Commodities & The Great Rotation
The after-shocks of the financial crisis remain with us, but the Great Rotation awaits as correlations and returns in markets adjust.
By Guy Isherwood
INVESTORS FINALLY SEEM to be looking at asset classes more on their merits. After several years of markets moving much in tandem, investors are once again differentiating between assets more selectively rather than just jumping on the ‘RO- RO’ bandwagon. This could be a sign that markets are “returning to normal” we are told, implying that things aren’t as bad as people thought. Rationality has returned.
As investors have become more confident in the global economy they have put their faith into riskier assets
Commodities are also acting more independently
and the debate on how changes in interest rate regimes may affect commodities is getting louder. “So far in 2013, the correlation between the S&P500 and DJ-UBSCI at 47% is only half the level of a year ago while the correlation between different commodities continues to fall; from 45% in January 2011, to 33% in 2012 and 19% currently, suggesting a more diverse outlook for commodities ahead,” according to commodities analyst Sudakshina Unnikrishnan at Barclays. Gold – the eternal safe haven – is out of favour,
with investors selling a record 104 tonnes out of ETPs alone in February, the largest monthly outflow
Global Composite PMI & GDP
34 38 42 46 50 54 58 62
Global Composite PMI Output Index (LHS)
CE World GDP Index (%, q/q annualised) (RHS)
World GDP calculated at PPP exchange rates
Latest = Q4 2012
-8 -6 -4 -2 0 2 4 6 8
00 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: Thomson Datastream, Markit, Capital Economics 4 March 2013
on record (see page 25). Japan’s stock market has rallied and the yen has fallen. Meanwhile, China’s economy seems to have landed softly and looks on track to record 7.5% growth this year. Critically for the Dow, every single piece of
positive economic data from the US – of which there have been quite a few lately – has triggered an almost automatic ‘buy’ reaction from investors and algo traders. The US economy has turned a corner, with the
composite PMI rising to its highest level for two years. “The US economy seems to have shrugged off the weakness of overseas demand and domestic fiscal uncertainly,” according to Andrew Kenningham, Senior Global Economist with Capital Economics. “
...the housing sector is recovering and employment is rising at a steady pace,” he confirms. Indeed, the latest ISM manufacturing index survey is consistent with GDP growth accelerating to around 3%. As investors have become more confident in the
global economy they have put their faith in riskier assets. But not into commodities. Risk assets generally are also benefitting from the
Fed’s third round (and confirmed continuation) of QE. The punchbowl will only be withdrawn once the economy gets moving and unemployment falls further. Indeed, Chairman Bernanke recently defended the Fed’s QE program during a closely watched two days of testimony before Congress, suggesting that an early exit
from its
aggressive monetary easing campaign could in fact backfire. “A premature removal ... could, by
slowing the economy, perversely serve to extend the period of low long-term rates,” he told congress. That made investors feel good. And when investors feel this good, everything ‘risky’ – assets like equities and commodities – used to rally together. Good news was also normally bad for the dollar, which would rally instead on disappointing or negative developments. There are signs this is changing. The dollar strength seen during February is a reversal of that trend. The S&P GSCI was down 4.4% during the month, pushing
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