The last couple weeks have been an excellent example of volatility, not only in commodity markets, but also in financial markets domestically and globally. The turmoil surrounding the Brexit situation in the financial and stock markets is a primary example as prices initially plunged but have now bounced back above pre-Brexit highs.
In the two days following Brexit, the Dow Jones Index fell nearly 900 points with some concerned that aggressive follow-through liquidation would lead to a widespread, global recession. However, fast forward just two weeks and the Dow Jones index has regained all of the losses and has moved to 14-month highs well above 18,000 points with Monday trading at 18,256 points. This is well over a 1,100 point rally from the post-Brexit lows.
It is premature to say that we have all the ramifications of the United Kingdom leaving the European Union in hand, as realistically the only thing that is complete is the initial deciding vote. Much more volatility is likely to be seen in the months and years ahead as each side charts its course.
In commodity markets, this is an important lesson to take to heart. The most publicized and talked about events that touch a market may not always be the "sky is falling" type of tragedies they are made out to be. Take for example the lean hog market. Over the last two months it has shown both sides of this equation as nearby contracts rallied sharply during the last two weeks of May and first half of June. This added $9 per cwt to July contracts. Expectations for extreme firmness in cash prices and tighter supplies heading into the summer added fuel to the already red-hot fire; the price increases seemed unstoppable -- until the second week in June.
However, over the last month, the total opposite action is taking place, with sharp and steady liquidation not only quickly eroding front-month July futures prices to near the May lows, but the trade also aggressively shed open interest as commercial and investment traders alike bailed on the market which just a month ago held so much promise and optimism.
There are fundamental and technical factors involved in the lean hog market which may continue to drive additional volatility, but it is good to keep in mind that the more volatile the market, the more vital to keep a long-term view of market shifts, and try not to get caught up in the daily and intra-day action that can add so much emotion to the complex.
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