Home Commodities Commodities Pointing Lower After Biden Announces Ban

Commodities Pointing Lower After Biden Announces Ban


Key Takeaways:

  • Commodities Sell Off Before the Open after a Large Surge on Tuesday in Response to Russian Commodity Ban
  • Falling Gold, Rising Yields, and a Lower VIX are Good Signs for the Bulls
  • Will the Major Indices Get Help from the FAANGMs?

Equity index futures are pointing to a higher open ahead of the Wednesday’s JOLTS, or Job Openings, report. Stocks appear to be getting help from pullbacks in the commodity markets. Commodities are pulling back despite President Joe Biden announcing sanctions on Russian commodities that were announced on Tuesday.

Heating oil, crude oil, and RBOB gasoline were down 8.27%, 3.31%, and 2.11% respectively in pre-market trading. Each commodity is coming off 14-year highs. The EIA’s weekly crude oil report is due later today, which will provide an update on oil and gasoline inventories. This report is one that can move these commodities. Natural gas futures also pulled back another 1.17% before the opening bell, which may create a three-day losing streak of about 8.6% if the selloff holds.

Investors appear to be feeling more confident this morning as the Cboe Market Volatility Index (VIX) dropped 7.74%. Gold futures also sold off 1.51% before the bell, retracing most of Tuesday’s gains. Gold has recently acted as a safe haven for investors concerned about the Russia-Ukraine conflict and rising inflation. Investors are also selling bonds this morning, causing the 10-year Treasury yield (TNX) to spike another 1.5% in premarket trading. Each of these moves are good sign for the bulls.

Positive signs for the market are needed as the yield curve, when measured by the 2s20s Treasury spread, is at 0.25. The spread was around 0.9 at the start of the year but has flattened dramatically with rising inflation and the Russian invasion of Ukraine. A flat or negative spread is usually seen by many investors as a harbinger of a recession.

While there are a number of positive signs this morning, it’s natural to ask whether this is a turnaround or a “dead cat bounce.” What we’ll need to see is some actual follow through today and tomorrow. Yesterday, the market did test intraday lows, but they didn’t break despite the ugly selloff near the close. With that said, we’re not out of the woods, but if we could get into a trading range for the rest of the week, it could be a good sign.

There are a few earnings announcements of note this morning. Campbell Soup (CPB) reported better-than-expected earnings despite missing on revenues. The company said it was a tough quarter due to labor and supply constraints related to the Omicron surge. However, CPB offered a brighter outlook on labor availability and the ability to mitigate inflation. The company expects to have a degree of price control as it will have to raise prices once again. The stock was 0.52% higher in premarket trading.

RV and camper maker Thor Industries (THO) jumped 7.43% in premarket trading after beating on earnings and revenue. The company has seen strong demand that started during the pandemic and appears to be continuing despite falling COVID-19 cases.

Yesterday’s Action

The markets were primed on Monday for Tuesday’s White House announcement that President Biden was signing an executive order banning Russian oil, liquefied natural gas, and coal from coming to the United States. However, stocks still traded lower after the announcement.

An estimated 2% of oil in the United States comes from Russia, which means the embargo isn’t likely to hurt Russia much. However, Great Britain has also vowed to phase out Russian oil by the end of the year. Russian oil accounted for about 8.3% of Britain’s oil imports in 2020. The added sanction on Russia were ones that President Biden originally wanted to avoid because of the effect they might have on U.S. consumers.

As might be expected on an oil embargo announcement, crude oil futures rose another 1.98% on Tuesday after a volatile day of trading. Heating oil rallied nearly 14% on the day, and RBOB gasoline rose 3.24%. However, in an odd zag while other petroleum products zigged, natural gas futures fell 5.61%. Russia is a large exporter of natural gas, and its Nord Stream 2 pipeline is not in use until Germany approves it, which Germany has said it won’t do at this time because of the Russian invasion into Ukraine.

Stocks were positive much of the day but failed to hang on to their gains after the announcement. The S&P 500 (SPX), Dow Jones Industrial Average ($DJI), and the Nasdaq Composite ($COMP) fell 0.72%, 0.56%, and 0.28% respectively. However, the Russell 2000 (RUT) was able to hold on to a gain of 0.60% after trading 2.8% higher earlier in the day. The Nasdaq is now down more than 20% from its high, while the Russell is down more than 19%, which puts them both in or near bear market territory. The S&P 500 is down about 13% from its high, while the Dow is down a little more than 11%.

Risky Behavior

Investors appeared to have a bit of an appetite for risk despite Tuesday’s down day. The signs of desire for riskier assets starts with small-cap stocks like those in the Russell 2000, but also the performance of defensive sectors. Consumer staples, health care, and utilities are considered defensive, and they made up the bottom three sectors on the day. In fact, investors were sellers in the bond markets too, pushing prices lower and causing the 10-year Treasury yield (TNX) to rise nearly 7%.

However, investors were still buying gold. Gold futures were up 3.15% on the day, which added to a four-day, 6.5% rally. Precious metals were popular as silver futures rose 4.61%.

Apparently, athletes, sportsmen, and outdoorsmen were willing to risk COVID-19 to remain active because Dick’s Sporting Goods (DKS) recorded record profits for the year. The company also beat analyst expectations for earnings and revenue for the quarter. DKS reported significantly higher growth in every category. The stock rallied 2.09% on the day.

Risk of Overweighting: According to Yardeni Research, the FAANGMs, which include Facebook now Meta (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Google now Alphabet (GOOG), and Microsoft (MSFT), had a combined market cap of $8.8 trillion at the end of February. This means the group is 20.5% of the S&P 500 market cap. Since the first of the year, the FAANGMs have lost about $150 trillion in market cap, which has weighed down the S&P 500. The FAANGMs have pulled the S&P 500 to tremendous performance over the last decade, but they’re now at risk of dragging the index down if they can’t get a push from the bulls soon.

Valuation Weigh Station: The S&P 500 has seen improvement in valuations when looking at forward price-to-earnings (P/E) ratios. In summer 2020, the S&P 500 had a forward P/E around 23, but by the end of February, it was down to 18.6. However, the FAANGMs are keeping the valuation of the index high. When excluding the FAANGMs, the forward P/E for the S&P 500 was 17.

Amazon had the highest forward P/E at 53.2, followed by Netflix at 30.5. Microsoft was 27.8. Apple was 25.6. Alphabet was 21.8. And, finally, Meta was 15.4. These valuations are historical lows for Amazon, Netflix, Meta, and Alphabet, which might make them value candidates for some investors, depending on how these investors define value.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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