Equities and bonds higher but the real story is in the commodity markets

Global equity markets edged higher last week, with the major equity indices in the US holding at record high levels. The S&P 500 index, which accounts for approximately 80% of US equity market capitalisation, is up 9.5% since October 15th while over the same period the much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, has fallen sharply from 31.06 to 13.12. Asian markets outperformed last week with Japan’s Nikkei 225 Index rising 3.62%, helped by the weaker Yen. Bond yields in Europe continue to move lower against the backdrop of falling inflation expectations; the German 10-Year government bond yield closed at 0.79%.

While equity investors in general have shrugged off the October scare the real story is in the commodity markets, most notably the spectacular collapse in the oil price in recent months.

At a macro level, it provides an interesting dynamic because on the one hand it raises questions about global demand, adds to disinflation worries and pushes out the timing of any rate hikes. On the other hand lower energy costs could provide a boost to the economy via the impact of higher disposable incomes on consumption. While shares of energy companies have declined airline stocks have raced ahead; the NYSE airline index is up 28% since mid-October.

One final point on the recent oil price decline is that moves of this magnitude over such a short time period can be inherently destabilising, as higher prices budgeted by energy export-reliant countries and energy-related companies have failed to materialise.

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