Equity markets have been relatively calm for the past couple of weeks. It’s been a nice respite for weary investors. But now is the time, it seems, for commodity markets to go haywire.
The average daily move in the S&P 500 —up or down—during March was an incredible 5%. The average daily move in April a little more than 2%. Stock volatility is falling.
Not so with oil. The average daily move in benchmark crude prices this month is 32%. Each day. March wasn’t an easy month for commodity traders either. April’s jump is up from 7.6% in March.
Oil has been pummeled by the twin problems of the Saudi-Russian price war as well as falling demand for crude. No one is flying commercially right now. Passengers passing through TSA checkpoints at U.S. airlines are down more than 90% year over year. Miles driven on U.S. highways are back down to 1980s levels, when the country was two-thirds it current size. Gasoline and jet fuel are products refined from crude oil.
Crude oil is down about 38% month to date and 80% so far in 2020.
Industrial metals prices, on the other hand, are up in April. Copper is up 6.2% in April. Silver is up 7.6%, according to Dow Jones Market Data.
Industrial metals aren’t subject to the wild swing in supply that oil is prone to. There is no OPEC of copper or aluminum. The rising prices are a signal to investors that the economy is expected to improve. When the economy is humming, more metal is demanded and prices usually improve.
Stocks are reacting to the uptick in commodity pricing. The SPDR S&P Metals & Mining ETF (ticker: XME) is up 18% month to date, outpacing gains of the S&P and Dow Jones Industrial Average.
The ETF includes gold miners such as Newmont (NEM). But industrial metals companies including Nucor (NUE) and Freeport-McMoRan (FCX) are also represented.
Then there’s natural gas. As a fossil fuel, its price should be linked with oil. That’s one theory. But natural gas is up while oil plummets. Prices have risen about 9.4% month to date. Natural gas is also a byproduct of oil exploration and as oil exploration slows, its production might too. That isn’t great for U.S. petrochemical producers which, oftentimes, make plastics out of natural gas derivatives. Costs rising is one issue. But global plastic prices are usually set based off the price of oil.
And then there are agricultural futures. Worries about the ability of meatpacking plants to stay open have put live cattle futures on pace to be down for the fifth straight month, the longest streak since the six months ended January 2009. The continuous most active contract of Class III Milk futures is down 30.46% this month, on pace for its worst month since February 1999. The milk is there, but like meat, it can’t be processed. Unlike oil, you can pour it down the drain.
There is a lot for investors to digest these days with markets rising and falling rapidly. Commodity markets, however, are worth watching. Rising and falling metals prices tell investors something about the economy from a group—commodity traders—that aren’t as steep in stock markets as other market participants.
Write to Al Root at allen.root@dowjones.com
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April 29, 2020 at 04:09AM
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Oil Is Not the Only Commodity Acting Wacky. Just Look at Milk Futures. - Barron's
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