January 30, 2013 / 3:00 PM / 5 years ago

Divergence in trading of commodities vs stocks likely to last

* End of money printing will ensure decoupling

* Fundamentals for oil, other commodities well-balanced

By Simon Falush and Eric Onstad

LONDON, Jan 30 (Reuters) - Commodities have decisively broken their lock-step with other assets, which lasted from 2008 to 2012, and now lower volatility and an expected end to central bank money printing could ensure the correlation does not return.

The 30-day correlation between the Thomson Reuters-Jefferies CRB commodities index and the S&P 500 equities index has slid to 0.24 from 0.7 in late November.

Many commodities markets have seen lacklustre activity and range-bound prices in January, and many investors are opting for equities, which have been buoyed by recovering global growth.

“This year we have seen quite a lot of banks having their first-quarter review, and for the first time some of them are wondering if the bull market seen in some commodities, whether it is over,” said Gabriel Garcin, a portfolio manager at Europanel Research & Alternative Asset Management in Paris, which invests in European hedge funds and CTAs.

“Some banks are trying to sell this to their clients. Indeed since the beginning of January we have been seeing a big rotation and a very nice rally in equities.”

The S&P 500 vaulted above 1,500 for the first time in five years on Friday on strong U.S. earnings reports. It has gained 11 percent since mid-November, while the CRB has only added 3 percent.

Central banks in the biggest industrialised nations have responded to a crisis of confidence in global markets since 2008 by printing trillions of dollars, and the repeated injections of cash led investors to pile into all assets considered as risky.


Many analysts expect central banks to turn off the taps towards the end of this year and into 2014, which means the four-year phase of so-called risk-on, risk-off trading is unlikely to return.

“The S&P 500 is very close to record highs, so there are increasing signs that they will stop QE ... so that will take away a key reason for the close relationship (between equities and commodities),” said Olivier Jakob at Petromatrix in Zug, Switzerland.

Many investors have cooled towards commodities. Their supply-demand scenarios are more balanced than in previous years, when surging demand from China and shortages combined to create volatile price movements.

Brent crude oil has gained around 2.9 percent in January compared to a 5.7 percent gain for the S&P 500.

“Equity markets have a totally different dynamic from oil,” said Filip Peterson, a commodity analyst at SEB in Stockholm.

“Equities are looking at the growing economy, while for oil we’re looking at factors like the marginal cost of production, while there is over-production from OPEC and pressure on Saudi to cut (output).”


Another factor limiting the correlation between commodities and equities is lower volatility. The CBOE volatility index has dropped to its lowest since 2007, a time when correlations between equities and commodities also was much lower.

“With oil trading in a relatively steady range in the last two years, it’s not surprising that the correlations have come down,” said Robert Farago, head of asset allocation at Schroders Private Bank.

“There’s sufficient supply of oil and metals but also reasonable economic growth, so demand is not going to collapse either. There’s a good economic rationale for oil being in a range of $80-$120 (per barrel).”

While many investors are shunning commodities as an asset class, some are still hunting individual markets where supply is constrained, said Andrey Kryuchenkov at VTB Capital in London.

“As far as your typical investor is concerned, they say why would I want to be in commodities if the commodity index will maybe only be slightly better. People are turning to individual supply-demand specifics, so they will be picking and choosing instead of just getting into a basket of commodities.”

Gold, which has been the top commodities pick by many investors in recent years, is also losing its attraction as a safe haven asset. Spot gold has shed about 7 percent since early October, when it failed to break through the $1,800 an ounce mark.

“The reason gold is underperforming is simply because people are saying, ‘Should I be in gold when I might get better returns in platinum or palladium or put my money in mining stocks?’” Kryuchenkov added. (Graphics by Vincent Flasseur; editing by Jane Baird)

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