Media matters for asset price volatility

The media narrative is a powerful influence on the price of financial assets. Positive news not already built into investor expectations tends to result in higher prices, and vice versa for unexpectedly negative news. Often the bigger the surprise, the larger the jump in volatility.

The narrative of any story is constructed from three basic building blocks: sentiment (whether a story is positive or negative), attention (the volume of the narrative) and cohesion (the consistency and strength of the narratives foundations). Being able to follow the changing media narrative and interpreting it correctly could give an investor an edge in understanding future price action.

Attention may lead to higher volatility

Research published in the International Journal of Forecasting analysed the impact of two of these building blocks on stock market volatility: sentiment (the degree to which news articles/tweets were positive or negative) and attention (the volume of tweets/searches). Their study shows that both sentiment and attention variables have predictive power for future volatility even when controlling for a large set of economic and financial variables.

However, measures of investors’ attention were found to have the most significant impact on future volatility. More precisely, Google searches for financial keywords (e.g. ‘‘stock market’’) and the daily volumes of company specific messages posted on social media were positively correlated with higher price volatility. Importantly, these indicators only appeared to have any degree of predictive power over the course of a couple of days.

Media sentiment has an asymmetric impact on some commodity markets

Most research has tended to focus on the impact of media sentiment on equity markets, sectors and the value of individual shares. Very little research has focused on commodity futures prices. A recently published study by researchers at United Arab Emirates University investigated the effects of media sentiment on eight different commodities – aluminum, crude oil, gold, heating oil, natural gas, palladium, platinum and silver .

Media sentiment was gauged by using daily commodity specific investors sentiment indices, obtained from Thomson Reuters MarketPsych Indices (TRMI) covering the period between January 1998 and July 2018. The TRMI’s sentiment indices are derived from textual data from financial news and social media (i.e., includes more than 2 million news articles and posts every day) and broadly reflects market emotion for a specific commodity by investors, analysts, journalists, and economists, etc.

Unsurprisingly, they found that positive media sentiment carries through into a positive return for commodity prices, and vice versa for negative media sentiment. Where the results are particularly interesting is the impact of the media on volatility, and what this could mean for investors managing positions.

The study found that oil and natural gas show a negative and highly significant asymmetric relationship between sentiment and volatility. An increase in news sentiment resulted in lower volatility in oil and natural gas prices, and vice versa for negative sentiment. This implies that long-side investors need to factor in the potential for greater volatility in oil and gas markets, especially when positive news sentiment is stretched, and there is a risk of mean reversion towards negative media sentiment.

The fact that they didn’t find a strong relationship among the other commodities may suggest something fundamental about oil and gas which singles them out versus other commodities. The most likely one being the storage and logistical constraints involved with the supply of oil and natural gas.

Smoke and mirrors: New real time measure of global economic activity

French newspaper “Les Echos” has launched the Kayrros-EY Consulting recovery index, which allows weekly monitoring of activity industry in the main economic zones of the planet – China, the United States, the European Union and India.

Satellite data on fumes, temperatures or greenhouse gas emissions on industrial sites around the world are recorded every few days. These images, coupled with anonymous mobile data and radar recordings, give an almost real-time vision of the situation of a blast furnace or an oil tank, and therefore to assess, after some calculations, the degree activity of a site, country or sector. The index is weighted according to the importance of the business sectors and the weight of each country, and has a base of 6th January 2020.

By tracking the activity levels of heavy industry (steel, electricity production, oil and cement) in the selected areas to the nearest metre, the index allows investors to compare the situation almost in real time across different countries.

The chart below shows that global activity across those 4 activities is down 30% since the start of the year. Worrying perhaps is that although the rebound in Chinese activity during April is clear, activity has since softened in tandem with the US and Europe. Indian activity has dropped off a cliff – down 50%!

The steel sector has been particularly badly hit. According to satellite data steel sector activity in these countries is down 40% since the start of the year with no sign at present of it bottoming out.

I’ve written before about the challenges in interpreting Chinese data alone. The incentives provided by the state make everything from traffic congestion to electricity generation very difficult to interpret. This new data source should give commodity traders a much more reliable source of real time activity across different major economies and industrial sectors.

Related article: Deciphering Chinese economic activity post-COVID-19

It’s time to build: Here’s what that might mean for commodities

In August 2011, venture capitalist Marc Andreessen published an article in the WSJ entitled Why Software Is Eating The World. Marc argued that, despite much deep seated scepticism of company valuations “many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses”, before then outlining several examples of how software was eating the world across industry sectors. He concluded the article by calling on investors and others to embrace the opportunity:

“Instead of constantly questioning their valuations, let’s seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world. That’s the big opportunity. I know where I’m putting my money.”

