The strong inflation in commodity prices within the recent weeks and months seems to have ended. Despite the continuing monetary easing around the world, energy and commodity markets realized significant price corrections. The price of silver fall within a few days by 28 percent, the cotton price lost in four weeks more than 30 percent and even the industrial metal and agricultural commodity markets recognized at least significant price consolidations. How is this explainable?
Futures exchanges like the Chicago Mercantile Exchange (CME) increased their margins for several commodities due to concerns of a market overheating. As example, the margin requirements for silver investments increased by 84 percent. Now, open contracts have been backed by more capital. As a result, more and more liquidity is taken away from the markets. What does it mean for the equity market?
Equities are more attractive for investors with a need of low margins. Second, the crash scared many actors. Some investors see this as a buy opportunity and believe that we are still on the way to new all time highs. Others talk about the long anticipated beginning burst of the commodity bubble. But why? Nothing has changed fundamentally. China was a main driver of the past boom. I believe in fundamentals and this implies that if China’s growth slowdown, the basic material market will be weak if no other demander will come.
The Bank of America points out that the largest 100 pension funds in American held only 37 percent of their portfolios in bonds and cash. The remaining part is invested in equities, alternative investments and commodities. Bonds are threatened by inflation. Institutional investors have no other choice as to buy commodities and equities in order to realize adequate returns.
Over the past month, the Dow Jones increased by 1.8 percent. In total, money flows into the Dow Jones increased by 6 percent to USD 4.5 billion over the recent month. Equities with engagements in the basic material sector fell by 6.8 percent for the past four weeks. Silver, oil and gas drilling and exploration stocks as well as gold are the biggest losers.
Despite the sell-off in commodities, capital markets remain stable. More and more cheap money is coming into the markets. The number of stocks bought on margin rise significantly and increases the market risk. If interest rates of the developed markets follow the rates of the emerging markets and commodity export based countries like Canada or Australia, we have to expect the next sell-off. The only question is: When it will be happen?