Some analysts have pointed to an interesting dichotomy during the past few days. One the one hand, risk assets such as stocks, have been rallying and the S&P 500 is not far from its all-time high. On the other hand, commodities and particularly metals and energy, are hitting multi-year lows because of a slowdown in global growth and particularly demand from emerging markets.
In theory, healthy economic growth should lead both commodities and stocks to move higher. Therefore it can be a little confusing when equities are going up while commodities are falling hard. Before the financial crisis of 2008 for example, commodities started to drop before other risk assets imploded. Hence some commentators are referring to commodities as the ‘canary in the coalmine’, which can warn of future problems. This remains to be seen of course but it is an interesting point to take in.
The positive risk appetite is also having an impact on currencies. For example, the aussie and the kiwi have been supported lately because of positive risk sentiment and indications that their respective central banks would be on hold despite the drop in commodity prices. More drops in commodities could weigh on the two currencies.
Positive risk appetite could be hurting the euro and the yen. The two currencies are currently the funding currencies of choice as not only are their interest rates effectively at zero but they are also conducting aggressive quantitative easing campaigns that could weaken their currencies even more. This can translate into short positions against the two currencies and investing the proceeds into riskier investments.
To sum up, the excessive weakness in commodity prices and positive performance of risk assets can be difficult to reconcile in the long-run. In the short-run however, this is a characteristic of today’s markets brought about by the mixture of slow growth and aggressive monetary easing around the world. This can also have important implications in currency markets in relation to the characteristics of each economy.
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