"My God. The Dukes are going to corner the entire frozen orange juice market"

Louis: "Trading Places"

THIS IS NOT INVESTMENT ADVICE. THE WRITER MAY OR MAY NOT HAVE POSITIONS IN THE SECURITIES OR MARKETS BEING DISCUSSED

Ramblings

After an awful October, the markets have found their footing and tech equities are heading towards ATH. What a difference a few weeks makes?! A disorderly bond market through October caught markets off guard and this continued to deteriorate through the month. However, since November begun we have witnessed a staggering recovery. Helped by a stabilising bond market, lower oil prices and signs that US inflation might be easing have all turned headwinds into tailwinds as we had for the seasonal Santa rally. As for Orange Juice.. it is getting interesting!

Bonds

I cannot add a lot to what has already been written and I am not a fixed income expert. But if you look at the three charts below, we seem to have put an interim high in yields. I still think longer term yields head higher at some point, probably 2024 but very hard to guess given the signals the oil market is giving about demand. In the US, a 10yr to 3.8-3.9% is not out of the question before returning to above 5% if the economy remains resilient.

US 10yr yield

The chart of the UK 10-yr yield looks the most vulnerable to heading lower, which makes sense given the disorder in the economy.

UK 10yr yield

The Aussie 10yr yield still looks like it wants to go higher in the longer term, but potentially we get the 10yr back towards 4% before it heads higher in 2024. The biggest risk in either direction for Australian yields is China. If China can stabilise itself then Australia’s economy can probably muddle through and digest the higher yields. If China deteriorates further and brings down iron ore and coal prices with it then Australia could be in for a lot more challenges.

The challenge is fundamental outcomes could lead to different interest rates outcomes depending on the sequencing. For example here in Australia. If China slows down, that should be negative for global growth, slow commodity prices and lead to a slowing in the Australian economy which should lead to lower yields. However, if this slowdown is met with fiscal stimulus from borrowing right at the time tax receipts are reduced (due to unemployment and lower tax revenue from lower commodity prices) then bond the Australian bon might sell off and drive yields back up again. This type of situation could happen within a few months of each other which makes structural trading of fixed income more challenging going forward.

Australian 10yr yield

The takeaway here is monetary policy and interest rates are going to remain volatile relative to what we have become accustomed to. Overall, I think that is a positive as risk is getting priced more appropriately now and you get paid to be patient as an investor thanks to higher short term rates.

Equities

The NASDAQ sold off nicely as I anticipated and then rallied hard as I did not anticpate! Wow, what a rally. We are now looking at breaking out above the highs from earlier in the year and heading towards ATHs. Technically, that looks like the most probable outcome. Given most were short through October and now only getting back in, the FOMO fever could take hold between now and year for an extended rally.

NASDAQ100

The energy sector is on the precipice. It needs oil prices to hold here otherwise some of the momentum sellers will start weighing on price action. Fundamentally, should still be good cash generating assets but if sentiment falls out of favour you may get better opportunities ahead.

XLE ETF

Energy Markets

The reversal in early October seemed prescient. Despite the increase in tensions in the Middle East since writing the last report, oil prices have sold off on demand worries and a weaker products market. Prices tried to stabilise the past couple of days so there could be some respite for the bulls, but without a new catalyst I see oil prices drifting back to the lower end of the range.

Weekly Chart - WTI Crude 2nd month

Ags/Softs

The OJ market has been on fire, whilst grains continue to sell off. The orange juice market has been caught in a classic supply side squeeze, which has then driven CTA’s into the market who keep buying, which drives away natural sellers and so it continues. At some point the CTA’s are going to own the whole Florida crop if this keeps going. The unwind is going to be spectacular!

In other softs markets, cotton is suffering from global growth worries. Coffee has rallied again as new supply from Brazil has yet to translate to more stocks on the exchange. So we are in a period where, despite a more bearish leaning global fundamental outlook for 2024, until certificated stocks start increasing the contract can remain supported. Looks to me like an opportunity to sell H2 2024 calendar spreads.

Cocoa and sugar remain well supported on their respective supply side stories. However, if oil continues to sell off you would think that starts to put pressure on the sugar market into 2024.

Relative performance of Softs - last 3 months

The carries on offer in the grains markets continue to drive flows, as well lacklustre demand for US wheat. Corn remains well supplied so it is left to the soybeans complex to hold the market higher. In a stunning return to form, soymeal has rallied 12% whilst soybean oil has sold off 18%. Anyone long oil share?

Relative performance of Grains & Oilseeds - last 3 months

So where does that leave us?

Last time I wrote I don’t think the equity market goes down much more than 12-15% from the recent highs. It went down 11.7% and has since rallied 13.6%. So if you were quick and got set at the recent lows it has been a good month.

Macro wise, the same clouds are around with the added complexity of Middle East geo-politics. Flows wise, year end should remain positive for equities and bonds, with commodities to remain sanguine and potentially head lower. Those focused on certain niches within markets should do well given the above idiosyncratic nature of the commodity markets.

NONE OF THIS IS INVESTMENT ADVICE.

PLEASE SPEAK TO A FINANCIAL ADVISOR BEFORE MAKING ANY FINANCIAL OR INVESTMENT DECISIONS.