Investors and funds demand equities consistently on the back of central banks’ cash injection, governments’ support, and talks that Fed is gearing up to buy corporate bonds. Despite the fact that, the pace of Covid-19 spread is far from losing momentum, and unpleasant economic data, the equity rally turns out to be a phenomenon that metal markets deny.
An overall look at white metals suggests that the spread between the paper assets and silver-palladium-platinum complex is strengthening in favor of equities while lack of demand for such metals continues. The commitment of Traders Index for platinum and palladium continue their stagnant pace while silver’s COT Index shows only a modest rise in the past few weeks. In addition, the spread between the COT index for SP 500 Index and silver suggests that investors prefer to own stocks rather than owning industrial metals. Looking at the comparison between the volatility of equity indices (VIX Index) and metals volatility (3 Month implied volatility), data confirm that, investors are less reluctant to buy equities than to buy any of the three metals in general. For example, data show that the return ratio as well as the COT spread of Nasdaq and Palladium are well above the pre-Covid-19 levels. This comes as no surprise because, in response to the emergence of Covid-19, the rise in cash flow of technology companies supported the Nasdaq index while the cash flow of traditional companies using industrial metals fell significantly due to lock-downs. On the other extreme, the same type of data for the Dow Jones Industrial Average Index to Silver suggests that there isn’t much change.
With the uncertainty of how long Covid-19 effects will continue to influence markets, the divergence between the Nasdaq and Palladium, in particular, seems to continue for a while and the two will converge only after the Covid-19 loses its steam.