The rest is history. Tech company valuations did pretty well over the subsequent decade, and have only (so far) suffered just a minor hick-up in recent months

In Marc’s latest article, It’s Time To Build he laments the lack of preparedness among Western institutions, the collective “failure of imagination” but what draws his scorn in particular is the “failure of action, and specifically our widespread inability to *build*” (emboldened sections from me):

You see it in housing and the physical footprint of our cities. We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future. We also can’t build the cities themselves anymore. When the producers of HBO’s “Westworld” wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin — they went to Singapore. We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?

You see it in education. We have top-end universities, yes, but with the capacity to teach only a microscopic percentage of the 4 million new 18 year olds in the U.S. each year, or the 120 million new 18 year olds in the world each year. Why not educate every 18 year old? Isn’t that the most important thing we can possibly do? Why not build a far larger number of universities, or scale the ones we have way up? The last major innovation in K-12 education was Montessori, which traces back to the 1960s; we’ve been doing education research that’s never reached practical deployment for 50 years since; why not build a lot more great K-12 schools using everything we now know? We know one-to-one tutoring can reliably increase education outcomes by two standard deviations (the Bloom two-sigma effect); we have the internet; why haven’t we built systems to match every young learner with an older tutor to dramatically improve student success?

You see it in manufacturing. Contrary to conventional wisdom, American manufacturing output is higher than ever, but why has so much manufacturing been offshored to places with cheaper manual labor? We know how to build highly automated factories. We know the enormous number of higher paying jobs we would create to design and build and operate those factories. We know — and we’re experiencing right now! — the strategic problem of relying on offshore manufacturing of key goods. Why aren’t we building Elon Musk’s “alien dreadnoughts” — giant, gleaming, state of the art factories producing every conceivable kind of product, at the highest possible quality and lowest possible cost — all throughout our country?

You see it in transportation. Where are the supersonic aircraft? Where are the millions of delivery drones? Where are the high speed trains, the soaring monorails, the hyperloops, and yes, the flying cars?

From PPE to food Americans and many other countries around the world know shortages for the first time in their lives. Marc concludes that the only way forward post covid-19 is to build.

Our nation and our civilization were built on production, on building. Our forefathers and foremothers built roads and trains, farms and factories, then the computer, the microchip, the smartphone, and uncounted thousands of other things that we now take for granted, that are all around us, that define our lives and provide for our well-being. There is only one way to honor their legacy and to create the future we want for our own children and grandchildren, and that’s to build.

The economic fallout caused by the covid-19 pandemic is forcing governments around the world to come up with policies for stimulating the global economy. Infrastructure investment is a tried and tested method to boost economies in the short-term while also providing wide societal benefits in the long term. The kicker when it comes to a post covid-19 world is that infrastructure builds redundancy and resiliency. Both things that are in short supply.

According to the G20 Global Infrastructure Outlook the world is on-trend to face a $15 trillion gap between the infrastructure investment needed and the amount provided by 2040.

For Western economies the focus is likely to be on repairing their countries ailing infrastructure and large scale transport projects. In America and many other countries that could be rebuilding and repairing the road and bridge network, refurbishing hospitals and other vital infrastructure that has been found wanting during the present crisis.

Along the road

For countries like China where large scale infrastructure investment has arguably met diminishing marginal returns some time ago, the focus is likely to be on technology that gives them a competitive edge.

In the past few months China’s local governments have outlined plans for new infrastructure projects to offset the economic impact of the covid-19 outbreak and cultivate new growth drivers. New infrastructure projects include 5G base stations, ultra-high voltage grids, intercity transit systems, new energy vehicle charging stations, big data centers, artificial intelligence and the industrial internet.

Elsewhere in Asia infrastructure is also likely to be the first tool in government armory to get their economies moving again. Even before covid-19 India had promised $1.5 trillion of infrastructure spending over five years, including expanding the energy, road and railway network. This investment is likely to accelerate and expand across other countries in the region over coming years.


What commodities stand to benefit the most from this infrastructure splurge? Copper and other base metals are the most likely candidates. The red metal in particular is an essential ingredient in almost all infrastructure investment, from wiring a hospital to national power grids to transport.

Construction companies looking for raw materials will find that much of the output of base metals has been shut-in due to covid-19. According to GlobalData, 12% of lead output, 13% of copper, 15% of nickel and 24% of zinc has had to be taken offline due to concerns over the spread of the virus.

It’s also put the construction of new mines on hold. Progress has also been halted on 23 mines under construction, including the $5.3 billion Quellaveco copper mine in Peru, one of the world’s biggest copper mines under development. The 180,000 tonnes project was due to commence operations by 2022.

If it’s time to build, it’s time to own copper or companies that mine and process it. We now look back on the early 2010’s as just the start of a technology boom. In ten years time we could be looking back at the early 2020’s as a new commodities boom, one driven by government directed infrastructure investment.

Equity markets are probably not at their point of maximum despair. But that time will come, probably towards the end of 2020. Copper and other base metal miners may be the ones that will stand to benefit. The infrastructure investment bazooka, a weakening in the US dollar and the wake left behind from recent central bank liquidity will be a strong tailwind.