This past week’s sharp sell-off across global financial markets revealed deep concerns over the global economy as long as the coronavirus remains a threat.
Bad news about clinical trials for an experimental COVID-19 vaccine caused investors to recalibrate expectations over when economies might return to pre-coronavirus levels.
Hopes that such a discovery could be found quickly fueled a remarkable rally in the stock market since hitting a bottom in March (Figure 1).
With that premise shaken, the markets are at a crossroad. Economic data will be reexamined to help guide the market through the end of the year.
One source of fundamental data comes from satellite imagery, which can be leveraged to gain insights into various financial and commodity markets.
In this blog, we’ll look at Ursa Space data derived from satellite imagery to help answer some of the major questions facing traders and analysts.
Let’s begin in the oil market, which has seen a similar trajectory as global equities.
Oil prices recovered in the spring after getting clobbered in March-April when economies shut down, causing a significant contraction in fuel demand.
The rally paused over the summer, though prices held firm, until the first week of September when renewed economic concerns led to selling pressure.
After trading in the mid-$40s since July, ICE Brent fell to $40/b, its lowest level since mid-June (Figure 2).
Many were caught by surprise, but global oil inventory data -- the best gauge of the supply-demand balance -- captured the structural weakness lurking under the surface.
According to Ursa Space data, global crude inventories were mostly unchanged over the summer after a period of large builds caused by refinery cuts during the height of the coronavirus outbreak.
That might not sound bad, but it was the lack of draws that signaled demand wasn’t quite as robust as many had expected heading into the summer.
Oil demand is highest during the summer (peak driving season), causing inventories to typically draw. Those draws didn’t materialize this summer. (Figure 3).
There are already signs of a glut.
Oil traders have begun storing crude and diesel onboard tankers, taking advantage of the widening contango in oil futures.
Trafigura has chartered at least five tankers each of which can carry 2 million barrels of oil, Reuters reported.
The US Labor Day holiday, which typically marks the end of the summer driving season in the Northern Hemisphere, has already passed.
Next comes the autumn refinery maintenance period. With refineries set to shut units for repairs, demand will decline further, setting the stage for inventory builds to resume.
If China decides to cut imports, then reduced demand from the world’s second-largest oil consumer will push more supply into the global market where many barrels likely won’t find a home.
China imported record-high volumes of oil since May, deciding the historic drop in oil prices was a good time to beef up inventories, a practice it has employed before (Figure 4).
Ultimately, the deeper issue here is the state of the Chinese economy. Are things really back normal?
An industry we’re monitoring to provide clues is auto manufacturing. Because these plants entail tight working conditions, their ability to stay open hinges on successfully preventing COVID outbreaks.
One angle is therefore the number of COVID cases. Another is consumer demand and whether enough buying appetite remains for plants to continue operating.
We’re utilizing satellite imagery to detect finished cars in factory lots, similar to the one pictured below, as an indicator of production levels.
Ursa’s China’s auto manufacturing index rebounded in mid-March, climbing higher until early July, but since then has been uneven.
That trajectory has been mostly positive, but falls short of the emphatic recovery needed to erase all concerns.
The US auto manufacturing index plunged from February through May, bottomed late July, and then shot higher in August and has continued to trend higher in early September.
US manufacturing Purchasing Managers’ Index (PMI) data confirmed this trend, as August surveys indicated expansion in the sector.
Our analysis of data since September 2018 has shown strong correlations between our auto manufacturing indices and various economic indicators.
US auto manufacturing index vs:
US Manufacturing PMI: 0.72 correlation
US Consumer Confidence: 0.76 correlation
US Unemployment Rate: -0.80 correlation
German auto manufacturing index vs:
German DAX: 0.62 correlation
EuroStoxx 50: 0.65 correlation
Moreover, these indices can provide a leading signal for economic indicators. A change in the index foreshadows a change in a related economic indicator.
The US auto manufacturing index, lagged 1-month, has a 0.85 correlation versus the US consumer sentiment index.
The China auto manufacturing index, lagged 5-weeks, has a 0.65 correlation versus the Global Auto Index Fund (ticker: CARZ).
Check back here for more updates on how satellite imagery data can reveal insights about the state of the global economy.