As we look forward, here are the key volatility drivers for the week ahead:
Weekly volatility matrix – Using options data to see how the market is seeing future movement.
In many cases identifying these moves and entering was straight-forward – long palladium and short EURAUD were ideas being pushed for a couple of weeks – the hard part, obviously if swing or position-trading, is holding and extracting as much as you can – these are multi-year affairs and for the hedge funds, these are the ones you simply have to hold to generate real alpha. This is where a rules-based approach can be truly advantageous.
Palladium rallied +27% last week and closed > $3000 – one we talked up on The Trade-Off two weeks ago as Russia export 46% of the worlds’ palladium. Eyeing a break of the May 2021 highs.XAUUSD - A big week for Gold (XAUUSD) putting on 4.3% and now eyeing a test of $2k. The break of the double bottom neckline at $1917 sets the yellow metal on for a target of $2140. XAUEUR was the star though gaining +7.6% on the week, with XAGEUR (silver in EUR terms) +9.2%. Gold 1-week calls trade at a 3.3 vols premium to puts which is the highest since March 2020 – there’s a lot of love for Gold. Crude rallied +23% on the week, with our Brent price closing above $120 and SpotCrude also eyeing $120. While there are many ways to look at how overbought or one-sided the moves have been, one I traditionally look at is crude -/+ % the 50-day MA – we see Crude now trades at a 31% premium to its 50-day MA, which is 3 standard deviations to its average since 2000. These are extraordinary times though and perhaps these metrics have limited sway when the market is still unsure about the future of Russian supply – still too many unknowns to be anywhere near a lasting decline. Sugar +8.6% last week - hugging the upper Bolly Band and above the 5-day EMA – happy to hold longs until this dynamic changes. EU Nat gas +120% last week to close above E200 – not a market offered, but one that's incredibly volatile and has one of the biggest implications for European households as we head into the winter period – if this keeps heading higher it will get more and more attention. EU equity markets were savaged on Friday, with the EU Stoxx -5% on the day on volumes 80% above the 30-day average. EU Stoxx 50 lost 10.4% last week alone and is easily underperforming other developed market equities.Our GER40 has nearly lost 20% since the highs on 6 January and the market finds sellers into any rallies. EU banks are being called into question and are at the heart of the concern with traders looking at funding and interbank borrowing metrics and a ballooning cost to insure against debt default (Credit Default Swaps).Copper gained +9.6% in 5 days and eyeing a break of $5 – lovely shape I think this test the round number.EURAUD fell 5.1% last week – a huge move and is the quintessential expression of all that is playing out in markets – short Europe (as it is easily most exposed to the fallout of sanctions and Russian debt repayment consensus) and long Commodities. The hard part is when to fold – the EURAUD RSI is 12.9, and we see a 2.4% discount in price to the 5-day EMA (a 3.5 standard deviation event) – as oversold technically as you’ll likely see – but these are exceptional times. EURNZD -4.9% on the week – obviously the same theme as EURAUD, so if expressing be cognisant of the correlation so as not to double up on the exposure. EURCHF fell 3.9% last week and is now eyeing parity – the SNB are going to be watching this closely, but what can they do?EURJPY – we see EURJPY 1-week put volatility trading a 4.4 premium to calls – a huge reading and most since 2020 & 2016. I am surprised the JPY isn’t far stronger in this market. EURUSD fell 3% on the week and has firmly broken the double top neckline of 1.1121 and targets 1.0750 – can’t find a friend and could be headed to target if we get an 8% headline US CPI.
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