As virus immunity grows globally, the prospect of a strong economic rebound over the next few quarters is fueling optimism in the markets. Yet, natural immunity in South America doesn’t seem to turn out as a good experience with Covid variants increasing the chances of re-infection. Vaccine immunity is catching up thanks to the global daily pace of vaccination that has moved from 6 mio per day at the end of February to 16 mio per day at the end of March. The disbursement of the US stimulus rebate (which has started mid-March) is having a direct impact on consumer spending and investment inflows. From the March FOMC minutes, central bankers (and other economists) don’t seem overly concerned about overheating and inflation being out of control even if the consensus expects a continued increase in US yields. The overall stabilisation of long term rates with unchanged inflation expectation kept gold flat for the month with a continued oversold market while silver retraced (-7% from its overbought position compared to gold). Base metals retraced slightly (copper down 3%) with no change in strong fundamentals and is seen as a potential correction in its long term bull run (price doubled in 1 year).
Petroleum complex experienced a lot of two-way volatility during the month with frequent daily moves higher than 5%. Higher prices have triggered an increase in shale oil production but its marginal cost is expected to increase with the Biden administration. The normalisation in excess inventory is taking place at a somewhat faster pace than expected and should be finished in fall with a fully backwardated market. OPEC+ start of its ramp-up of production is coming a month sooner than expected (May vs June), with Saudi Arabia reversing its unilateral cut in May by 250kb/d. Growth expectations this summer is expected to have a bigger impact on oil demand than the increase of production and should create a tight market for the months to come (Brent -1.5% in March).
US farmers are expected to plant on ‘every possible piece of soil available’ as they aim to bank on record corn and soybean prices in the US. The USDA, in its last outlook, estimated the area under corn to rise by 1.2 mio acres while soybean acreage is expected to increase by 6.9 mio acres. Corn and soybean prices were stable during the month. We expect farmers to hedge and put pressure on prices given the high margin this year. China’s import demand remains strong, increasing by roughly 15% on soybean and 300% on corn — China does not usually import corn.
Volatility is generally down across sectors in March. The main exception being the energy sector amidst a reversal of the uptrend in underlying prices. Crude implied volatility is up from 41% to 48% on the month. Noticeably as well, the agricultural sector saw a short lived spike of volatility at the end of the month when a USDA planting forecast fell short of expectations. Implied volatility for soybean is up from 22% to 26% on the month but back down to mid teens since, whereas for corn it is up from 28% to 45% on the month but back down to high 20s since. In macro sectors though, we saw a net drop in implied volatility amidst the prospect of a stronger economy. The VIX is down from 27.95% to 19.40% and the VSTOXX is down from 26.86% to 17.97%. Similarly, implied volatility for gold is down from 18% to 14% whereas implied volatility for silver is down from 40% to 28%.
Source: Four Elements Capital