoming more balanced,” but the Fed is not thinking about lowering rates right now.
Investors focus on the current rate well into restrictive territory, but pointedly ignore the warning that it was premature to speculate on easing rates. The confirmation bias is at work here. They hear what they want to hear and create a new narrative that rate cuts will come sooner.
Pricing in 5-6 rate cuts in a year is very aggressive. The Fed Chair has been accused of being too late to act, seeing inflation transitory earlier on. When it comes to cutting rates, the Fed would be very cautious, and at a very slow and measured pace.
Trading Opportunities with Gold Options
Market fundamentals haven’t changed. Market sentiment, however, has shifted.
The aggressive rate-cut assumption has the effect of lowering the expected interest rates. This helps raise the present value of future cash flows. Hence, stock value goes up.
Lower bond yield reduces the disadvantage of holding the non-yielding gold, and the US dollar weakening makes gold more attractive to foreign buyers.
This bull market is vulnerable. If investors adjust their rate-cut assumptions from 5-6 to 2-3 times, the market could turn nosediving.
However, investors set their sight on rate cuts and will not abandon it until the fact rejects the false narrative. Gold has a so-called “Santa Claus rally” and could continue for a while.
The Fed Chair’s statement could become more convincing if:
• Nonfarm payroll stays strong (December 8th)
• CPI stops falling (December 12th)
• The Fed keeps rate unchanged and emphasizes on fighting inflation (December 13th)
Options on COMEX Gold Futures (GC) could be a cost-efficient and risk-mitigated way to express one’s opinion on how quickly the Fed would cut rates.
Each options contract is based on 1 futures contract and has a notional value of 100 troy ounces of gold. At $2,089.7, each contract is worth $208,970.
For illustration purpose: For the February 2024 contract, an out-of-the-money (OTM) call at 2190 ($100 above futures price) is quoted at 18.80. To acquire 1 call options requires an upfront premium of $1,880 (= 18.80 x 100 ounces). An OTM put at 1990 ($100 below futures price) is quoted at 9.00. To acquire 1 put requires an upfront premium of $900 (= 9.00 x 100 ounces).
Options premium is significantly lower than futures margin, which stands at $7,800 per contract. It’s a fraction of the cost if you were to buy 100 ounces of gold in the spot market.
If the trader buys a call and gold futures goes up, his account will increase in value. Unlike investing in spot gold or gold futures, the payoff in options is nonlinear, determining by the Black-Scholes option model. Similarly, when the trader buys a put and gold futures declines, he would also make a profit.
On the flip side, the trader could lose money if the market moves against him. But the maximum loss is capped at the upfront premium.
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
CADJPY Probabilities of further stimulus incoming_BOCGoverning Council stands ready to adjust policy further and to deploy other market tools if required: BOC . 25 bps cut probabilities at the April meeting or sooner.
0% interest rate = Short Bonds! I may be jumping the gun here, but with the emergency rate cut.
we are going to have to cut the rates some more next fomc meeting, and as the situation progress and with the way trump is whining about fed rate cuts.
there a high chance of certainty that they will eventually cut the rate to 0%, especially as corona cases get serious and hits 1 million. it's currently at 90k right now but there's without a doubt it will suppress 1 million.
i am looking to buy puts for 2021 and continue to double down if it keeps going up. Kinda like Michael Burry from "The Big Short" i will borrow money to keep doubling down if i have to! ITS A BOND BUBBLE!!!!! lolz
Corona virus reference
nypost.com
multimedia.scmp.com
Dxy Insane Opening. Last Stop around.....The Saudi price war was a flashpoint for today's action but it's really all about coronavirus. The news on the weekend worsened with too many cases and outbreaks to count.
The conditions for a panic were evident the moment markets opened plunged heavily lower. Japanese market participants invest abroad massively but when uncertainty hits, they bring their money home. No one wants to be the last one to the exit and now the building is on fire and it's a stampede. Oil Price Declines Roil Global Markets, Virus Containment Efforts Escalate, Supply Crunch Ripples Past China, Treasury Yields Fall Further As Investors Expect More Rate Cuts and there are a lot of issue going around the world so basically 94.26 would be a potential area for dxy which is pivot weekly s3 or even the past lowest low around 93.87 (The last destination where price may head and halt if this pandemic eats global market for a certain while).
SPX500 Plan for the Upcoming Week — H1 speculation during CovidContext & Navigating markets during COVID-19
Due to COVID-19 outbreak happening on top of an uptight bond market and weak economic fundamentals, the OANDA:SPX500USD — along with other major indexes — has tanked from its 3396 historical high in a straight line untill it found a yet to confirm or break H1 support on the 2855 area which happens to be the 50% fibonacci retracement of the December 24th 2018 to Febuary 20th 2020 rise fueled by the series of Federal Reserve's interest's rate cuts.
