Indices mixed as Coffee surges and Natgas swoons

Summary:

• Quiet start to a busy week for Equities

• US indices near record highs but DE30 drifts

• GBP pairs remain well supported; Options traders getting nervy?

• Coffee rallies more than 4%

• Natgas plunges 5% lower

There’s been a rather sleepy feel to the markets at the start of the new week, with the subdued volatility and lack of sustained moves reminiscent of the sort of price action seen around Christmas. However, the calm mood is likely not the beginning of a sustained lull with several key events due this week which are expected to cause some frantic action. 

The US500 has now recovered almost entirely the decline seen last week and moved back above the 78.6% fib level at 3139 which could now be seen as the initial support. Should price break below here then subsequent fibs at 61.8% (3124) and 38.2% (3103) could attract buyers. As for resistance the all-time high of 3158 is the first level to look for but if this is broken above then further gains are possible with the 127.8% fib at 3182 one to keep an eye on should it occur. Following a break below the lower limit of the previous trading range (13150-13300 pts), DE30 started to move in a new sideways channel. New range is being limited by the support zone ranging above the 13050 pts handle and the 200-hour moving average serving as a resistance (purple line, 13175 pts area). 

The prevailing wisdom in the markets at the moment is that a Conservative majority would be positive for the pound as it would deliver a greater degree of clarity on the next steps regarding Brexit and therefore it’s not too surprising to see the currency remain well supported. Sterling has eked out a new 8-month high against the dollar in recent trade while the GBP/EUR rate remains at its highest level since May 2017.

However, if FX markets and bookmakers are increasingly pricing-in a Conservative victory, certain derivatives markets are a little more cautious. Looking at options markets there’s a clear premium being charged for downside protection in the pound with the 1-month Risk Reversal for GBPUSD dropping to its lowest level since April. Without going into the specifics of how this measure is calculated, it shows that the premium options buyers are willing to pay for downside protection compared to upside exposure is at its highest level in almost 8 months. 

Price of coffee is surging 4% today and the commodity trades at the highest level since December 2017. Rally can be ascribed to the latest ICO report that showed a massive drop in exports in October and hinted on a deficit in 2018/19 and 2019/20 seasons. Moreover, global coffee stockpiles tracked by ICE slid to the lowest level in three years.

Natural gas prices keep deepening their previous falls at the beginning of the new week and are trading already 5% lower compared to the Friday’s close, the lowest since October. A major cause of this pullback was a lower than expected decrease of stocks which could be tied to a relatively high temperature in recent weeks. Looking ahead, weather forecasts suggest this warm to stay, hence temperature is likely to be higher than last year. Moreover, natural gas remains oversold when looking at the CFTC data.