Other Inter-Market Relationships
Commodity Prices, The Dollar, and Emerging Market Equity
Even in this new age of e-commerce and technological revolution, commodity prices still matter. Many regions of the world are extremely sensitive to the pricing of basic raw material prices. The U.S. dollar is also a major factor. As the dollar rises, other nations’ goods and commodities become more competitively priced. I have found that multiplying the U.S. Dollar Index by a broad index of commodity prices is a helpful tool in assessing the overall trend of some of the smaller equity markets. As an example, below we show this product compared Argentina’s Buenos Aires SE Bolsa Index.
Shown below is a comparative chart of the CRB Index futures and the price spread between the U.S.’s Dow Jones Industrial Index and Canada’s TSE 300 Index. Since Canada has a much greater reliance upon commodity prices than does the U.S., it makes intuitive sense that Canadian equity markets would tend to outperform once commodity prices turn higher, and vice versa.
Technology and Commodity Prices
The trend in commodity prices affects interest rates, currencies, foreign equity markets, and commodity-sensitive industries. It also has a rather marked impact on certain sectors that ordinarily would not be associated with raw material price trends. To show what we mean, we have included a comparative chart that contrasts the movement of the CRB Index futures with the price ratio between the Nasdaq Composite Index and the CBOE Internet Index (Isdex). When this ratio is falling, it means that Internet-oriented companies are performing better than the Nasdaq index as a whole. The relative performance of Internet stocks is inversely related to the price performance of commodities.
Summary
I have demonstrated a number of inter-market relationships that may help in understanding the reasons behind the broad trends in some of the financial markets. At the IMRA, we cover the equity, fixed income, foreign exchange, and commodity markets. We work on identifying trend changes and explaining the likely impact that one market will have on another.
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