Volatility strikes back

Upcoming economic events (Singapore Local Time):

Upcoming Economic Events (Singapore Local Time):






Eurozone HICP (February)



US ISM Services PMI (February)



US ADP Employment Change (February)



China CPI (February)



BoJ Interest Rate Decision



US Nonfarm Payrolls (February)



US CPI (February)



US Retail Sales (February)

The most important events in the next two weeks are the February inflation numbers and the Bank of Japan’s monetary policy meeting. As we mentioned in our first piece of the year, investors should closely monitor BoJ and its policy implications.

Markets in Focus

Figure 1 Generic 1st E-mini Dow Jones Future

Previously on multiple occasions, we have discussed the ongoing market “rotation” from growth to value. The Dow Jones has been the relative outperformer among the major US indices, considering how much it has recovered from the 2022 decline. However, it also has rolled over recently and broken a four-month descending triangle. The next significant support level is only found near 30000.

Figure 2 USD/CNH

We flagged out the potential bullish case for USD/CNH two weeks ago after it broke the neckline of a double-bottom. The rally indeed has accelerated as the greenback strengthened broadly. However, USD/CNH has moved into a significant resistance region, breaking from which this pair may climb towards 7.2.

Figure 3 Generic 1st Silver Future

On the renewed strength of the US dollar, the silver price plunged to below 21. This level has historically proven to be critical support and resistance. We expect the battle between the bulls and the bears to be fought here.

Figure 4 Feeder Cattle May 2023 Future

Feeder cattle have completed a Cup-and-Handle pattern and decisively broke out on Thursday. From a technical analysis perspective, such a breakout usually suggests continued upward momentum.

Figure 5 Generic 1st Natural Gas Future (Monthly)

Natural gas price has collapsed 80% from 10 to 2 in a short span of half a year. Such a price drop may be almost unimaginable for many other financial instruments, but historically it is not uncommon for natural gas. It is currently trading near its multi-decade support at around 2.

Our market views

Not long ago, the market had been cheering for the declining headline CPI and optimistically hoping for a “Fed Pivot” due to the widely anticipated economic slowdown. An equity rebound, weakening US dollar, fallen bond yield, and looser financial conditions were an apt description of the market from Q4 last year until recently. This optimism also led to subdued volatility in many assets, especially commodities. As noted in a few recent pieces, both the fundamental side (the market once again getting ahead of itself) and the technical side (prices have been consolidating in tight ranges) suggested a potential change – a rude awakening, as we called it.

Indeed such change happened. The market finally had a reality check as more economic data suggested that the US economy, especially the labor market, is still robust. The economy may not have a “soft landing”, or any “landing”, at all. By front-running the Fed and pricing in the “Pivot” prematurely, the market made it more likely for growth and inflation to pick up again, undermining the central bank’s effort to cool down the economy. As a result, more Fed officials publicly reiterated their commitment to tackling inflation before it becomes entrenched. 

The currency market shows the clearest sign of the reversal. The US dollar has strengthened substantially against a broad range of currencies, especially those in emerging markets. The canaries in the coal mine are pairs like USD/CNH and USD/KRW, both rising rapidly since February, albeit under the radar of many investors. The speed and magnitude rivaled the move from last August to September, when the Dollar Index (DXY) went from 105 to 114. 

Stress from a strong US dollar is propagating to all other parts of the financial market. In commodities, we also observed many instances of prices breaking down from tight consolidations, such as silver and corn. In contrast, feeder and live cattle are gaining momentum on the upside. These assets are interesting to us because of their low correlation to the rest of the market, and few investors pay attention to them.

When volatility is back with a vengeance, it brings both risks and opportunities. Buckle up, and get ready for a wild ride in the next few months.

How do we express our views

We consider expressing our views via the following hypothetical trades1:

Case study 1: long E-mini Dow Jones future

We would consider taking a long position on the E-mini Dow Jones future (YMH3) at the present level of 32800 with a stop-loss above 34000, which could bring us a hypothetical maximum loss of 1200 points. Looking at Figure 1, if the descending triangle breakdown is confirmed and the decline continues, the index has the potential to drop to 30000, a hypothetical gain of 2800 points. Each point move in the E-mini Dow Jones future contract is USD 5.

Case study 2: long feeder cattle future

We would consider taking a long position on the feeder cattle future (GFK3) if the price retests the breakout’s line at around 196, with a stop-loss 193, which could bring us a hypothetical maximum loss of 3 points. Looking at Figure 4, if the Cup-and-Handle breakout is confirmed and the rally continues, feeder cattle have the potential to reach 206, a hypothetical gain of 10 points. Each point move in the feeder cattle future contract is USD 500.

1 Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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