In last week’s edition, we wrote that the price of oil would now be calling the shots and thus determining the performance of global financial markets. The last few days have confirmed this thesis – and with more force than we ourselves would have expected. Since the publication of the last Thoughts, the price of oil has shot up by no less than 60%.
With such a development on the energy markets, one might have expected the stock markets to take a double-digit hit. But that was far from the case. The S&P 500 has lost a maximum of 3% since then. On the contrary, it was striking that the Wall Street index was able to recover surprisingly quickly after the initial sell-off at the start of trading.
As mentioned in the last issue, investors had hedged themselves very broadly against the risk of a conflict with Iran – with futures or put options. When such hedges are established, it is usually the market maker on the stock exchange who sells these instruments to investors. To neutralize his own risk, he hedges in return: when selling futures with the corresponding shares, with options with futures on the underlying index. If the market begins to correct and investors unwind their hedges, the opposite happens: the market maker also unwinds his hedge positions. He buys back futures or shares – and suddenly the market begins to recover again.
We can therefore assume that numerous hedge positions have been unwound during the past few trading days. Experienced investors are particularly inclined to take such steps when sentiment becomes extremely gloomy – exactly as the fear indicator is currently showing.
This composure, which may come as a surprise to many, is also reflected in our sentiment indicator. Investors clearly assume that the stock markets will soon calm down again – which, historically, they have often done after five to ten days when wars have broken out.
In fact, it is worth taking a step back and asking who will be particularly affected if the world’s most important maritime energy route is blocked for an extended period of time. The problem is exacerbated by the fact that several countries that normally export their oil and gas through the Strait of Hormuz have already reduced or even completely halted production. These include Saudi Arabia, Kuwait, Iraq, the United Arab Emirates, Qatar, and Iran itself. In Bahrain, restrictions are in place due to damaged infrastructure. The US, on the other hand, is likely to be among the least affected. Thanks to its fracking industry, it has long since become a net exporter. With production costs of around $65 per barrel, the industry can also ramp up production relatively quickly at current market prices.
Some of the energy supplied through the Strait of Hormuz is exported to Europe. Russia, once one of the most important suppliers, is largely out of the question as an alternative for Europe. In recent years, around 10% of European imports have come from African countries such as Nigeria and Angola. Europe is therefore increasingly dependent on its own North Sea sources and on supplies from North America. However, reserves only last for around 60 days and are also heavily regulated and spread across many countries – which does not exactly make political decisions any easier in an emergency.
However, a considerable proportion of exports through the Strait of Hormuz go to Asia. Despite the sanctions, India has received permission from the US government to continue purchasing oil and gas from Russia. China has a similar option, even if the relevant infrastructure is still limited. To this end, Beijing has massively expanded its strategic reserves in recent months and is now covered for around 120 to 140 days. The situation is even more comfortable in South Korea and Japan, which have oil reserves sufficient for around 200 and even 250 days of daily consumption, respectively.
The fact that the global economy is no longer as dependent on supply disruptions from the Middle East as it was fifty years ago should contribute to a certain degree of calm sooner or later. In fact, the stock markets already have now reached an oversold level, which is why a medium-term low can already be expected in the coming days. The smart investors’ indicator for the S&P 500 already shows a clear “exaggeration” with the red area.
As also explained in last week’s edition, the selling pressure on precious metals came as no surprise. In stressful situations, the first assets to be sold in order to raise liquidity are those that are particularly liquid – especially if they are still in profit. However, as soon as this phase subsides, geopolitical uncertainty comes back into focus, and with it the demand for safe investments.
This is exactly what is likely to happen again this time. The selling pressure of the last few days has been absorbed surprisingly well by precious metals – a sign of what is often referred to as ‘inner strength’. Once the selling pressure eases, gold and silver bugs are likely to take the helm again. This can already be seen for gold in the same chart as before.
And, of course, the same applies to silver. Particularly impressive in this chart is the light blue area representing the distribution pressure that has weighed on silver over the last six weeks. This cannot be compared to previous correction phases.
The starting position for silver appears particularly exciting because sentiment has suffered significantly in recent weeks and remains negative. Let’s remember: peak prices usually occur in moments of collective euphoria, while troughs occur in phases of pronounced fear.
However, the oil market will continue to set the pace in the medium term, even if it should see a short-term calm. In the medium and long term, however, unless the geopolitical situation eases soon, it will have a significant impact on the development of inflation.
