Stock Bulls Find Validation in Reflation Signals Across Commodity Markets

Business Standard Stock bulls find validation in reflation signals across commodity markets

Progress toward vaccines and easing US political uncertainty helped lift an MSCI index of world stocks to its best month ever in November while driving down the dollar.

Equity bulls who expect a global economic recovery to prolong the recordbreaking rally in stocks can take some comfort from signals in commodity markets. Copper, iron ore and aluminum futures are around multi-year highs and the Bloomberg Commodity Spot Index is close to its strongest since 2014 after rising from pandemic lows. For optimists that signals an Asia-led worldwide rebound — soon be aided by the rollout of vaccines against the pandemic — can help global stocks extend an 11 per cent advance so far in 2020.

“The commodities rally is the reflation trade, which has kicked in very strongly” amid progress toward a Covid-19 vaccine, said Rupal Agarwal, quantitative strategist at Sanford C Bernstein in Mumbai. “Global equities should continue to do well as uncertainty is finally dissipating.”

Progress toward vaccines and easing US political uncertainty helped lift an MSCI index of world stocks to its best month ever in November while driving down the dollar.

Investors have begun piling into sectors of the stock market viewed as more sensitive to economic recovery, such as cyclical value shares and small caps.

The impending deployment of Covid-19 vaccines together with the impact of stimulus “are driving the expectations of a ‘V’- shaped recovery,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by email.

The ratio of copper to gold — often viewed as a window on expectations for the global economy — surged this week to the highest since mid-2019. The climb in the S&P 500 index of materials companies has overtaken the technology-heavy Nasdaq 100 index’s rally since the March lows.

“In a typical recovery, commodities should be performing well,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte in Singapore. “The best link to this trade is industrial stocks.”