April 20, 2018|

Geopolitical fears stoke commodity supply worries: Capital Economics


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By WilliamWatts Deputy markets editor

A strong global growth outlook lifted both industrial commodities and the stock market over the last year or so, but the close relationship between these two asset classes is breaking down.

That’s illustrated in the chart below from Capital Economics, comparing the S&P GSCI commodity index with the S&P 500 SPX, -0.57% In a Thursday note, economist Tom Pugh pinned the divergence on geopolitical risks, which led to a surge in the prices of oil and some industrial metals.

Aluminum prices soared 13% last week after the U.S. Treasury on April 6 slapped sanctions on Russian entities and individuals in response to what it said was Moscow’s attempt to “subvert Western democracies” and its pursuit of “malicious cyberactivities.” The sanctions included United Co. Rusal, which is responsible for 7% of global aluminum output.

Aluminum prices continued to rise this week, with three-month prices hitting a more-than-six year high at $2,603 per metric ton. Nickel prices are also soaring, hitting their highest level since December 2014, on worries Russia producer Norlisk Nickel could also be caught up in the sanctions.

Jitters over Syria were also a factor in lifting oil prices last week, though fears that a U.S.-led military strike could lead to a confrontation between the U.S. and its allies and Syrian allies Russia and Iran subsided.

On top of that, OPEC members are hinting they’ll extend production cuts into 2019, while reports of mass resignations at Venezuela’s state oil company, PdVSA, heighten risks that crude output will fall sharply, Pugh noted. Oil futures CLM8, +0.06% LCOM8, +0.16% traded near a 3 1/2-year high Thursday.

Geopolitical concerns haven’t kept stocks down in April, but they are lagging the broader commodity index. In the month to date through Wednesday, the S&P 500 has returned 2.6% versus 4.8% for the S&P GSCI. In the year to date through Wednesday, the S&P 500 has returned 1.3% versus 7.1% for the commodity index.

Capital Economics raised its end-2018 forecast for Brent to $65 a barrel from $60 previously, though that’s still down from its present level near $74, reflecting the firm’s skepticism about OPEC’s willingness to extend production curbs and expectations for rising U.S. output.

Still, the backdrop doesn’t indicate commodities are set to suffer relative to stocks.

“Given the rise in potential risks to commodity supply, it seems unlikely that the relationship with equities will resume anytime soon,” Pugh said.