Did Watson Blow a Fuse With the Latest TACO Tuesday Trade?

• An hour before the US president was supposedly going to end Iran's civilization forever, the US president reportedly extended the deadline by two weeks.
• The Energies sector imploded on selling tied to algorithms triggered by the headline, while gold rallied more than $200 per ounce.
• The bottom line is US stock index futures, the only market sector that seems to matter, rocketed higher, again on algorithm buying being triggered by the headline. 

Around 18:00 (CT) Tuesday, or roughly one hour until the US president’s deadline to end Iran’s entire civilization, he called it off. One of the fund managers I work with who was following along with yesterday’s commentary sent me the message, “Happy TACO Tuesday” with a link to a CNBC.com piece with the teaser, “(The US president) suspends Iran attack for two weeks, subject to Hormuz Strait opening”.  A couple observations:

• It is always “two weeks”. Whatever the discussion. Two-week delay. Two weeks away. Two weeks.
• We will soon hear about another “deal” that simply doesn’t exist. I don’t guarantee much when it comes to markets, but I can guarantee this.

Any rational person who has watched markets over the past 10 years knew what was going to happen Tuesday night. Yes, the US president had made the boastful threat he would end Iran’s civilization if a ‘deal’ wasn’t made to open the Strait of Hormuz, but nobody in their right mind believed him. Should have believed him. In fact, I like to think that if humans still ran markets in open outcry pit trade, much of what has happened this past decade would’ve been largely ignored. But that isn’t the world we live in. When the inevitable backing down and extension was announced, WTI crude oil (CLK26) fell as much as $21.90 (19.5%) while diesel fuel (HOK26) dropped as much as 87.8 cents (19.6%). Both were still showing sharp losses of $20.00 (17.7%) and 70.5 cents (15.7%) respectively at this writing. On the other hand, gold (GCM26) rallied as much as $203 (4.3%) and was sitting $120 higher (2.6%) Wednesday morning. Keep in mind, though, the only things that matter to the US president besides his ‘deals’ are US stock indexes, and this morning we see the S&P 500 futures (ESM26) up 2.3%, DJIA futures (YMM26) up 2.7%, and Nasdaq futures (NGM26) up 3.0%. Out in the Barn, spillover buying interest from the Indices sector has both cattle markets in the green, but not by as much as I expected. At this writing the June live cattle contract (LEM26) is up $0.50 after rallying as much as $1.95 while May feeder cattle (GFK26) are showing a gain of $2.00 after jumping as much as $3.925.

As for the Grains sector, the one US farmers are most interested in, that group the US president told “You make enough money”, the reaction was as expected. The fate of the oilseed sub-sector was easy to guess. The TACO Tuesday trade happened after the Energies sector had reopened for the evening but before the opening bell for the Grains sector. With Watson sending diesel prices reeling on what was inevitable news, rational human beings knew it would be a rough open for soybean oil, which would likely put pressure on soybeans. Sure enough, the May and July bean oil (ZLN26) contracts initially hit the daily limit down mark of 3.5 cents before immediately bouncing a bit. (Bean oil bounces, did you know that?) As of this writing both May and July are down about 2.3 cents on trade volume of nearly 50,000 contracts (each). May soybeans (ZSK26) fell as much as 17.75 cents before recovering to a gain of 3.0 cents Wednesday. If we want to let our imaginations wander a bit, the initial selloff could’ve sparked a round of buying interest from the Eastern Hemisphere. July was sitting 1.75 cent higher at this writing. The national average basis calculations came in Tuesday night at 70.0 cents under May and 86.25 cents under July as compared to last Friday’s 70.75 cents and 87.25 cents under respectively. 

What happens to markets now? That all depends on the next headline and/or social media post. The one thing we know for sure, or as close to sure as we can get these days, is technical and fundamental analysis are irrelevant. While I haven’t gone to one of the predictive websites yet, my guess is the US bombing of Iran will start again before the end of the week, likely bringing buyers back to the Energies sector. Let’s see how all this plays out short-term. Stay tuned.