In case you missed it, the two year chart of crude oil…..
has been the inverse of the two year chart of the DXY, the US dollar index….
Yeah, I know you took your Econ back in the day, and you get the correlation, but with the DXY approaching a breakout to multi-year highs, as the Fed is about to raise rates for the first time since June 2006, and the ECB about to embark on further Quantitative Easing, it’s hard to imagine that crude oil will not re-test its lows from the depths of the financial crisis in late 2008, early 2009, which for the record is some 25% lower than current levels:
Not the highs in crude in early 2008 at $147 a barrel to the lows of $32 a barrel later that year, a year in which the Fed Funds rate started at 3.5% and ended at zero (and have remained that way since.)
It’s my sense that what comes next in commodity markets will go from what has been an orderly decline for the better part of 2015, to what is likely an all out panic, and the multi-trillion question is whether or not we will see the volatility spill-over witnessed in late August.
Equity volatility is crashing, and that with two very identifiable events with the ECB meeting on Dec 3rd and the two day FOMC meeting that ends on Dec 16th, very soon, likely at the end of this quiet holiday week. US equity vol will be a buy into the new year, and the trade may be to sell short dated index put options to finance owning longer dated ones. Realized volatility, in the case below with the SPY, has dropped off 50% from its late September highs, with implied vol (the price of options) now slightly below realized.
Once again commodities prices are likely telling complacent investors something, and it’s unlikely the sort of volatility we’re seeing in oil and other industrial commodities will stay sequestered from other risk assets.