Since then the market has demonstrated extreme volatility on lower timeframes, thus highlighting profilic opportunities for speculators. After confused reaction to the FED's emergency 50 basic points rate cut on Tuesday, the market ended up rejecting twice the 50% retracement at 3130$, a fib level that usually isn't supposed to show much reaction, displaying how weak the buyers were by not being able to push throught 61.8% (much more attractive for short sellers risk management). The market was then vowed to retest, if not break its support. The bulls showed very low interest on the range support area of 2960 - 2920 (highlighted by fib retracement and fib extension) only a few hours before the weekly close, which led me to believe that we were going to break the support either before closure or at the next opening. MACD and RSI were not showing any kind of bullish signals anyway therefore i decided not to buy the support as i previously planed to. However volumes sudently rised up and printed a 3 min range which broke to the upside the 3min bearish trendline and closed the week with a 1 hour green engulfing candle, thus quickly sending a whole bunch of bullish signals :
Trade
As a result, i intend to buy any retracement of the aforementioned engulfing candle with an invalidation level under the 2830 level. Regarding the objectives of that trade, i wouldn't target anything higher than 3191 - 3270$ which are respectively the 61.8 & 76.4 retracement of the "corona" bearish wave; i'll even go so far as look to reinforce my daily shorts on that very atractive area. Average risk ratio of the trade is 1/4 (2.5 stop for 10% gains) but that might change slightly given the price you enter at. Targeting new historical highs from there seem completly unrealistic and that is especially considering the underlying context and daily technical structure which seems to be a bearish trend that may drag us to as low as 2700$ if not way lower (see my future long term analysis on the stock market).
Hope this idea will inspire some of you !
Go easy on leverage and don't forget to hit the like/follow button if you feel like this post deserves it ;)
Kindly,
J.M.K
DOLLAR MILKSHAKE WAS WRONG! PETER SCHIFF WAS RIGHT 2.0!RATE CUTS AND 'NIRP'!
DOLLAR MILKSHAKE THEORY RELIED ON RATE HIKES AND QUANTITATIVE TIGHTENING!
U$D IS NOT THE CLEANEST DIRTY SHIRT IN THE HAMPER!
GBPCHF what if reports are better then forecast/previous...??!!Sterling could be in for additional volatility as the U.K. jobs figures are due and might set the tone for BOE policy expectations. If the actual figures beat expectations, however, it could spark a strong bounce for pound pairs as this would likely dampen BOE rate cut hopes. The pair is floating around 38.2% Fibonacci retracement level, which coincides with an area of interest, weekly pivot level, and the 100 SMA dynamic inflection point. In my opinion, we may not see a further deep or retracement around 50-61.80% Fibonacci if we have a surprise better than the expected report where consensus is better then what it is hoped by the economist. The faster-moving MA is above the 200 SMA to indicate that support is more likely to hold than to break at the moment and also, stochastic is indicating oversold conditions or exhaustion among sellers, so buyers might take over soon but as we said everything depends on the upcoming outlook from the UK and global risk sentiment. The average daily volatility of GBP/CHF is around 82 pips a day so decide wisely entries and exit levels after knowing the reports. Stay careful friends!
NZDUSD - Long #Forex #ForexTrader #ForexTrading #ForexChartNZDUSD - Long opportunity
I managed to catch a small inverted H&S pattern and it got my attention that there is another one that is much larger forming.
I'm still currently short due to the fact it is still short overall on the daily TF
However..
With a strong possibility of Fed rate cuts coming i believe that this could be a great opportunity to go long.
Any questions feel free to ask
GOLD end of 2019|DEC RATE CUT|TRADE WAR|ECON FUNDAMENTALSKeeping it short but precise, few fundamental bullet points on factors that will affect gold until the end of 2019:
1. Once US/China deal gets finalized, Gold should have a bearish consolidation to 1410, eventually to 1360 by the start of 2020.
2. GOLD is currently in a horizontal range due to two factors: Global monetary policy dovishness continues for October(bullish) , but at the same time higher likelihood of a good US/China deal outcome(bullish), and then there's Brexit.
3. On the point of monetary policy; OCT 31st meeting already priced in , everyone is focusing now on Dec 11th FOMC (Ref#1) . The issue for the Dec 11th FOMC, is that it will depend massively on the US/China deal outcome, that'll be decided sometime mid November.
4. Expecting yields on the US 10Y to recover if a deal goes through . Yields in a range, above the critical 1.5% support, and
at the moment are looking for a breakout. Of course, this would have a very bearish effect on gold.
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On the technical side, you can see the developments on the chart. On the daily looks very indecisive, but leaning bearish.
In fact, I think that after the FED rate cut next week, on Friday the 1st of November there should be a sell-off in gold. Earnings season is going okay-ish well, and by the end of it we should know how it will affect gold. Have to reiterate that Trump has to get a deal done with China; that'll basically guarantee him another mandate from 2020 . This is the main factor, that makes me bearish on gold for now.
This is it for Gold, it was just a short, but precise update.
-Step_ahead_ofthemarket-
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
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References and disclosure:
1. www.cmegroup.com
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels.
This short update is just a continuation from a previous chart on gold:
Navigating the RBA Rate Cuts - Pricing In AUDUSD 23 SeptSentiment/fundamental rationale tells me to look for short signals only this week. It is reported that the market is starting to price in RBA rate cuts on Oct 1st (81% as of now so plenty of moves to be had)
Technically it is very obvious, at least in an intraday context, AUDUSD have been trading lower and now in an intraday bearish trend.
Since I am bearish on the AUDUSD, I am looking to "short the rallies". I have identified several liquidity spots, which I marked with green sniper crosshair, as a place I would place my short (if there were bearish signal).
The targets potentially be the Boomerang level (purple line) or the 20-week AWR downside projection
SPY remains with a specified range range:
$281.72-$294.15
Going long the lower end of the range and shorting the upper end of that range has been profitable for the past few trading weeks.
USD/JPY BUY !!! not having best luck this week, lets see if I can pull a big win or small loss to end the week be careful trading NFP
