What makes me worried, though, are the latest developments in commodity markets. I used the chart below previoiusly. It shows the development of equity markets (here the EStoxx index), 10y Bund yields and the CRB-index. The EStoxx index and the CRB-index are both set at 100 for March 8 (the day of the equity low) in order to improve readability.
Commodities are sending a warning shot for government bond bulls
As can be seen, government bond yields and commodities exhibited a relatively good co-movement during the past 7 months and both deviated significantly from the equity market performance. I suggested previously (see for example Commodities and related markets to fall first? dated August 26) that equities would be rallying amid the improved outlook for real growth whereas bond yields would be falling amid easing inflation fears which is also evident in the lacklustre performance of commodity prices. Just to repeat, theoretically and empirically it is nominal growth which matters for the level of nominal bond yields. And while the real growth outlook has been improving, expectations for nominal growth have not really moved higher as inflation in general (again, the UK is the big exception) has surprised on the downside. In turn, nominal bond yields were able to fall. Unfortunately, the latest signal being emitted by the commodity complex are looking worrisome for government bonds. Not only do equity markets continue to rise, but now also commodity prices seem to have moved back on a rising path, drawing a wedge between the performance of bond yields and the CRB index (marked in yellow in the chart above).
Looking at the commodity index itself, it seems that it has moved out of a consolidation phase yesterday, breaking a short-term downward trend to the upside while the medium-term upward trend has remained intact (see chart below).
The end of the consolidation period in commodities?
Autumn growth weakness is finally becoming evident) to lead to a relative worsening of the seasonally adjusted economic data for September/October which will weaken the growth recovery story. However, should the CRB index break above its August 6 high at 269.18 while equity markets continue to rally, I would need to reconsider my bullish stance.