Don’t be fooled by the relative calm across financial markets: The inputs in the global supply chain are flashing warning signs.
Commodities have approached correction territory, under pressure again on Thursday in the face of the resurgent dollar and lingering global trade tensions. Among the recent milestones: Copper dipped below $6,000. West Texas Intermediate crude tested $70. Gold crashed through $1,220.
The metal moves, in particular, are key to investors. Prices in the sector can be used to predict the pace of global growth before other measures, like business surveys or trade data, even become available. They would have presaged an upturn in early 2016, for instance, according to Bank of England economist Tom Wise. Most forecasters didn’t.
“Metals prices are timely, highly correlated with world economic activity and perform well at predicting short-term movements in GDP,” Wise said in research published on the central bank’s blog. “Consumption moves very closely with GDP.”
As the drop in the Bloomberg Commodity Index nears 10 percent from its almost three-year peak in May, here’s a look at how the sell-off is feeding into other assets.
Stock Sickness
The moves are clearly showing up in equity markets, with miners the worst performers in the Stoxx Europe 600 Index this month.
That miners are heavily exposed to metal prices is predictable, but the dependence is growing. A 10 percent move in the LMEX Index of six base metals corresponded to a 7 percent move in the Stoxx Europe 600 Basic Resources sub-index in the past year -- that’s stronger than during the preceding decade, according to data compiled by Bloomberg.
FX Effects
The weakness in material prices is spilling over into the currencies of producer nations.