Shipping ETFs Surge Amidst Middle East Conflict Concerns

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Exchange-traded funds (ETFs) that track shipping stocks experienced a significant increase in value on Friday following airstrikes conducted by U.S.-led militaries on Yemen’s Houthi rebels. These airstrikes were carried out in response to the rebels’ attacks on Red Sea shipping, raising concerns in the market about the possibility of the Israel-Hamas conflict escalating into a larger Middle East confrontation. Such a scenario could lead to a further surge in oil prices and shipping costs.

The SonicShares Global Shipping ETF (BOAT), which monitors global companies engaged in maritime transportation, witnessed a jump of 3.4% on Friday morning. Similarly, the U.S. Global Sea to Sky Cargo ETF (SEA) saw an increase of 2.7%, according to FactSet data.

Both ETFs are on track to achieve their highest daily percentage gains since December 18, 2023, when Yemen’s Houthi movement attacked two commercial ships in the Red Sea. In response, the U.S. formed a naval coalition the following day to protect commercial shipping in the region.

Furthermore, the Breakwave Dry Bulk Shipping ETF (BWET), which tracks the price movements of near-dated dry bulk freight futures, experienced a 7.3% increase on Friday. This month, the fund has risen by 17.8%, putting it on course for its most substantial monthly percentage advance since June 2023, based on FactSet data.

It is worth noting that dry bulk carriers transport unpackaged dry cargo such as iron ore, coal, and grain, which distinguishes them from oil tankers and containerized cargo ships.

To mitigate risks and higher shipping costs, numerous prominent shipping firms, oil producers, and cargo carriers have halted shipments through the Red Sea since early December. Although this diversion adds weeks to their journeys, it is a necessary measure to ensure the safety of their vessels.

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Impact of Redirection on Shipping Traffic

The recent diversion of containership traffic around Africa has already disrupted the industry, but now tankers and dry bulk carriers are facing a similar fate, according to John Kartsonas, the managing partner at Breakwave Advisors. This redirection of maritime traffic is expected to result in longer voyages, potentially adding up to two weeks to the journey. As a consequence, shipping rates may be affected, depending on the duration of this disruption.

Container rates have already doubled in the past two months, signaling the immediate impact of this redirection. Although tanker rates have not reacted as strongly, this could change in light of the new information. The situation is compounded by the escalating attacks on shipping by Houthi rebels and the subsequent military responses by the United States and the United Kingdom. These events further support the increase in oil prices.

On Friday, West Texas Intermediate crude for February delivery rose 1.5% to reach $73.12 per barrel, following an initial surge of over 4% in morning trade. March Brent crude, the global benchmark, also experienced a 1.6% increase to reach $78.58 per barrel on ICE Futures Europe, briefly surpassing the $80 mark.

In financial markets, the impact of these developments was felt as U.S. stocks took a hit. The Dow Jones Industrial Average (DJIA) declined over 200 points, equivalent to a 0.6% drop, settling at 37,48. Similarly, the S&P 500 (SPX) saw a 0.2% decrease, while the Nasdaq Composite (COMP) experienced a 0.1% fall, as reported by FactSet data.

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