Market Currents
Cautious winds are blowing through the markets as we approach year end, and nowhere is it being...
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Friday, October 26, 2012, 5:17 PM ETCautious winds are blowing through the markets as we approach year end, and nowhere is it being felt more heavily than in the commodities sector. Prices have been in a freefall recently, as traders who thought global growth and easy monetary policies from central banks would translate into big commodity profits head for the sidelines, says Cronus Futures' Kevin Ferry. "If these guys got it wrong and now they're bailing out of the commodity market," Ferry warns, then that's telling you that globally we've hit stall speed. His advice - watch out below.
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Commodities -should- move inversely to equities, this is what makes sense. There's a reason asset diversification used to be important, and it stopped being important when commodities and equities started moving in tandem.
If energy is cheap, companies using it should be more profitable. It makes sense. If aluminum is cheap, Coca Cola should be making money.
Lately, the assumption has been that if (KO) sells more product it needs more aluminum and folks would bid up aluminum as a result, making the equity and the commodity move in tandem. This is in large part due to deregulation of commodities markets and the rise of ETFs and the resulting entrance of banks as intermediaries with lots of cash into fragile and relatively small commodities markets. But it doesn't make sense, as it leads to a headwind against either performing well.
A good example is energy: world markets improve, energy goes up on assumption of increased demand, then markets fall because energy prices are too high, so energy prices fall... etc.
If this relationship is finally breaking down, and commodity 'investors' are exiting such trades, this is a good thing.