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Friday, March 26, 2021
JPMorgan suggests a trade to hedge against a worst case scenario
Images of the massive 400 meter-long container ship Ever Green running aground and blocking the Suez Canal are stunning.
And the world is quickly learning how crucial that chokepoint is to global trade.
“The immediate impact of delays in the canal will center on European-Asian trade, adding delays to already disrupted supply chains affecting oil and refined products’ supplies,” ING economist Joanna Konings said. “But the route is significant to world trade as a whole, with around 10% of world trade by tonnage and 9% of the world’s seaborne oil (equivalent to 5.5 million barrels of oil per day) passing through the Suez Canal over the course of a year.”
These are not small numbers.
“Containerized goods represent around 26% of total Suez traffic and in value terms, delays will be significant,” according to shipping industry news site Lloyd’s List. “Rough calculations suggest westbound traffic is worth around $5.1bn daily while eastbound traffic is worth $4.5bn.”
The longer this disruption persists, the wider the ripple effects will be. However, most are hopeful that the situation will be resolved in a matter of days and that the impacts to business and the economy will be fleeting.
“As long as the blockage is resolved soon, there will not be any lasting effects on the world economy,” Capital Economics’ Gabriella Dickens said. “While there is clear and growing evidence of bottlenecks pushing up producers’ costs, there is little sign, so far at least, that they are restricting real demand for traded goods.”
Nevertheless, at least one Wall Street mind has thoughts on how to hedge the risk of a worst-case scenario with a few trade ideas.
“While we believe and hope the situation will get resolved shortly, there are some risks of the ship breaking,” JPMorgan’s Marko Kolanovic wrote in a note to clients on Thursday. “In this scenario, the canal would be blocked for an extended period of time, which could result in significant disruptions to global trade, skyrocketing shipping rates, further increase of energy commodities, and an uptick in global inflation. This risk can be hedged by buying Oil and associated equities (e.g., energy, shipping, etc.).”
Kolanovic’s suggestion is a reminder that you can trade almost anything, albeit not directly. This includes events. Like buying shares of a standby generator manufacturer ahead of a major storm. Or buying shares of a mask manufacturer at the onset of a pandemic involving an airborne virus.
That said, there’s never any guarantee that these imaginative trades will work out even as events unfold as predicted.
What to watch today
8:30 a.m. ET: Advance goods trade balance, February (-$85.9 billion expected, $84.6 billion in January)
8:30 a.m. ET: Wholesale inventories, month-over-month, February preliminary (0.8% expected, 1.3% in January)
8:30 a.m. ET: Personal income, February (-7.2% expected, 10.0% in January)
8:30 a.m. ET: Personal spending, February (-0.8% expected, 2.4% in January)
8:30 a.m. ET: Personal consumption expenditures (PCE) deflator, month-over-month, February (0.3% expected, 0.3% in January)
8:30 a.m. ET: PCE deflator, year-over-year, February (1.5% expected, 1.5% in January)
8:30 a.m. ET: PCE core deflator, month-over-month, February (0.1% expected, 0.3% in January)
8:30 a.m. ET: PCE core deflator, year-over-year, February (1.5% expected, 1.5% in January)
10:00 a.m. ET: University of Michigan Sentiment, March final (83.5 expected, 83.0 in prior print)
No notable reports scheduled for release
European stock markets shrug off rising COVID-19 cases across the continent [Yahoo Finance UK]
Senate votes to extend PPP for two months, bill heads to Biden’s desk [Yahoo Finance UK]
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