- After a period of strong correlation, US stocks have diverged from commodity prices.
- It’s been caused by unexpected developments which have slowed commodity supply.
- Meanwhile, stocks are struggling for momentum as doubts emerge about the global growth outlook.
US stocks have tracked a close path with commodity prices since the middle of last year, as both asset classes benefited from an improving global growth outlook.
But lately, that correlation has broken down as commodity prices surge higher while stocks struggle for traction.
The divergence is shown in this chart from Capital Economics (CE):
Both asset classes moved in lockstep towards the end of last year, as US stocks rose to new record highs and commodities benefited from synchronised global growth.
But recent data points suggest the outlook for the global economy is less rosy.
Instead, CE analyst Tom Pugh highlighted that the split has been caused by a series of unexpected external factors which halted commodity supply
“First, the US announced sanctions on prominent Russian citizens and companies, including Rusal, which accounts for 6% of global aluminium supply,” Pugh said.
That saw prices for aluminium rocket higher by around 30%, to reach a seven-year high earlier this week.
There’s also been a number of developments in the oil market which has seen Brent crude push towards $US75 a barrel.
For one thing, Pugh think it’s unlikely that US President Trump will waive sanctions on Iran’s oil exports when they come up for renewal in May.
And in addition to last week’s US-led attacks in Syria, Pugh drew attention to the ongoing conflict between Saudi Arabia and Yemen which poses a further threat to oil supply.
“Earlier this month, Yemeni rebels attacked an oil tanker in the Red Sea near the Suez Canal — through which more than 3 million barrels per day of oil passes,” Pugh noted.
Reports on Reuters earlier this week also suggested that Saudi Arabia — the world’s biggest oil exporter — may seek to curb supply in order to drive oil prices towards $US100 a barrel.
There’s also iron ore, which has spiked by more than 7% in the last three days and had its biggest one-day gain since December overnight.
Meanwhile, US stocks have struggled for traction since reaching an all-time high in January. And so far a solid round of results in quarterly earnings season has failed to spark a sharp rally in prices.
That’s coincided with a more sobering outlook for global economic growth, with JP Morgan’s composite manufacturing and services index falling to its lowest level in 16 months.
Furthermore, research from Deutsche Bank shows that in January, every country in the G10 had positive economic surprises in their data. That’s now fallen to just one country — the US.
“Given the rise in potential risks to commodity supply, it seems unlikely that the relationship with equities will resume anytime soon,” Pugh said.
But although oil prices are at a four-year high, Capital Economics expects prices to end the year at around $US65 a barrel as US shale oil producers respond to higher prices by ramping up production.
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