Having subscribed to Evernote, an excellent service, I have started to type the notes I write for myself into it, rather than writing them on pieces of paper as I used to do. This is one such note. I am sorry if it is a difficult read. I have put a key to symbols at the bottom. The second part is more interesting than the first.


USD: Expectations for an extended period without rate hikes are leading to the currency being used to fund carry trades.
EUR: Expectations for continued rate hikes are pushing it up.
GBP: Growing realisation of the weakness of the UK economy is reducing expectations for rate hikes.
AUD: High interest rates and high inflation (more hikes to come) are attracting capital inflows.
NZD: Ongoing commodity boom and high interest rates mean capital inflows.
JPY: Continues to weaken following the quake and with ongoing high risk appetite.
CHF: Deflation and haven appeal mean continuing appreciation.
INX: QE and strong earnings mean continued appreciation.
TY: Market remains confident that the Fed will fight both inflation and deflation. Thus yields have risen from their lows but are anchored by the short end. That means there is only one way for the market to go.
ED: Market remains confident that the Fed will fight both inflation and deflation. Recovery expectations mean slow rate hikes are priced in.
GC: QE and inflation concerns continue to drive price appreciation.
SI: QE and inflation concerns continue to drive price appreciation.
CL: Strong global oil demand, supply disruption and lack of excess capacity put upward pressure on prices. Local situation moderates price rises.
BRN: Strong global oil demand, supply disruption and lack of excess capacity put upward pressure on prices. 
HG: Rolling over — why?
PL: Rallying with gold and risk appetite.
PA: Rolling over — why?
NG: Secular drivers of decline remain in place; not sure about reason for short-term rally.
S: Dry weather in US may favour soybeans as a replacement for corn, and La Nina effect should continue to moderate => increased supply. Chinese cancelling orders on account of domestic price controls => demand moderating. Much speculation in the price.
W: Pulled back after a period of speculation. Dry weather in the US may be offset by mean-reversion elsewhere — hence prices are range-bound.
C: Expectations for a tight market, with increased production offset by ethanol demand (and general rising demand). High oil price should be positive for corn because of the substitution. Hence prices remain high.
SB: Don’t know
KC: Ongoing supply disruption across South America.
CC: Ouattara victory takes political risk out of the price. Mid-harvest yet to reach its peak.
The thing that worries me is that HG, PA, S, W, SB, are rolling over, along with global equity markets ex US. This suggests an over-arching explanation for all these pullbacks. What might that be?
  1. High oil price to depress global demand. If the oil price continues to rise, then it is a sign of strong global demand and the prices of other commodities should logically rise as well. That the prices of other commodities are not rising has two possible explanations:
    1. Fears of demand destruction in sectors that are not driving the oil price rise. So if Chinese manufacturers are driving the oil price upwards, Western consumers may buy fewer cars, hence a lower platinum price.
    2. Supply constraints are the real problem: Libya and Arab unrest in general, and because of that a realisation that Saudi Arabia does not have the excess capacity that everybody thought. On reflection, this seems the most plausible explanation for the market action we have seen.
  2. Global monetary tightening is having an effect. I am not convinced by this explanation. The continued fall in the USD suggests the carry trade is still on; data last week confirmed what I have long expected, that the Chinese boom is still on; and European tightening has been limp so far.
Thus the most reasonable explanation for recent market action is that investors believe that the rising oil price is driven by supply constraints and hence that a high oil price will depress global demand. Industrial commodities that had been helped upwards by speculation are therefore rolling over as speculators pull back, commodity-driven EM equity markets (e.g. Brazil) are pulling back while manufacturing-driven markets (e.g. Korea) continue to rally, and the other prices that are rallying are those that both have defensive characteristics and also benefit from liquidity flows: AUD, CHF, gold, silver. Corn is rallying because it is something of a substitute for oil. This interpretation is borne out in the COT data, which shows the speculative net long position falling in HG, PA, S, W and SB, but still high in oil and corn.

Incidentally, you might say this is the impression you had got from the newspapers anyway. That would not be an unreasonable comment: in the markets, the big, obvious explanation is often the right one.

Key to Symbols


USD: US dollar
EUR: Euro
GBP: Pound Sterling
AUD: Australian dollar
NZD: New Zealand dollar
JPY: Japanese yen
CHF: Swiss franc
SGD: Singapore dollar
INX: S&P 500 US equity index
TY: Treasury futures
ED: Eurodollar (short-term dollar interest rate) futures
GC: Gold
SI: Silver
CL: West Texas Intermediate oil
BRN: Brent Crude oil
NG: US natural gas
HG: Copper
PL: Platinum
PA: Palladium
S: Soybeans
W: Wheat
C: Corn
SB: Sugar (New York)
KC: Coffee
CC: Cocoa
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