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BOOK YOUR FREE STRATEGY SESSION NOW >>The early months of 2022 have been very eventful for markets. Amid the Russia-Ukraine conflict, rising interest rates, and rising inflation, we've witnessed several events that have had a major impact on market performance.
This video will offer a brief but comprehensive overview of the most important movements in recent months focusing on stocks, bonds, commodities (energy, metals, meats, grains, soft commodities), currencies, and cryptocurrencies.
Here are some topics covered in the video:
- Effects of inflation and rising interest rates on stocks and bonds
- Impact of the war in Ukraine on commodity prices
- Returns of the main markets from the beginning of the year to date
- Volatility trends and signs of concern from traders
Enjoy the video!
Hey everyone and welcome back! One of the coaches at Unger Academy here and today we're going to be doing an overview of the markets. However, unlike what we do every week because it will be a little bit more long-term, just to see the interesting things that have happened in the last six months.
Alright, so let's start as usual with the stock indexes. Now, in this chart, we can see the Nasdaq and how it performed last year. It's quite easy to see that it was a good year-end and in the last five months, the trend has reversed despite a notable rebound in the last few days. We're talking about a +7% in the last five days. So, a market that has had two fairly major leg downs, for an overall decline of more than 30% from high to low.
The situation wasn't very different on the other indexes. We can see in this chart the Mini SP 500, also with the two down legs, and a fairly strong rebound in the last 5 days. The decline of the Mini SP 500 was more moderate. It's a little more than 20%, so, it's already of a certain magnitude.
If we go take a look at the one-year return, we can see that it is negative for all equity indexes. So, at the moment we see a pretty large bearish trend, with corrections above 20-30% that are not that frequent in these markets. So let’s hope that we've come close to the end of these trends.
As you all know, there are fundamental reasons that are undermining the resilience of the markets. The tension related to interest rates resulting from the U.S. Central bank policies, namely the rate hike that is weighing as a regressive measure for the economy. And these rising rates also result from tensions in commodity markets, which means that inflation is very high and so, the U.S. Central bank is trying to put a brake on that by raising the rates. Let's see how far it can go because obviously, as mentioned before, raising rates will weigh on the economy.
In parallel with the decline in equities, we've also seen a decline in bonds, which is also a natural consequence of rising rates. So bonds’ prices have also gone down and we've seen a strong bear market on all bonds.
In this case, we’re seeing the U.S. T-bond, the U.S. 10-year bond, and the European 10-year bond, namely the Bund. We can see that all of them are down between 8% and 9 %.There’s a downtrend in bonds as well as in equities. It is quite a difficult situation especially for the investing world because it's mainly composed of these two asset classes – the bonds and equities - and if they both go down, it's surely difficult to build efficient portfolios.
On the other hand, the Energy sector has undoubtedly performed very well. I mean, take a look at the Crude Oil. We can see it in this chart from about a year ago. We see a very strong bullish trend. Let's not forget that it had even touched negative prices during the Covid period, so this was certainly a remarkable run-up.
Of all the energy markets, however, Crude Oil is one of the worst performers, because if we look at the one-year performance of other markets we see much higher returns. I mean, +358% for Heating Oil, +156% for Natural Gas, and +123% for Gasoline.
Of course, the macroeconomic tensions arising from the war between Russia and Ukraine are weighing on this sector. And as we all know, this is reverberating in a sharp rise in commodity prices, particularly energetics and grains.
Turning to the Metals market, we've been saying this for a long time, they haven't had a trend or even a directional movement. You can see that at one year they have had mainly negative returns. The worst performer is certainly Silver. Here’s Platinum. While Gold is pretty much unchanged.
Negative returns also on the Meat sector. Here again, there isn't much to report, while instead, we can see a remarkable price growth in soft commodities and grains.
Among the soft commodities, those that grew the most were undoubtedly Orange juice, up 55%, and Cotton, up 77%. Let’s just turn on the standard deviation. Here we can see the volatility, in the chart below, and for all the underlying assets it is clearly high. We'll have a closer look at that in a bit.
Turning instead to the Grains sector, we have noteworthy returns, especially on Wheat. We know that it is one of the commodities produced in Ukraine, and so the tension of the war has spilled over into this agricultural commodity. Not only that, we can generally see positive one-year returns on the whole sector.
If we turn to take a look at currencies, we'll see the strength of the dollar is quite evident. The Euro-Dollar has lost about 12% in a year. Let's also take a look at the trend: decidedly bearish. It's clear that 12% on a currency is a fairly large movement because usually, the volatility of these instruments isn't comparable to that of other commodities.
And we’re finding this trend in all currencies. So, the dollar is strong against all other currencies.
The cryptocurrency sector is also weak. I mean Bitcoin lost about 21%, almost 22%, from a year ago. It is on significant lows now. It had broken through the threshold of 30,000 but recently recovered it.
The whole cryptocurrency sector is suffering right now and all in all, Bitcoin is one of the markets that is holding up the most.
Let's take a look at volatility measured as standard deviation, so as historical volatility. And we can see that over the long run, so I'm referring to a one-year time frame, we have percentile values that are still very high. 95th percentile on both the Nasdaq and the Mini SP 500.
We certainly have high volatility on bonds as well. On energetics a little bit less. So, there’s high volatility in soft commodities. Look, 98% on currencies. So in general, it’s a situation that reflects the instability of markets in the current period.
Finally, let's take a look at the term structure of implied volatility. In this chart, we can see the Vix, which is at quite high levels, among the highest levels of the last year. It touched a high of 39, so we're approaching the psychological threshold of $40.
All in all, when comparing these spikes to the magnitude of the downturn, it occurs to me that yes, volatility went up, but there was never any real panic because by looking at the term structure of the volatility indexes on the SPX, there were brief moments of backwardation. At the moment we're back in contango. However, we haven't seen anything particularly extreme especially compared to the downtrend in the indexes, which certainly is of a considerable magnitude.
With that, guys, our markets overview is over. I'd just like to remind you that if there is someone among you who is interested in systematic trading, we’re going to leave you a link in the description of this video. Through this link, you'll be able to participate in a free presentation by Andrea Unger who will introduce you to his trading method, which enabled him to win the World Cup Trading Championships 4 times. Not only that, but you'll also be able to book a free strategy consultation with one of our tutors, or get a copy of the best-selling book "The Unger Method" by paying only the shipping costs.
With that guys that's all for today.
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With that have a fantastic weekend! I will see you soon in our next video! Bye-bye!
We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>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.
