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HE CONTRASTING behaviours of global equity and commodity markets have to reconcile sooner than later. In a fascinating development, stock markets
and commodity markets around the world have been heading in opposite directions. Equity markets have been heading south since January 2008, while commodity markets have shot up. The Dow Jones index has slipped
10%, the Hang Seng, 18%, the BSE 22%, and China’s bourse 21%. On the other hand, gold has risen 17%, silver 36%, aluminium 34% and copper 17%. Even
the prices of soft commodities like wheat and rice have climbed 25%. But is this dichotomy in two large segments of the world economy tenable?
“The fall in equity markets is driven by the credit crisis in the US, the worsening positioning of the financial sector, and the possible effects this will have on the rest of the world,” explains Koen Koster, Senior Economist,
Emerging Markets, ABN Amro Bank. If this doomsday scenario comes true, it can affect countries like China. Logically, this should also affect commodity markets. A reconciliation, therefore, has to take place at some time.
But what is the reason for the divergence? “In the case of copper and iron ore, raw material supply has been slower than the rate at which fi nished products are being made, pushing up prices,” says an analyst. Again, hedge fund
money could fi nd its way into commodities, says Alok Sama, Founder and MD, Baer Capital. Eventually, plain economics should take over and end the dichotomy. The question is, will the ending be a happy one?