The correlation across sectors within the commodity asset class have started to fall. They are still not near their medians but these correlations have started to come down and suggests that commodity sectors are being driven by the local supply and demand effects within the markets. The chart shows the overlapping 30 month correlation between sectors for the last 10 years. The hash marks represent the current levels.
Correlation between the equity markets and commodity markets also have fallen significantly. We have moved from very high positive correlation which for the DJUBS commodity index and the S&P 500 was above .8 to now a negative .7. This has been a frustration for many investors, but the futures market seem to be more closely linked to the real economy and not to financial assets. There is now more diversification with holding commodities than we have seen in the past. The cost has been return.
The volatility of commodities have also fallen in response to the fall in correlations within the commodity sectors. This will be a continuing theme in the commodity markets. Note, for example that the correlation between ag and energy markets has at times been negative. The same applies to base and precious metals. Most of the correlation across sectors are well below .5. Commodities as an asset class just do not move closely together.
No comments:
Post a Comment