Shipping stocks and the broader market continued their roller-coaster ride Wednesday, falling amid an historic tumble on bonds after rising Tuesday on Trump tariff delays.
The Dow Jones Industrial Average declined 761 points through late afternoon to 25,530 as 10-year bond yields dipped below 1.6% this morning just under the 2-year Treasury bond yield.
Equities in multiple sectors — including shipping — followed this downward movement that marked the first decline below 2-year yields since 2007, rising fear of a recession.
"Shipping is a high beta sector, so whatever happens in the overall stock market will be magnified in the shipping market, especially if it involves risk to commodity demand via a global slowdown or recession," Jefferies analyst Randy Giveans told TradeWinds.
On Tuesday, 30 out of 35 New York-listed shipping stocks closed on an upswing after the Trump administration pushed back a 10% tariff on certain Chinese imports to 15 December for the holiday season.
Tanker owner Frontline, whose majority owner John Fredriksen has partnered with Trafigura to form a marine fuel giant, has fallen 9.3%.
Meanwhile, bulker owners Globus Maritime and Safe Bulkers have both slipped 7.4% to $1.75 and $1.69 respectively.
Diamond S Shipping has declined 5% to $9.90.
The R word
"The trade tensions have already created much uncertainty for shipping stocks but a recession, or the ‘R word’, could be even worse," Noble Capital Markets Poe Fratt told TradeWinds.
"A global recession would reduce trade flows and shipping volume would be likely to drop.
"While I think that shipping demand tends to be more resilient, the market believes that shipping demand will drop and rates will have nowhere to go but down."
The “R word” pulls down shipping and transportation stocks especially because of their high-beta status, Seaport Global Securities analyst Kevin Sterling said.
“Any time recession or recession scenarios are thrown around, that is not a good scenario for shipping stocks or transportation stocks”, he said.
“These stocks will be under pressure as long as the market continues to worry about recession. In particular global recession concerns will weigh on shipping stocks.
There could be a silver lining, however, around this otherwise bleak scenario, Fratt said.
"Many companies are not carrying as much financial leverage so the survivors could thrive once the dust settles," he said.
At the same time, the order book is low and lower rates could trigger higher scrapping, which would help partially offset softer demand and possibly balance the market.
IMO2020 will be interesting to watch since higher fuel costs, as shipping companies switch to low sulfur fuels, could trigger slow steaming and/or scrapping."
'Not overly concerned'
The bond market's effect on shipping stocks should not cause too much worry because many shipping company equities are well capitalised, Deutsch Bank analyst Amit Mehrotra said.
"So they can endure a weak rate environment for a prolonged period of time," he told TradeWinds.
"Also very few, if not none, have newbuilding capital commitments, which was the main driver that drove equity values to distressed levels in 2016."
He said Wednesday's dip is not a distressed sell-off of shipping stocks, many of which aree actually up year-to-date, he said.
"For example, Frontline is down 9.4% today, but still up 17.7% year-to-date," he said.
"And it’s no surprise that the move in shipping stocks in any given day will be exacerbated by overall market moves.
"From this perspective sell-offs like these create attractive, albeit selective, buying opportunities."
