Quest for profit breaks commodities link with stocks

The degree to which commodity futures and stocks are moving together can be seen in correlations, which at about 60 per cent are the highest since the early 1970s.

Correlations have been rising since last December, when the spectre of the worst recession since the 1930s triggered a sharp sell-off across commodities and bonds.

The connection has been reinforced by the dollar, which has become even more negatively correlated with commodity futures, which rise when the dollar falls and vice versa.

Growing risk appetite has in recent weeks weakened the dollar, which this week was trading beyond $1.50 against the euro, its lowest since August 2008.

Under pressure

“The dollar is under a lot of pressure due to US monetary and fiscal strategy,” Shah said. “Risk assets are going up because of dollar weakness, increasing the correlation between equities and commodities.”

Other reasons for the strong relationship between stocks and natural resources include loose monetary policy which has led to a glut of liquidity looking for a home.

Disillusionment with complex instruments has strengthened the tie.

“For reasons of transparency and liquidity, commodities may be becoming early predictors rather that late predictors,” said Ian Morley, chairman of Corazon Capital.

He added that wealthy individuals no longer trusted financial derivatives offered by banks.

“They are more likely to be interested if you go to them with tangible assets, assets they can touch, they can feel.”

Another idea also touted is the growing presence of investors in commodity markets.

Many of these investors use macro indicators from major economies to make trading decisions for commodities, just as they do for equities and bonds.

“Commodity assets have become more mainstream in the last five years,” said Sean Corrigan, chief investment officer at Diapason Commodities Management.