Markets: Risk-on, Risk-off, Risk-maybe

On the macro economic front, significant coronavirus concerns have resurfaced again this past week. Germany, Europe’s largest economy, is enduring a third wave of the pandemic. After Covid numbers fell sharply in February, German Health Minister Jens Spahn said new infections are now rising at an “exponential rate.” The renewed concerns are prompting fears of new lockdown measures and the resulting negative economic impacts.

This comes on top of additional lockdowns implemented elsewhere in Europe in response to surging case numbers. Last Friday, France imposed a new partial lockdown, shutting all non-essential businesses. Poland also announced a new nationwide three-week lockdown after cases surged from the previous week. Adding to concerns, on Wednesday India reported the highest jump in new cases since November. Markets will watch these developments closely for any signs of a growing spread of new large-scale lockdowns. The potential demand-side hit to the economy would throw a serious wrench into the current coronavirus recovery theme.

Global supply concerns entered the picture earlier in the week when a giant cargo ship ran aground in Egypt’s Suez Canal amid a sandstorm, blocking the canal. Analysts at ING claim, “Around 10% of global seaborne oil trade passes through the canal, whilst around 8% of global LNG trade also uses the canal…” According to the BBC, about 12% of global trade passes through the canal, which provides the shortest shipping rout connecting Europe and Asia.

Officials in the Egyptian Government have said they hope to resolve the situation within two to three days, but other experts warn it could take weeks if the ship’s cargo containers must be removed. The blocked canal and resulting “traffic jam” of cargo ships is expected to affect shipping schedules around the globe. Reports are that the blocked canal is holding up the transport of $9.6 billion of goods each day.

As expectations of a longer blockage have increased, cargo ships are starting to reroute towards the significantly longer and costlier southern passage around Africa’s Cape of Good Hope. Reports state that among the already rerouted ships are at least seven giant LNG transfer vessels. The costly rerouting adds about 10 extra days to a cargo ship’s journey.

In the US energy market, petroleum products saw about a net five million-barrel inventory build across the board between crude and finished product. Despite what should have been a bearish report, after a brief sell-off oil prices recovered pre-inventory report levels within minutes, which speaks to the price volatility in crude this week.

On the oil production side, US production ticked up by 100,000 barrels, back up to the 11 million-barrel-level that existed prior to the Texas freeze. Next week, OPEC+ will convene for their latest meeting and are expected to rollover current supply curbs into May. WTI crude oil was down on the week, but, amidst volatile trading, price closed above $60 at $60.97 per barrel.

In the precious metals complex, the week-over-week price action was tepid, but some assets faired better than others. Gold prices declined modestly by .54%, but silver spot took it squarely on the chin, leading the declines in the precious metals sector with a 4.60% drop on the week. Platinum’s losses were less severe, declining 1.85%, while palladium was the lone gainer in the complex, up 1.70%. On the mining side, gold miners took a relatively hard hit as seen by a 3.99% drop in the HUI gold mining index. Performance in the precious metals space no doubt suffered from an easing of the inflation trade seen throughout the majority of the week.

Other performance for the week was mixed. IFRA, the I Shares US Infrastructure ETF, was up 1.30%. Oil was down modestly by .76%, while Natural Gas prices rallied 3.15%. Oil Services (OIH), tracked oil prices fairly closely and lost 1.01%. The Goldman Sachs Commodity Index was off by .23%, while the S&P Global Natural Resources was up .47%.

The Dow Jones US Real Estate index had a nice week, up 3.57%, while the Dow Jones Utilities also faired well by 3.07%. The US Dollar Index was stronger on the week, up .94%, and broke out to new highs for the rally that started at the beginning of the year.

Overall, the week was characterized by an apparent cooling off of inflation expectations and a shift toward a more risk-off tone from Monday through Thursday. Long-dated bonds caught a consistent bid through Thursday, and, consequently, the multi-month theme of rising yields reversed. Long-bonds gained ground over inflation-protected Treasurys and interrupted the inflation narrative that has been gaining market attention of late.

While the Monday through Thursday strength in bonds was notable, the rally was on ever-decreasing volume as the week progressed, perhaps casting doubt on the sustainability of the move. Nevertheless, waning inflation concerns put pressure on the commodity complex through Thursday, and contributed to a volatile week, especially in silver, copper, and oil.

A further contributor to a broad increased risk-off sentiment may have come from the S&P 500. The benchmark index is facing the psychologically significant overhead resistance level of 4,000, inspiring a bout of pronounced volatility in equities. The yield on US 10-year Treasurys closed the week lower at 1.67%. The tone changed on Friday, however, as yields turned higher and both equities and commodities rallied across the board.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC