Home Business Why Are Commodities Rallying Despite China Fears?

Why Are Commodities Rallying Despite China Fears?

When you purchase through our sponsored links, we may earn a commission. By using this website you agree to our T&Cs.

Societe Generale’s Cross Asset Research published their monthly Commodity Compass on Tuesday of this week. SG analyst Mark Keenan and Head of Commodity Research Michael Haigh suggest that the current turmoil in emerging markets is not likely to influence commodities price unduly. They argue that commodity prices are in general tracking economic growth, and as long as China’s economy stays on track, commodity prices should be stable with an upward bias in 2014.

“Overall, we expect commodities to continue tracking their underlying fundamentals. The EM upset will likely have the greatest effect on industrial metals as weakness in commodity currencies will act to cushion production costs . A significant risk to commodity markets, and also to emerging markets, with many capital allocation strategies being driven by broad factors rather than more localised factors across the sector, is China. As long as Chinese banking risks do not escalate; we expect developing economic growth to be the dominant driver of commodity returns going forward.”

Decoupling of commodities from other asset classes

Keenan and Haigh also highlight that commodities, which have in the past rather reliably tracked other asset classes, have decoupled from other asset classes over the last few quarters and that this trend is continuing.

“The DJUBS Commodity index was up in January 2014. Throughout 2013, we have quantified the de-correlation and decoupling of commodities as an asset class from other assets and highlighted their importance in portfolios going forward – especially as the prospect of economic growth returns. We continue to see evidence of this decoupling, with the MSCI world equity index down 3.8% in January and the DJUBS Commodity index up 0.3%.”

Investor sentiment indices

February’s Commodity Compass also emphasizes that investor sentiment remains relatively strong despite the Fed taper and the EM currency turmoil and equity market downdrafts. They point to the SG Sentiment Indicator, a set of indices that use equity volatility (VIX index), FX volatility, interest rate volatility, credit spreads, swap spreads and the ratio of gold to gold equities to gauge investor sentiment. These sentiment indices dipped in January, but not to extreme levels and are already bouncing back.

Sentiment indices

China is key

Keenan and Haigh conclude the report by emphasizing that commodity prices are highly dependent on the status of the Chinese economy. “Further developments on how risks in the Chinese shadow banking system might develop or be contained will be critical in determining the overall risk in emerging markets, and specifically in determining the direction of future commodity prices.”

Our Editorial Standards

At ValueWalk, we’re committed to providing accurate, research-backed information. Our editors go above and beyond to ensure our content is trustworthy and transparent.

Want Financial Guidance Sent Straight to You?

  • Pop your email in the box, and you'll receive bi-weekly emails from ValueWalk.
  • We never send spam — only the latest financial news and guides to help you take charge of your financial future.