Markets in Red: Stocks, Metals and Soft Commodities + Volatility in Backwardation

by Francesco Placci

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It has been a difficult week for many markets, with negative returns and general weakness. Among the sectors that suffered the most we find stock indexes and bonds (which were affected by the rise in interest rates) and metals and soft commodities, with the exception of Cotton. On the other hand, we had positive 5-day returns for Natural Gas and Wheat, which continue rising under the pressure of the Russia-Ukraine conflict. 

In recent days we have also noticed some signs of concern about the future performance of the markets. The term structure of implied volatility is now in backwardation and the VIX has reached 32. Although these events don't indicate a panic situation yet, they still suggest the need to pay close attention. 

To learn more about how the markets are moving and the volatility trend, don't miss our weekly overview!

Enjoy the video!

Transcription

Hey everyone and welcome back! One of the coaches at Unger Academy here and this is the chat we usually have during the weekends about the market trends.

It has undoubtedly been an eventful week on the markets. I'm referring in particular to stock indexes which, following the Fed's decision to raise rates by 50 basis points, first rose at the close of the market, and then in the last two days have made two quite important red bars.

We've crossed the lows, particularly on the Nasdaq, which were recently reached. So, this is definitely not a good signal. And I'll point out that short-term volatility is in the 100th percentile on both the Nasdaq and the Mini S&P 500.

The Mini S&P hasn't crossed the lows yet. Let's see how it will close the day. However, the situation is quite worrisome. Volatility, as I said, is increasing.

We can see a bad trend in bonds that have continued in this trend for several months now. In particular, let's take a look at the T-Bond, which has again dropped this week by 2.30%.

In addition, the Bund has had a decidedly bearish trend. And this is obviously linked to fears of further interest rate increases.

On the other hand, the energy market, as usual, is showing more signs of momentum. In particular Natural Gas also this week went up a lot, despite there being a discreet red bar today. A 16% compared to 5 days ago. More contained are the increases in the other energy futures.

Metals continue to show weakness as well. You can see the three-month yields are pretty much all negative, apart from Gold.

As for Meats, we have a +4% this week for Feeder Cattle.

On the soft commodities side, Cotton continues to be at all-time highs. It broke the recent highs during the week. As far as the other soft commodities are concerned, we do see negative returns everywhere.

Orange Juice has stopped its strong uptrend and lost 2% this week.

Coffee fell 4.80%, so the only market still showing signs of upturns in soft commodities was Cotton.

As for Grains, Wheat continued to climb this week. We know this is due to the conflict between Russia and Ukraine, but even in this sector, aside from Wheat, all other Grains were negative.

On the other hand, as far as currencies are concerned, we saw a halt in the descent of the Euro-Dollar. This week has been consolidating around this value, slightly higher than last week, but in general, it was still the US Dollar to show signs of strength.

As for cryptocurrencies, Bitcoin also fell by 6%. We're approaching the lower part of the trading range and is getting dangerously close to this lower part of the trading range which has always worked as support so far. The situation for the cryptocurrency market isn't looking good. Let's see if it will be able to bounce back, as it has done so far, in the next few days.

Turning now to the analysis of the volatility term structure, we can see a volatility that has been increasing for several weeks now. Because if we’re looking at the lows, we're talking about early April. So, volatility has been going up for a month now. 

There are no signs of absolute panic in the markets yet, but we do see the term structure is now in complete backwardation and the Vix is currently quoted at 32. So, it's definitely not a good scenario. We're close to the recent historical highs, although we are still far from the levels reached during the Covid period, and for this reason, I say that we aren't in a total panic yet. But the situation is worrying, so I recommend some caution in the markets.

We only have got a single rollover for next week, namely the Vix future on May 11.

Well, everyone, please remember that if you're interested in systematic trading, you have the opportunity, through the link in the description below, to view a free presentation by Andrea Unger that will introduce you to his method, with which he managed to win the World Championship of Trading with real money 4 times. Not only that, but you'll also be able to get the best seller "The Unger Method" covering only the shipping costs. And much more. So, please go check it out because it's definitely worth it.

I look forward to seeing you next week.

Don't forget to subscribe to our channel and leave a Like if you liked the video.

Goodbye everyone and have a great weekend! Bye-bye!

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Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.