You might have got the impression that prices are rising everywhere, especially within the commodities complex. That’s only partially true though. The main benchmark commodity index, the S&P GSCI (ER) rose by 6.0% in September, which is a relatively big though not unprecedented number. Year to date, the index is up 38.2%.
That sad last month two-thirds of the sectors within the commodity complex printed negative performances. Feeder cattle was the worst performer, falling 9.9%, followed by nickel at -8.3%, and silver and lead at -8.2% and -7.4%, respectively.
That echoes a similar point made by HSBC analysts as they focus on the hottest bit of the commodity spectrum: the energy complex. Their strategy team observes that the current spike in energy prices is NOT an energy crisis,
“… it’s a gas issue, mostly. Crude prices are barely above where they were in June. And the pain in Europe (for myriad reasons including low inventories, no wind, hot summer in Asia, rebounding demand, expensive carbon credits, drought in Latin America, fire at a Norwegian LNG plant) is not being felt in America, the world’s second bigger gas producer behind Russia – as can be seen below. One story to watch is that traditional oil and gas stocks have now jumped by third over the past twelve months, whereas global clean energy indices are flat, having slumped 50 per cent since January. Time to look at renewables again for those who missed the green boat first time?”
Now one of the reasons why investors DO get so worked up about rising energy prices is that they project those concerns into a narrative built around the seventies. As a species we are behaviourally incapable of looking at set of events and not building a recursive historical narrative around these very different events.
The seventies narrative is pervasive now, which prompts the inevitable question – was it really so bad for equity investors in the era of Abba and flares ? The SocGen Macro Blog by Jitesh Kumar and Vincent Cassot tries to answer one part of this question by looking at market volatility : how volatile was the broad large cap stock market during this period of high inflation?
The short answer from the Sg strategists is “not that volatile”. See the chart below.
“The immediate takeaway is that 1) Deflation poses much more of a risk to equities than inflation. 2) Higher inflation does coincide with somewhat higher volatility, but the average levels of volatility have historically been manageable during high inflation periods. E.g. the average level of inflation through the 1970s was 7.1%, while the average 6 month volatility on S&P500 was 13%. 3) The worst-case-scenario has not been catastrophic – even at its highest point during the 1970s, equity index volatility did not surpass 30% over any 6 month horizon.”
Last but by no means least, one of the more interesting very recent developments is that long term sovereign bond yields have started rising noticeably again. Albert Edwards, also at SocGen, thinks they could go even higher.
“I think bond yields could continue to drift higher due to the more inflationary backdrop together with the threat of Fed tightening (yes, I do think that tapering is tightening). As the evidence shifts, US 10y yields could well attempt to explore 2-2¼% – the upper bound of the long-term secular Ice Age downtrend (see chart below). Although this move would not violate the bond bull market, it would certainly feel like a violation to equity investors, and particularly to tech investors who have built nose-bleed valuations on ultra-low bond yields. We could yet see a Dec-2018-like Powell Pivot just weeks into a Fed Taper. But what about the R-word?”
That R word is crucial. We’ve all collectively been so enthusiastically talking up the pandemic recovery story, that maybe we’ve missed another story that has little to do with inflation etc. what happens if we are about to head into a global slowdown. Maybe recession looms ?
China fact of the day
China is the single largest source of demand for new elevators with 60% of total global units5 and this of course is what drives headlines.