Commodities still hot as Ukraine conflict heats up

Brian Dress – CFA, Research Director, Investment Advisor

If you’ve been casually following the news, whether political or economic, you know this week’s headlines are once again dominated by the ongoing war in Ukraine. Come out to the innocents affected by this brutal battle raging in Eastern Europe and to the refugees displaced from their home countries.

Beyond the humanitarian toll of conflict, our weekly look at financial markets reveals many primary and secondary economic impacts. The most significant impact we have seen has come from the harsh sanctions regime on the Russian economy. Given that Russia is one of the most important exporters not only of oil and gas, but of many important industrial products such as palladium, titanium, steel, aluminum and fertilizers, this is especially true for global commodity markets. It will have a significant impact. These sanctions, if justified, will have a significant impact on how companies around the world do business. This is borne out by the sharp rally in commodities over the past two weeks. In her five days covered by this report, oil prices he rose more than 15%. As the world struggles to cope with the turmoil of the pandemic, the movement of commodities could cause real economic damage given the current rise in inflation.

But Ukraine is not the only financial development worthy of consideration. We are taking steps toward the end of the earnings season this quarter. We see a pattern in which companies that beat estimates get limited support for their stock prices, while companies that undershoot have a complete stock price crash.I think things could change a bit in that regard this week, but we’ve still seen some breathtaking earnings-related downdrafts in growth tech stocks like Snowflake (SNOW) When Viva Systems (VEEV).

We received more US consumer health news from the earnings report from . Best Buy (BBY), Target (TGT), Dollar Tree (DLTR), Nordstrom (JWN), When Kroger (KR). Earnings season has had some notable exceptions, Home Depot (HD), consumer-related companies generally report solid performance. I think this news is interesting. Consumer Choice Sector SPDR Fund (XLY) XLY’s weakness seems to suggest market participants are pricing in a recession in the second half of 2022. This is likely, especially given that the US Federal Reserve and other central banks around the world appear poised to start raising rates. Zero lower bound.

Speaking of the Federal Reserve, we saw more news from the Federal Reserve this week as Chairman Jerome Powell testified before Congress on Wednesday and Thursday. Markets rallied on news that the Fed is likely to raise interest rates by 25 basis points (0.25%) at this month’s meeting. Of course, inflation in gas and other prices complicates matters for the Fed, which has been slow to unwind monetary stimulus introduced early in the pandemic.

With that all said, let’s get into it!

In the table below, note last week’s performance of key indexes and other selected data for the five days from 02/25/2022 to 03/03/2022.

what is working?

The “What’s Working?” Basics and “What’s Not Working?” weekly post segments track nearly 1,000 stocks and over 300 ETFs each week on the Jarvis securities rating system. Use the patterns you see in that data to determine where your pockets of strength and weakness lie.

This week I reviewed an almost complete copy of what I pointed out in last week’s post. This is a major strength of the commodity-related sector. Topping the relative strength list in the market this week were ETFs that directly reflect commodity prices. Brent Oil Fund, LP (BNO), Invesco DB Commodity Index Tracking Fund (DBC), US Natural Gas Fund, LP (UNG), When VanEck Vector Steel ETF (SLX). Also note that Russia exports about 50% of the world’s palladium supply, and palladium is used in many industrial applications, such as catalytic converters and airplane spark plugs. for that reason, Aberdeen Standard Physical Palladium Shares ETF (PALL) Gained 15% or more in value in the last 5 days of trading.

We understand the redundancy of the best performing ETFs from last week to this week, so we’ll dig deeper into the list for other areas of interest. Invesco Aerospace and Defense ETF (PPA), poised to benefit from the inevitable munitions buildup in the coming months. also, First Trust Nasdaq Cybersecurity ETF (CIBR) Based on Russia’s reputation for accompanying physical military attacks with cyberattacks. This was confirmed early in the conflict, albeit less than experts in the field expected. That said, the threat is still real.

What’s not working?

Traditional “risk-on” indicators, often identified in letters, continue to perform poorly, despite the fact that major market indices have risen marginally across the board. Those who have followed us for some time can relate to previous letters the fact that this pattern had strong staying power over many months.

Semiconductor stocks have performed exceptionally well over the past two years, with computer microchip supply shortages being one of the biggest contributors to the global supply chain crisis. This week we received some interesting news from President Joe Biden’s State of the Union address. Intel (INTC) plans to increase its investment in Ohio production facilities from $20 billion to $100 billion. This was an important reminder that semiconductors have historically been a cyclical business, and a significant supply could be ready to come online sooner or later. VanEk Vectors Semiconductor ETF (SMH) It was one of the worst performing ETFs on this week’s list. Looking at the 5-year chart SMH (below), after the dramatic outperformance of recent years, the sector certainly has plenty of room to set back.

Other sectors that showed weakness over the past five days were other risks in sectors such as: iShares Biotechnology ETF (IBB), Consumer Discretionary Select Sector SPDR Fund (XLY), Robo Global Robotics and Automation Index ETF (ROBO), When Invesco Allerian Galaxy Crypto Economy ETF (SATO)Proponents of crypto as an investment will point to this asset class as a potential hedge in times of conflict. Whether cryptocurrencies are fulfilling this function during the current crisis is clearly complex.

Are consumers strong?

With the pandemic beginning to subside, we know that consumers are eager to re-spend the extra savings they’ve accumulated over the past two years. We expect to see a lot of consumer activity this summer and the next few quarters as restrictions ease. From our point of view, this story is common sense. That said, market participants seem to disagree with this idea.Let’s take a look at the year-to-date chart Consumer Choice Sector SPDR Fund (XLY), Includes many of the most famous retailers in the US. XLY is one of the worst performing ETFs this year.

But as we often say, the stock market is just the stock market. The same is true for sector ETFs such as: XLYThis past week we have seen many positive gains from consumer-focused companies including: Target (TGT – Blue), Best Buy (BBY – Orange), Dollar Tree (DLTR – Yellow)When Kroger (KR – Teal)Take a look at the 5 day chart below. Explosive post-earnings moves have been shown from each of these leaders in the retail industry.

We think it’s at least possible that recent sales in the consumer discretionary (retail) space have gone too far. Such positive earnings results, forward guidance, and reaction to earnings suggest that the sector’s downside has gone too far. On the one hand, forward-thinking investors recognize that they may be anticipating a recession amid inflationary pressures that constrain consumers’ ability to spend. In our view, the retail trajectory could be a harbinger of the broader market in 2022.

Points of the week

There was a lot of market-moving news this week. While the war in Ukraine has clearly caused a surge in commodity markets, we have also seen extreme volatility in bond markets. Between the safe trade flight to Treasuries and the Fed’s remarks, the 10-year Treasury yield has had an extreme range between 1.68% and he 2.01% in just 5 days!

A consistent theme in the first two months of 2022, risks around indicators such as biotech and semiconductors struggled again. Consumer discretionary stocks also took a hit in 2022, but this week provided some important signals that this dynamic may be changing.