We’re thinking of renaming the FT’s very own John Authers “Dr Gloom”, or at least, something like that. As if subprime traumas were not enough. He warns in Tuesday’s Short View column that the problems besetting markets are “not just about financials”. Although just one nightmare (of financial sector crisis) has gripped the world’s markets in the past two weeks, it might pay to beware of dark movements in the cyclicals sector – and the potential for a commodities meltdown, Authers warns.
Morgan Stanley’s Cyclicals index, of 30 stocks that are highly sensitive to the economy, has actually fallen more than the financials since the market top, down 10.4 per cent, he notes.
Last week’s US data, showing worries among supply managers, and disappointing figures on US employment, “crystallised fears that the US and global economies are not the perpetual motion machines that some in the market had thought”, Authers says.
There are other signs of concern in commodities, with aluminium futures dropping 7.4 per cent in two weeks, while energy has also fallen faster than the market as a whole, with the S&P energy sector off 12.4 per cent since the S&P 500 reached its peak – a fall that can only be partially explained by the 3 per cent slide in crude prices over this period, he says.
The logical explanation, ventures Authers, “is that traders are now worrying about an economic slowdown, and not just a financial crisis (although the two could be created)”. Or, he adds, “this may be a sign of contagion”.
“Correlation between non-correlated assets, such as financial stocks and metals futures, has increased with the growth of sophisticated trading strategies. It may show that hedge funds, stuck with losses in unsellable subprime-related securities, have been forced to take profits in their remaining ‘good’ investments.”
Neither explanation gives “cause for cheer”, concludes Authers.
Indeed, on Tuesday, oil prices dropped for a third day as commodities-related stocks had a rough time in Asian markets, reports Bloomberg, quoting one investment manager in Tokyo saying: “Commodities have been bought to a greater extent than justified by fundamentals”.