In his Daily Market Notes report to investors, while commenting on the plunge in crude oil prices, Louis Navellier wrote:
Crude Oil Prices Plunge
The plunge in crude oil prices may be somewhat related to the fear of a global economic slowdown as the Covid-19 Delta variant spreads. Also influential in the crude plunge: United Arab Emirates’ (UAE) recent push to boost its output is expected to be followed by other OPEC members, since there are notorious for cheating on their quotas.
Although Saudi Arabia has more OPEC influence that the UAE, other OPEC countries desperately need more money for their domestic needs. It appears that UAE is “in the race for market share ahead of peak demand” according to Robin Mills of Dubai-based consulting firm Qamar Energy.
Finally, I should add that seasonal pressures typically weigh on crude oil prices, since commencing in September, worldwide demand naturally drops, simply because there are more people in the Northern Hemisphere than South Hemisphere, so I do not expect crude oil prices to resurge anytime soon.
Bond Yields Are Benefitting From The Delta Variant Fear
The biggest beneficiary of the Covid-19 Delta variant fear are bond yields, since the 10-year Treasury bond decisively “cracked” the 1.2% level this week and actually hit a low of 1.133% on Tuesday. This means that either inflation fears are ebbing or there is a flight to quality as the Covid-19 Delta fears spread. Frankly, I believe that although energy prices are moderating, the Covid-19 Delta fear of the global economy slowing is the biggest culprit behind falling Treasury bond yields. The next big test for Treasury bonds will be the “bid to cover ratio” at upcoming Treasury auctions to ensure that there is sufficient institutional demand at current ultra-low yields.
In the wake of the Monday sell-off on Covid-19 fears, I have been getting a lot of questions about what is potentially the next big tipping point that could trigger a market correction? Since positive second quarter earnings seem to be working and helping to shore up stock prices, the biggest risk that I foresee is merely market mechanics; specifically, ETF spreads. On Monday, had you sold an ETF, you would likely be fleeced 1% to 2% by selling your ETF at a discount. On Tuesday, if you bought an ETF, you could have been fleeced up to another 1% premium.
ETF Spreads Starting To Subside
I have been checking the ETF spreads and they started to subside on Tuesday. However, if we get into any extended, multi-day sell off, ETF spreads all too often spin out of control. As a reminder, when trading ETFs, just go to Morningstar.com and check the “Intraday Indicative Value,” which tells you any premium/discount compared to the ETF price.
The Commerce Department on Tuesday announced that housing starts rose 6.3% to an annual pace of 1.643 million in June. May’s housing starts were revised down to an annual 1.546 million pace in May, down from a 1.572 million pace previously reported. I should add that building permits declined 5.1% to an annual rate of 1.598 million in June. Lumber prices have declined 70% since June after surging 125.3% in the first five months of 2021, so oscillating lumber prices may have adversely impacted building permits.