Banks, bucks, and beans

Upcoming economic events (Singapore Local Time):

Upcoming Economic Events (Singapore Local Time):






China Consumer Price Index (YoY)(Apr)



US Michigan Consumer Sentiment Index (May)



China Retail Sales (YoY)(Apr)



Euruzone Gross Domestic Product s.a. (QoQ)(Q1)



US Retail Sales (MoM)(Apr)



Japan Gross Domestic Product (QoQ)(Q1)



PBoC Interest Rate Decision

In the next two weeks, the focus will be on key economic data from China, the US, and the Eurozone. Investors are also watching how the regional banking crisis in the US continues to unfold.

Markets in Focus

Figure 1 US Dollar Index

As we inch closer to the potential end of this rate-hiking cycle, the US dollar teeters on a critical support level that has thwarted its decline multiple times since mid-2022.

Figure 2 Corn Future (July 2023 Contract)

Corn has formed a twelve-month descending triangle, lately finding itself huddled in the support region around 570.

Figure 3 Soybean Oil Future (Generic 1st Contract)

Soybean oil has formed a massive two-year Head-and-Shoulder (H&S) top. Currently the battle is being fought at the neckline after a lengthy decline.

Figure 4 Soybean Future (July 2023 Contract)

Soybean has fared slightly better than corn, as it’s been trading within a symmetrical triangle, and its descent from the 2022 high was relatively less steep. Presently, it’s consolidating at the lower trend support.

Figure 5 Soybean Crush Spread (July 2023 Contracts)

Due to the striking underperformance of soybean oil and soybean meal compared to soybean, the crush spread experienced a jaw-dropping reversal from a historical high back to the long-term average in just a few weeks.

Our market views

Just days before the May FOMC meeting, which saw the Fed hike interest rates by another 25bps as anticipated, federal regulators swooped in to take control of First Republic Bank. This marks the third regional bank collapse in under two months, as the regional banking crisis continues to brew. The SPDR S&P Regional Banking ETF (KRE) has nosedived more than 55% since its 2022 high, edging dangerously close to pandemic lows.

Deposits are fleeing smaller regional banks at an alarming rate. This has been a key driver of the “bank run,” putting the squeeze on these institutions and even pushing some into insolvency. Depositors are flocking to Money Market Funds and US treasuries, where they can secure at least a 4% yield compared to the measly rates most regional banks offer. Counterparty risk considerations also make these alternatives more appealing, especially following the collapse of Silicon Valley Bank and Signature Bank in March. As the saying goes, money goes where it’s treated best.

It’s no surprise that short-term interest rate markets are signaling the end of rate hikes, as the Fed must tread carefully to prevent the regional banking crisis from spiraling. With the Fed Funds Rate now above 5% for the first time since 2007, it’s a possibility we can’t ignore. As a result, the US dollar is on top of our watchlist. If peak hawkishness has already passed, the greenback may struggle to maintain its current support level. If the dollar stumbles, the consequences could be massive, particularly for commodities and emerging market assets.

Agriculture commodities have recently faced the music, and markets like corn, soybean, and soybean oil are teetering on critical support levels after sharp declines. These markets offer attractive technical setups on the long side due to the heavily skewed potential risk/reward. In other words, if the dollar rebounds and risk assets (including these commodities) start selling off amid recession fears, we can quickly abandon ship once technical levels are breached, minimizing damage. However, if the Fed softens its stance and the dollar takes a further hit, these agriculture commodities may be primed for a significant rebound. This asymmetrical upside is what we mean by a skewed risk/reward balance.

How do we express our views

We consider expressing our views via the following hypothetical trades1:

Case study 1: long corn future

We would consider taking a long position on corn future (ZCN3) at the present level of 591, with a stop-loss below 570, which could bring us a hypothetical maximum loss of 21 points. Looking at Figure 2, if the rebound continues, corn has the potential to reach 650, a hypothetical gain of 59 points. A corn future contract represents 5,000 bushels of corns. Each point (equivalent to 1 US cent per bushel) move in the corn future contract is USD 50.

Case study 2: long soybean oil future

We would consider taking a long position on soybean oil future (ZLN3) at the present level of 54, with a stop-loss below 50, which could bring us a hypothetical maximum loss of 4 points. Looking at Figure 3, if the rebound continues, soybean oil has the potential to reach 75, a hypothetical gain of 25 points. A soybean oil future contract represents 60,000 pounds of soybean oil. Each point (equivalent to 1 US cent per pound) move in the soybean oil future contract is USD 600.

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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