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Futures

Livestock Futures: Traders Eye Weakness for Thursday's Potential Rise

2024-12-05

Live cattle futures have been engaging in a recent sideways trading pattern that shows no signs of abating. Traders are patiently awaiting cues from the cash market to determine the future direction. Cash cattle transactions with packers and feedlots are occurring on their own terms, with feedlots seemingly well-prepared to hold cattle for another week while packers have already made some purchases, potentially curbing their aggressiveness. Boxed beef prices have provided minimal guidance, with choice down $2.50 and select up $2.37. There has been no fresh news regarding the restriction of cattle imports from Mexico, which could potentially offer ongoing support to the market. Feeder cattle futures witnessed a setback on Wednesday, but the weakness is not expected to lead to further liquidation. The demand for feeder cattle at auctions remains robust.

Unraveling the Dynamics of Livestock Futures

BULL SIDE

There has been no update on the restriction of cattle imports from Mexico, which typically amounts to around 100,000 cattle entering the U.S. each month. This absence of news could potentially have a significant impact on the market. Additionally, cattle futures have been struggling to break above resistance and resume the uptrend, despite the restriction on cattle imports. The sideways trading range in cattle futures is building support, indicating that strong demand may be on the horizon and could support the market in the future.

As we look ahead, the seasonality and the time of year might pose a limit to further gains in cattle futures by the end of the year. However, the current market conditions suggest that there is still potential for growth if the right factors align.

BEAR SIDE

Weekly hog weights averaged 289.1 pounds, which is 1.5 pounds lower than a year ago. This indicates a potential shift in the hog market, and traders are closely monitoring these trends. On the other hand, hog weights have also shown an increase of 0.6 pounds from the previous week, driven by cheap feed. This could have implications for the overall hog market and its future performance.

Increasing daily volatility in the hog market often occurs when a market is nearing its peak. Traders become increasingly nervous and tend to focus on short-term trades, as seen in hogs over the past week. This volatility could lead to more uncertainty in the market and require careful monitoring by market participants.

For our next livestock update, make sure to visit our Midday Livestock comments between 11 a.m. and noon CST. Additionally, stay tuned to our Quick Takes throughout the day for regular updates on the futures markets.

In this year's DTN Ag Summit, we will delve into the state of national farm policy. This includes discussions on the timing of a farm bill, the composition of ag committees, and the new leadership at USDA. Some of the winners of the America's Best Farmers and Ranchers award will share their insights on selling directly to consumers. The DTN markets and weather team will also provide their perspective on what lies ahead in 2025. The DTN Ag Summit is scheduled for Dec. 5-6, 2024. Use this link to sign up: https://dtn.link/…

Robin Schmahl can be reached at rschmahl@agdairy.com.

International derivatives marketplace CME Group has made a significant move by announcing the launch of a 1-Ounce Gold (1OZ) futures contract on January 13, 2025. This decision comes after regulatory review and is set to open up new opportunities for market participants.

Unlock New Investment Horizons with CME Group's 1-Ounce Gold Futures

Gold as a Popular Investment

Gold has long been a favored asset class, attracting the attention of investors worldwide. In recent years, retail interest in gold has witnessed a remarkable surge. As more market participants recognize the importance of portfolio diversification, gold has emerged as a reliable hedge against market uncertainties. CME Group's decision to introduce the 1-Ounce Gold futures contract is in line with this growing trend, providing retail traders with an additional tool to access the gold market.The global benchmark Gold futures contract serves as the foundation for the 1-Ounce Gold futures, ensuring transparency and liquidity in the market. Traders can now benefit from the daily settlement price of this benchmark, which offers a clear reference point for pricing and risk management.

Benefits of 1-Ounce Gold Futures for Retail Traders

The launch of 1-Ounce Gold futures will bring several benefits to retail traders. Firstly, it will broaden their investment opportunities, allowing them to participate in the gold market with a smaller contract size. This makes it more accessible for individual investors who may have limited capital.Secondly, the futures contract provides increased flexibility. Retail traders can take advantage of the liquidity and efficiencies offered by CME Group's futures market, enabling them to enter and exit positions more easily. This flexibility is crucial in today's fast-paced trading environment, where traders need to be able to respond quickly to market changes.Moreover, the 1-Ounce Gold futures contract is financially-settled, providing a clear and transparent settlement mechanism. This reduces counterparty risk and ensures that traders can settle their positions with confidence.

CME Group's Existing Metals Products

CME Group's Micro Gold and Micro Silver futures products have already achieved remarkable success, becoming some of the fastest growing metals products in the market. This year, these products have reached record levels of participation, with average daily volume (ADV) for Micro Gold futures reaching 105,000 contracts and ADV for Micro Silver futures reaching 19,000 contracts.The success of these existing products has laid a solid foundation for the launch of the 1-Ounce Gold futures contract. It demonstrates CME Group's expertise in the metals market and its ability to meet the evolving needs of retail traders.In conclusion, CME Group's launch of the 1-Ounce Gold futures contract is a significant development in the derivatives market. It offers retail traders a new avenue for investing in gold and provides them with the flexibility and liquidity they need. With the global benchmark Gold futures contract as the foundation, this futures contract is set to play an important role in the gold market and contribute to the growth of the derivatives industry.

On November 18, the regulator took a significant step by passing directions against three specific platforms. This move comes as part of the Securities and Exchange Board of India (SEBI)'s continuous efforts to ensure the stability and integrity of the financial markets. In a consultation paper released on December 5, SEBI proposed a novel approach to manage potential risks associated with single stock derivatives. The proposed change aims to mitigate the impact of sudden price movements near market close on expiry day.

SEBI's Initiative to Transform Single Stock-Option Contracts

Current Scenario and Proposed Changes

Currently, all in-the-money (ITM) options based on the last 30 mins VWAP on the expiry day are auto exercised and converted to underlying deliverable obligations. However, SEBI now proposes that ITM options will initially devolve into stock futures one day prior to expiry, i.e., E-1 day. This means that instead of directly resulting in physical delivery obligation on expiry, the positions will first transform into futures. On the expiry day, only futures will be tradeable, and the open futures positions will be settled by delivery as at present.For example, assume that the stock future contracts expire on the last Thursday of the month. On Wednesday, which is one working day prior to the expiry (E-1 day), all the open positions in option strikes that are ITM based on the last 30 minutes VWAP of the underlying stock will be auto exercised and will devolve into a futures position at the exercise price, set to expire on Thursday. The resultant positions in futures can be closed on Thursday, and the residual open positions will be settled via delivery.This mechanism is comparable to what is available in the commodity derivative segment and is designed to minimize system-level changes at market-infrastructure institutions (MIIs), trading members, and clearing members.

Impact on Option Positions

Upon exercise, option positions may devolve into futures in specific ways. Long ITM call positions may devolve into long positions in the underlying future contracts. Long ITM put positions may devolve into short positions in the underlying future contracts. Short ITM call positions may devolve into short positions in the underlying future contracts. And short ITM put positions may devolve into long positions in the underlying future contracts. All such devolved futures positions shall be opened at the strike price of the exercised options.This detailed approach ensures a clear and systematic transition of option positions to futures, providing market participants with a more predictable and manageable trading environment. It helps in reducing the potential risks associated with sudden price movements and physical settlement requirements, thereby enhancing the overall efficiency and stability of the single stock-option market.