Weekly Update (Weeks of 3/13-3/20/23)
Weekly Update: March 20th, 2023
Trading Portfolio: (It is a link to Google Sheets)
Apologies for the missed week, I was out of town!
General Major News/Economic Developments
- SVB and Credit Suisse
- As many of you may know, Silicon Valley Bank (SVB) collapsed recently. The trigger for this collapse was a widespread "bank run" caused by a combination of rising interest rates, an increase in Venture capitalist cash reserves, and SVB's sale of government bonds at a loss to raise capital. This indicated to customers that their money in the bank may not be as liquid as they once thought, hence triggering many to withdraw a lot of money quickly. When SVB couldn't fulfill these needs, they failed within 48 hours of the disclosure of the sale of government bonds.
- Now, Credit Suisse seems to be the next bank in trouble. In fact, it reported $8 billion in losses in 2022, the biggest loss since 2008. It can be reasonably assumed that the risk CS faced in 2008 was systemic - this is likely not. The firm has been involved in a number of scandals including the mismanagement of funds. Their credit default spread has risen to astronomical levels, peaking at around 250 in 2008 and reaching over 2500 currently.
- Elon Musk’s Cost-Cutting Targets Put Pressure on EV Rivals
- Musk plans to reduce the costs of the next generation of Teslas by a staggering 50%. On top of the tax benefits, Tesla's vehicles already get, a lower price will make the purchase almost a no-brainer for both the car and the stock. Margins should shoot up.
Metals
Developments/News
- Glencore to discontinue $16 billion aluminum contract with Russia's Rusal. They will continue to honor existing contracts.
- With 5.4% CAGR, Steel Market Size to Reach USD 910 Billion by 2029
Gold
The support from the 100 EMA has continued to provide fantastic support for gold prices as we have now soared into my supply zone (1944) marked in red. We have peaked at 1993, and therefore I have not yet taken a trade. I did have a trade planned for when we entered the supply zone, however, the macro story has slightly shifted. Gold's role as an inflation hedge is taking prevalence. Since we are in the supply zone, I will hesitate to take a long position in the security until we achieve a better setup.
Gold, as a flight-to-safety instrument, is often the investment investors will race to when they do not trust currency or equities. Thus, amid the recent banking issues, gold demand has risen significantly, making me believe that the gold short will only be a pullback before we take out the highs.
However, US mint gold and silver sales did fall in February of this year. Granted this was pre-banking crisis. Additionally, over the past two decades, rising real yields have caused gold prices to fall without exception over the past two decades.
Silver
I was filled in the silver short I planned last week. The price remains below $22 currently. That is the main inflection point. I did see the price come over $22.08 in the premarket and watched it upon the opening to determine a close. I was met with an entire day of red hourly candles, leading me to hold the position. However, we did get a daily candle close OVER my stop loss level, so at this point, I have stopped out of the position.
While the demand for precious metals is rising amidst the crisis, the supply also seems to be falling. Production in Peru was down 20% in January. Over $22 leads me to flip my bias to the long side considering we are now out of the supply zone. However, there is not enough there yet for me to take a trade so I will wait. The direction of the market is likely to strongly depend on whether the Federal Reserve will tighten its monetary policy.
Copper
Missing the fill for the short by $0.004 is biting harder now with this strong dip in copper prices below $4.
My knowledge leads me to assume that copper, as used in a plethora of next-gen industries, is not exactly a metal used for safety and as a hedge against inflation. It seems to have a beta closer to 1 in that it follows what the equity markets are doing, which makes sense considering how heavily it is used in technology.
Agriculture
Developments/News
Coffee
Coffee prices seem to be adversely affected by the recent banking crisis. The logic follows that if there are additional recessionary concerns, coffee in its raw form as a consumer-purchased product will reduce both in consumption and market price.
ICE inventories rose on Friday (3/18) to a 3-month high of 7,596 lots. Additionally, Safras & Mercado raised its expectations for Brazillian production to 58.9 million bags up from 57.3 million. The International Coffee Organization (ICO) on March 10 projected that the global 2022/23 coffee market would be in deficit for a second year following the 4 mln bag to 5 mn bag deficit in 2021/22 due to arabica crop woes.
The additional supply in confluence with reduced demand should weigh heavily on coffee prices pushing them lower. However, don't get your hopes too high for your Starbucks cup to fall from its $6 price tag - you are paying for the experience and the ambiance, not the bean.
Overall I think we head down from here at least for the time being. Will plan a short trade if the right opportunity presents itself.
Brazil Feb green coffee exports down -35.8% to 2.11m bags
ICE Arabica inventories down further to 763k bags on Tuesday 3/15
Vietnam Feb coffee exports down -34.2% y/y at 122,833 MT
Cocoa
The 2832 short would have continued to give massive returns. I should have taken two, cut one, and trailed the other in hindsight. Micro cocoa futures were unfortunately not available for trading. You adjust as you go.
With expected upcoming supply deficits, both London and New York cocoa have risen to highs, earlier this month posting a 2-year high. The International Cocoa Organization (ICCO) cites supply deficits compounded with weather variations to be the reason for higher prices. Cocoa farmers will continue to struggle in maintaining the size and quality of their yields as we await the Ukraine-Russia conflict to die down. Exports of potash and fertilizers from Russia have been limited globally.
2021/22 production down 8% y/y to 4.823 MMT
2020/21 production was up to a record 5.242 MMT for reference
Wheat
We didn't quite get the price we wanted for our trade, but wheat is showing signs of strength as expected. Now that we have entered back into the broadening formation, it is possible to get a long continuation setup.
The Black Sea Export Corridors deal, involving Russia, has been extended 120-days. Russia was planning for only a 60-day extension so it is unclear if they will honor the arrangement and that remains a geopolitical risk.
May 23 CBOT Wheat closed at $7.10 1/2, up 11 1/2 cents, currently down 10 3/4 cents
Energy
Developments/News
Crude Oil (Brent)
My expectations from last week did not play out, but the trade did not trigger anyways. This revisit has allowed me to find a nice demand zone (marked green) which I have bought a single brent contract at as well as a supply zone to use as a target (marked red). I am looking for almost a 10-point move, risking about 1.5 points
There are a lot of mixed factors for oil prices. A weaker dollar to close the week was supportive of prices, but we saw a healthy breakdown before that. Late Thursday comments from the Presidential Coordinator for Global Infrastructure and Energy Security said the US was not rushing to replenish its petroleum reserves. The International Energy Agency (IEA) also predicts that global supply will comfortably exceed demand in 1H23. Finally, forecasts for China's fuel demand are lower due to low expectations of tourism and international travel from China.
Crude Oil (WTI)
WTI prices dipped strongly from the 100-EMA as well. Although there is no clear demand zone, there is new supply being formed overhead that will be good to keep an eye on.
The macro story remains the same as Brent's.
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