This is 'the danger'
Stock markets around the world are getting bludgeoned, and there is no shortage of reasons that may be behind it.
One big theme this year has been the longtime sell-off of commodities, which are more sensitive to the demands of the economy. For the most part, analysts had tied this sell-off to the slowdown in China's economy, the second largest in the world.
Interestingly, the S&P 500 has managed to decouple from commodities.
But with stocks tumbling, are we at risk of a recoupling? Because if commodity prices don't pick up, then stock prices will have to go down.
"Markets are afraid of further economic weakness in China, further pain in global commodity markets and uncertain about Fed and PBoC policy — what they will do and what the impact will be," Societe Generale's Kit Juckes wrote on Monday. "The divergence between global commodity prices and equities is not a new theme but the danger now is that they begin to re-correlate - as they did when the dotcom bubble burst in 2000 and what had previously been an emerging market crisis became a US recession."
Juckes offered this chart overlaying the S&P 500 with the CRB commodities index. He doesn't say it, but if we were to assume the lines were to meet up again, the S&P 500 would have to fall by around 50%. Again, no one's actually saying that; it's just that that's what it would take for the S&P to meet the CRB where it is now.
"The alternative view of course, is that US growth is sufficient that demand for raw materials and reductions in commodity supply will between them be sufficient to stabilize commodity prices, but in the near term, we have the Chinese slowdown leading to a commodity overshoot leading to broadening asset market weakness and deepening risk aversion," Juckes added. Read » | | | |
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