The relationship between commodity prices and the sharemarket appears to be changing
The relationship between commodity prices and the sharemarket appears to be changing. Typically one would associate declining commodity prices with weaker economic growth and declining earnings, which would facilitate lower sharemarket valuations. However, the market calculus this cycle is more complicated as movements in commodity prices are not indicative solely of changes in demand. Indeed, while there are some concerns about moderating activity in Europe and China, that is occurring in the wake of a massive investment pipeline over the past seven years which has, and will, increase global production and add to the downward price pressure. This is occurring at a time when the US dollar has appreciated to a four-year high which has placed additional pressure on dollar-denominated commodities and has lowered inflation across the entire supply chain. This should enable central banks to maintain their ultra-accommodative monetary policy settings and improving the relative valuations of equities relative to bonds. Lower commodity prices being a positive for equities is a complete reversal from the historic norm, but who ever said the current cycle is normal?
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