TWIFO 160: All The Research You Could Ever Need HOST: MARK LONGO, OPTIONS INSIDER MEDIA GROUP CME HOTSEAT GUEST: ERIK NORLAND - EXECUTIVE DIRECTOR AND SENIOR ECONOMIST, CME GROUP FX Brexit: Pound Set For Volatile Fall after Calm Summer? Options traders see a calm summer but volatile fall for GBPUSD. Implied volatility is far below 2016 levels. Options skewness is negative, especially for this fall, but not exceptionally so. A great deal of bad news has been priced into the pound. SONIA futures have abandoned hopes for the BoE rate hike, now suggest a cut is more likely. If U.S. Dollar Weakens, Who Benefits? The U.S. dollar could weaken because of bigger deficits, lower rates and slower growth. British pound may be undervalued because of Brexit and susceptible to a long-term rally. It may be hard for central banks to further devalue Euro, Swiss franc and Yen. Among emerging market currencies, the low-debt, not-commodity-dependent Indian rupee may be a winner. The Renminbi might follow USD downward. Iron ore and coal cast a dark cloud over the future of the Australian dollar. CRUDE OIL Oil: Three Signs of Prices Hitting Bottom - 6/19/19 Oil prices have fallen out of bed again, with WTI crude oil tumbling 24% between April 23 and June 5. Refined products experienced similar declines, with gasoline and ultra-low sulfur diesel off 21% and 18%, respectively, over the same period. Not even attacks on shipping through the Strait of Hormuz appear to be enough to spark a sustained rally in either crude oil or refined markets. In April, when oil prices hit their high for the year, three factors gave warning signals that a decline was becoming more likely: Soybean oil prices, often a leading indicator of crude, had been falling for months (Figure 1). Out-of-the-money (OTM) crude oil options skewness became less negative than usual. OTM options on refined products had achieved extreme positive skewness. Oil: Are Options Skews Reliable Price Indicators? 21 May 2019 By Erik Norland Topics: Energy Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets. EQUITIES RALLY TAKING A BIT OF A BREATHER TODAY VIX 14.25 - UP 1.5 FROM LAST SHOW VVIX: 86.5 - UNCHD FROM LAST SHOW RVX: 16.40 - UP .4 PTS VIX/RVX SPREAD - 2.15 - TIGHTER BY MORE THAN A POINT FROM LAST WEEK Portfolios and Investing: If/When “Winter” is Coming? The Fed may have overtightened monetary policy. The economic cycle may be gradually turning towards a wintry downturn. In past “winters,” equities have usually underperformed. Short-term bonds could soar because of the Fed’s policies. If the Fed doesn’t ease policy soon, brace for a surge in volatility. Forces That Drive Equity Select Sectors   GOLD Gold: Impact from U.S. and Chinese Policies Gold has earned broadly similar returns for Chinese and U.S. investors since 2000. The divergence in returns could grow as US and Chinese monetary policy part ways. Growing Chinese debt and a rising U.S. budget deficit could be globally bullish for gold. Fed rate cuts, if they happen, might also be bullish for gold. If the Fed stands firm and does not cut rates, gold prices might suffer. SOYBEANS China, Brazil and the Soybean Crush Chinese growth exerts a strong, positive correlation to soy oil. Chinese growth has a weaker and even inverse relationship with soy meal prices. Soy oil is typically about 2-2.5x more expensive than soy meal per pound. Soy oil has a stronger influence on planting decisions than less valuable soy meal. Soy oil moves in lockstep with the Brazilian real. Soy meal has a much weaker relationship with Brazilian growth.