Despite the rites of spring, Wildcat has been house-bound this week, picking over some year-to-date commodity rankings from the Chicago Mercantile Exchange, and dreaming of being magnificently rich. Here are a few chestnuts, and a question answered.
Gas is the dunce of the class, having fallen nearly 24% since the beginning of the year, making it the worst-performing major commodity in the United States. This narrowly outstrips the losses made by arabica coffee (-21.2%) and class III milk (-16.8%). (Sugar forwards have also made a loss, so put some pressure on your barista).
Apart from gas and cappuccino ingredients, the price of almost every grain, energy, metal, soft and livestock has marched up since the beginning of the year: gasoline, soymeal, platinum, silver, cocoa, heating oil, crude, live cattle and lean hogs.
Given that traders usually find some correlation between oil, commodities markets and other asset classes such as currencies, equities and bonds, this decoupling looks disturbing. The scale and isolation of the US gas market bearishness has put it at magnetic opposites to the commodities complex, throwing up an unprecedented discount to crude.
Wildcat saw a conundrum here. In view of gas market estrangement, was it sensible to rely on algorithm-driven High Frequency Trading (HFT) to trade gas? The role of HFT in commodities is already controversial, with some participants criticising it for distorting prices, and having a lasting impact that shapes prices and correlations for weeks and months.
We’re cleverer than you think, one trader tells Wildcat. “It doesn’t matter what market you trade. Traders will still be relying on HFT for gas. They’ll trade anything that’s liquid and there are thousands of ways for them to make money. It can be driven by macro, fundamentals, events, currencies and they’ll have loads of algorithms that will inform the computer what to do, to try and predict human behaviour,” he said.
“So I doubt anyone’s been burnt by the recent bearishness, because they will have joined the trend to sell it off heavily,” he added.
There’s more. “Prices are so low, that producers could be forced to actually give gas away. But the computer’s not going to start smoking if gas is uncorrelated to anything else. It will take momentum and fundamentals into account, as well as technical stuff if prices are moving through moving averages – Bollinger Bands and the like.”
So there you have it. And for the record, Wildcat’s unsure what a Bollinger Band is, but it sounds more expensive than a coffee. CN