Markets & Metals Navigator: Bonds Spook the Market + Commodities Hang Tough

Bond Vigilantes are Back

US bond investors took control of the market last week, as 10 year treasury yields spiked to 1.5% reaching pre-pandemic levels.

What has spooked the global markets is the rate of change of bond yields in 2021, a phenomenon that is global in nature. The global demand for higher yields is driven by higher inflation expectations.

Commodities Hang Tough vs. High Valuation Tech Stocks

The bond market volatility sent equity markets markedly lower last week, the S&P 500 was down -2.4% and the Nasdaq down -4.9%.

However during the volatile week the CRB Commodity Index was up 1%, while the tech heavy (and high valuation multiple) Ark Innovation ETF was down 15%.

J.P. Morgan highlighted last week that there are ample drivers in place for the start of a new commodity super cycle. Key drivers include: ultra loose global monetary policies, financial measures directed towards infrastructure, investment for metals for new green infrastructure (EVs, batteries) and the reopening of economies post-COVID-19.

Tavi Costa from Crescat Capital highlighted on Twitter that US private investment in mining exploration is at the lowest level since the last peak of the commodity bubble in 1983.

Bitcoin, Gold and Silver

While inflation was the cause of fear for the bond market, the ‘store of wealth/ insurance’ assets (bitcoin, gold and silver) had sold off as well (not the desired outcome).

While gold and silver sold-off inline with the S&P500, Bitcoin was bludgeoned – down -17% last week. It highlights two key points for investors: 1. Bitcoin as an asset is still very young and carries significant associated volatility. 2. There’s a high tech market beta associated with Bitcoin, a high correlation with selloffs in high flying tech (Ark & Tesla).

Tesla Potentially Shifting to Iron Phosphate Batteries Over Nickel Supply Concerns

Last Thursday Elon Musk stated on twitter that Nickel was one of the biggest concerns for Tesla to scale lithium-ion cell production, that is why Tesla is shifting to an iron cathode.

Last year, Tesla CEO Elon Musk mentioned that he believes the energy density of iron phosphate (LFP) batteries have improved enough that it now makes sense to use the cheaper and cobalt-free batteries in its lower-end vehicles.

Furthermore, the CEO indicated that the use of LFP batteries also frees up more battery supply of lithium-ion chemistry cells using nickel cathode for Tesla’s other vehicle programs.