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Commodities are on the back foot, with the asset class failing yet again to shrug off its reputation as a risk and struggling amid the latest investor flight to safety. But the correlation between most assets makes finding a safe home for investment money tricky, and is tarnishing even gold’s allure.
This is being highlighted in the metal’s price activity Thursday"”gold is down along with other commodities, instead of benefiting from the nervousness surrounding growth and inflation that is dragging down oil, copper and nickel.
The latest “flash crash,” as it is being termed among financial market participants, isn’t restricted to commodities and shows just how deeply correlated the financial markets currently are.
The euro is weakening further as worries over the eurozone’s fiscal situation deepen and perceptions grow that the U.S. dollar has turned the corner. Treasury yields are continuing to trend lower, spooked by rising inflation expectations and the end to the U.S. Federal Reserve’s treasury asset-purchase program in June. Stocks are also tumbling, demonstrating also their lack of faith in the global growth story. Everything seems to be moving in the same direction.
“Correlation is constantly changing, and in times of market stress the correlation between different asset classes increases as prices tend to move together,” said Ioan Smith, a London-based director at Capital Europe Limited. “As a result, the diversification benefits of a portfolio of macro assets may be less than initially anticipated.”
So if even gold is off the table as a good bet for investors, where is now the best place to put your money?
It’s a tough one.
The emerging markets have been the other beneficiary of the global growth story, with China leading the way and countries like India and Brazil bringing up the rear.
But cracks have been appearing in those economies for the last several months, and with inflation consistently shooting past central banks’ targets, something had to give.
Tightening measures are being stepped up in the world’s fastest growing economies"”China’s hike in the reserve requirement ratio for banks earlier Thursday is its tenth since the start of 2010"”restricting the flow of easy money that in part helped the price of commodities and other assets rebound faster from the 2008 downturn than the underlying growth story justified.
So what’s left?
With bonds no longer offering stable, positive yields to investors, analysts say they’re off the table right now too.
HSBC’s Global Head of Asset Allocation, Fredrik Nerbrand, argues that since bond markets “define the foundation of all asset prices, any downside in bonds on the back of higher risk aversion is likely to have a dramatic impact on everything else.”
Pricing levels to buy protection aren’t appealing, Mr. Nerbrand goes on to say, meaning that cash is the way forward because it offers something no other asset class does: diversification.
“We prefer to raise cash and face losing money in real terms and relative to our benchmark in order to moderate portfolio volatility,” Mr. Nerbrand adds.
It remains to be seen how long the volatility"”and correlations"”last. The outlook for inflation, global recovery, the dollar and whether capital inflows into emerging economies will revive"”all of these factors are in the mix. The world will always need commodities, but the knock-on shock of the sector’s consistently high prices is taking its toll.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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