Markets In Limbo
I had an aggressive vacation schedule this summer and wasn’t able to write as much as I would have liked. I was looking forward to trading more actively now that I’m back, but it has taken a while to develop a view of where markets are heading from here. Volatility is low and global macro feels like it’s sitting at an equilibrium. Quiet periods like this don’t last for long. I see three themes to keep an eye on and to position for over the next several months.
Super El Nino
I first wrote about Super El Nino in May, and the Super El Nino has impacted the soft commodities market mostly as I expected. The prices of the majority of soft commodity futures are rising as estimates of yields get cut on account of adverse weather conditions. The NOAA estimates a 93% chance that El Nino will intensify into the “very strong” category between September and November, so we have yet to see the full impact. I’m positioned long or am looking for buy setups in various soft commodity markets (more on that in the paid subscriber section).
El Niños tend to bring much wetter conditions across the southern U.S., from California through the Central and Southern Plains and the Southeast. This tends to reduce the risk of drought, improving water resources in our streams, rivers, and reservoirs for the next growing season,” he said, citing a factor that could benefit agricultural production.
Snodgrass, who served as head of the Department of Atmospheric Sciences at the University of Illinois Urbana-Champaign for 18 years, therefore believes Brazil is more exposed than the U.S. during El Niño years.
“The main reason is that El Niño tends to trigger drier weather in the Cerrado, the Central-West, and agricultural regions in the North and the Amazon, while producing much wetter conditions in southern growing areas such as Paraná, Santa Catarina, and Rio Grande do Sul,” he said.
If confirmed, this scenario could lead to an estimated 10% loss in Brazil’s 2026/27 soybean and corn crop, according to Eduardo Assad, an Embrapa researcher and professor at the Center for Agribusiness Studies at the Getulio Vargas Foundation (FGV Agro).
Beyond Brazil, corn crops could face drought in other producing countries. “In Europe, heat waves are damaging key corn, wheat, and sunflower crops,” Assad said. But overall, he said, the most severe situation is in Central America, in countries such as Guatemala, Panama, El Salvador, and Costa Rica. Rice and corn production in those countries could be affected.
The disinflationary lull in the US
The US economic surprise index has turned lower, creating a mild disinflationary impulse and causing in a pullback in Fed rate hike expectations. This has resulted in strength in equities and precious metals, which tend to do well during disinflation regimes.
I don’t see this disinflationary impulse lasting long. Part of the downward surprise was caused by an abnormally weak non-farm payrolls data earlier this month. Jobless claims and other employment data do not confirm the weakness in NFP, which means the weakness could very well reverse in coming months. The AI capex boom, ongoing tensions between US and Iran, and rising food prices may start to put upward pressure on headline inflation again, giving the Fed reason to stay hawkish. This might be an opportunity to trim longs in equities, precious metals, and bonds.
Seasonal weakness in equities, strength in VIX
The S&P 500 has a seasonal tendency to trade sideways or lower during the period from September to October. This pattern played out even on strong years such as 2020, 2021, and 2023.
The VIX index also tends to spike during September and October.
This signal is made more reliable by the fact that we are going into this period at the year’s low in VIX. From Sentimentrader:
Sentiment and positioning are also very bullish:
Despite the pullback in AI stocks, AI remains BofA’s fund manager survey’s most crowded trade:
Given the current backdrop - an expired US-Iran MOU, a hawkish Fed, and persistent bullish positioning and sentiment, I would not be surprised to see a correction of 5% or more in the next two months.
In the paid subscriber section, I’ll highlight some charts and discuss the positions I’ve recently opened in equities, precious metals, and soft commodities to position for the views above.
