Russell 2000 Leads Slump as Yields Bounce Back
Russell 2000 Leads Slump as Yields Bounce Back
Also, 10-year T-note, gold, crude oil, and Japanese yen futures
Russell 2000 e-mini futures (/RTY): -0.93%
10-year T-note futures (/ZN): -0.11%
Gold futures (/GC): -0.04%
Crude oil futures (/CL): -0.77%
Japanese yen futures (/6J): -0.54%
Catalysts are scarce this week, leaving markets sensitive to typically lower priority items.
Fedspeak in recent days has trended more hawkish than the perspective offered by Fed Chair Jerome Powell last week at the May Federal Open Market Committee (FOMC) meeting. Traders may be rethinking the quick shift in cut odds, which went from less than one 25-basis-point (bps) rate cut discounted through 2024 last Wednesday to over two 25-bps cuts priced-in by the start of this week.
U.S. Treasuries are down across the curve, and the knock-on effect may be weighing on U.S. equity markets as we turn though the middle of the week.
Symbol: Equities | Daily Change |
/ESM4 | -0.38% |
/NQM4 | -0.61% |
/RTYM4 | -0.93% |
/YMM4 | -0.14% |
S&P 500 futures move down
S&P 500 futures (/ESM4) fell Wednesday morning, trimming a four-day rally that saw the U.S. benchmark at its highest since April 12.
The chip sector is facing headwinds after Intel (INTC) said that its revenue would be hit by the U.S. export ban to Huawei. Canada’s Shopify (SHOP) showed a surprise miss for first-quarter sales, underpinning weakness in the Canadian economy.
Traders will have their eyes on tomorrow’s jobless claims data to assess the U.S. labor market and how it feeds into Fed rate cut bets.
Strategy: (37DTE, ATM) | Strikes | POP | Max Profit | Max Loss |
Iron Condor | Long 1900 p Short 1925 p Short 2175 c Long 2200 c | 64% | +340 | -910 |
Short Strangle | Short 1925 p Short 2175 c | 70% | +1240 | x |
Short Put Vertical | Long 1900 p Short 1925 p | 84% | +155 | -1095 |
Symbol: Bonds | Daily Change |
/ZTM4 | -0.02% |
/ZFM4 | -0.07% |
/ZNM4 | -0.11% |
/ZBM4 | -0.21% |
/UBM4 | -0.41% |
A $42 billion bond auction coming
Ten-year T-note futures (/ZNM4) are in focus today ahead of the Treasury’s $42 billion auction of the notes.
Bond traders are watching this one closely and it poses one of the main event risks for the week amid a light economic calendar. A strong showing for the auction could help to dampen yields on the 10-year notes, which currently stand at about 4.5%. Traders may see the risk/reward equation as favorable by investors if the Fed doesn’t pivot to hike rates soon.
Strategy (44DTE, ATM) | Strikes | POP | Max Profit | Max Loss |
Iron Condor | Long 106 p Short 106.5 p Short 111.5 c Long 112 c | 67% | +125 | -375 |
Short Strangle | Short 106.5 p Short 111.5 c | 72% | +421.88 | x |
Short Put Vertical | Long 106 p Short 106.5 p | 91% | +62.50 | -437.50 |
Symbol: Metals | Daily Change |
/GCM4 | -0.04% |
/SIN4 | +0.02% |
/HGN4 | -1.45% |
Gold futures drop
Gold futures (/GCM4) struggled against a stronger dollar on Wednesday, dropping about 0.31% in morning trading.
A recent slowdown in buying by the Chinese central bank has recently dampened sentiment for the metal. The Fed’s path on interest rates seems to be in a holding pattern for now, leaving gold traders with uncertainty about the metal’s outlook. Today’s bond auction may indirectly influence the metal.
Strategy (48DTE, ATM) | Strikes | POP | Max Profit | Max Loss |
Iron Condor | Long 2200 p Short 2225 p Short 2450 c Long 2475 c | 66% | +640 | -1850 |
Short Strangle | Short 2225 p Short 2450 c | 72% | +2220 | x |
Short Put Vertical | Long 2200 p Short 2225 p | 86% | +310 | -2190 |
Symbol: Energy | Daily Change |
/CLM4 | -0.77% |
/HOM4 | -0.26% |
/NGM4 | +2.04% |
/RBM4 | -0.87% |
Crude oil futures (/CLM4) continued to slide, dropping to its lowest level since early March as U.S. inventory increases dissuade traders from buying the commodity.
Demand concerns have now overtaken any geopolitical uncertainty despite Israel pushing forward with an operation in Gaza’s Rafah city. Yesterday’s figures from the American Petroleum Institute (API) showed a surprise build of 500,000 barrels for the latest reporting week.
Today, traders are focused on the upcoming figures from the Energy Information Administration (EIA).
Strategy (37DTE, ATM) | Strikes | POP | Max Profit | Max Loss |
Iron Condor | Long 69 p Short 70 p Short 82 c Long 83 c | 62% | +290 | -700 |
Short Strangle | Short 70 p Short 82 c | 70% | +1400 | x |
Short Put Vertical | Long 69 p Short 70 p | 87% | +110 | -890 |
Symbol: FX | Daily Change |
/6AM4 | -0.42% |
/6BM4 | -0.20% |
/6CM4 | -0.10% |
/6EM4 | -0.01% |
/6JM4 | -0.54% |
Bank of Japan Governor Kazuo Ueda’s comments overnight did little to deter traders from coming in and placing the Japanese yen (/6JM4) at the bottom of the totem pole versus the U.S. dollar on Wednesday.
Interventions to support a currency often fail if the underlying fundamentals don’t change, and the yield differentials and deteriorating Japanese terms of trade haven’t gone anywhere.
On approach to 0.0064, however, traders may be incentivized to look long deltas in /6JM4 in anticipation of another intervention effort to prevent the USD/JPY spot rate from breaking the 1990 high at 160.40.
Strategy (30DTE, ATM) | Strikes | POP | Max Profit | Max Loss |
Iron Condor | Long 0.00625 p Short 0.0063 p Short 0.006625 c Long 0.00665 c | 64% | +125 | -500 |
Short Strangle | Short 0.0063 p Short 0.006625 c | 71% | +462.50 | x |
Short Put Vertical | Long 0.00625 p Short 0.0063 p | 86% | +75 | -550 |
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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