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Oil prices have been sliding despite the sabre rattling from OPEC earlier this month. As oil is the most widely traded commodity in the world it is difficult to ignore when reviewing commodity markets.

Many analysts have been expecting the oil price to start to pick up steam, particularly as the global economy looks to be improving, but sadly it hasn’t. The oil bears still reign.

Why is the relationship between stock market and commodity market at odds?

Oil hit the lowest levels seen since November today, and this has to be remarked upon. According to market analyst Bryan Rich at Logic Fund Management:

“We are back in the low forties, which has been the danger zone for oil. And the danger zone for oil is the danger zone for the shale industry, and for oil producing countries. And the danger zone for oil producers means the banks are in the danger zone.”

Oil is down 19% on a year-to-date basis. However, financial stocks have been going in the opposite direction, and are up about 3-4% on a year to date basis, depending on the ETF you are using to trade the sector. Rich expects this divergence to disappear if oil cannot rally.

“Remember, we have had drawdowns for nine out of the last 10 weeks,” Rich adds. “Despite what the media reports, it’s not a ‘glut of oil’ story. It looks more like a market being pushed around by speculators – squeezing weak hands, i.e. not sustainable.”

There has been short term positioning in the commodity ETFs market as well. ETF Securities, one of the biggest players in the Europe ETF market, reported outflows $150 million in the week to 2 June from commodity ETFs. Weak iron ore prices, a downgrade of China’s credit rating by Moody’s and a drop in China’s manufacturing benchmark are all contributing heavily to a bearish feeling on the part of commodities investors.

Unwarranted optimism

Following the US presidential election in November, there was a great deal of unwarranted optimism in the market, as traders hoped for massive new infrastructure investments from the Trump administration. This would in turn, they reasoned, require substantial demand for commodities. With China’s economy beginning to slow down a little as it hits development capacity in various areas, a US infrastructure boom would be just what the commodities market needed.

Both equities and commodities markets had seen a considerable boost in Q4 of last year. The S&P 500 was at 2085 on 4 November. It is now at 2437. The S&P GSCI, which is a benchmark for the broader commodities market, also rose in November from 349 on 4 November, to 407 on 10 February. Since then the commodities party has been more muted – the index is now at 357,  not far from where it was when Trump was elected.

If the ETF trend is anything to go by, commodities investors are running out of reasons to stay in the asset class, other than perhaps in silver and gold. Despite a bullish economic outlook, with central banks now firmly into a rate raising cycle, commodities markets are pointing to a very different world, with economic demand actually slowing.

One of these two markets has got it wrong, but which?

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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