I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Friday, July 23, 2010

Diverging trends

Overall equities/commodities/fx performance over the last couple of weeks shows diverging trends. It all started with FX, when EURUSD rallied off 1.18, and since this week metals followed. Oil and equities remain tight together. Here's an update of short term correlations:


Metals broke risk assets relationship with copper surging to 2 months hight towards 100d and 200d moving averages. A move higher would open a 1k dollar rally for a retest of this year highs at $8000/mt:


As usually my favourite market remains Nymex gas, which as discussed earlier is bouncing off long term support line. Feels like consolidation at these levels is more likely outcome, but a rally through 200d moving average would open further upside towards low $5 and ultimately $8/mmbtu:


Oil and Equities remain well tied up together for the moment and for these markets risk still remain to the downside as we still post lower highs and only rally through 1100 in S&P would call for a further bounce towards 1115-1130 area. If such move occurs it will damage overall bearish trend, but hardly will make it a bull case scenario and rather call for consolidation and risk of further losses:


Same thing for oil... failure to push through 200d moving average still leaves us open for further losses. Short term moving averages give support to the market:


Bottom line, there is still little evidence in risk assets that there is a change in trend. Except for probably metals, risks are to the downside.
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