Global stock markets are finally showing some strength after a difficult period of almost two years when investors had a hard time making money off stocks. Following the U.K.’s decision to leave the European Union, global stock markets fell sharply, but the sell-off didn’t last very long.
The fast recovery following Brexit is very encouraging and it suggests that investors are turning more positive on the health of the global economy.
U.S. Markets Make New Highs
In the chart above, we see the S&P 500 index making an all-time high this week after the index had struggled for almost two years. Rising stock markets don’t necessarily mean rising metal prices, but it’s a good sign.
When stock markets decline it’s a sign that investors have fear about economic performance, and they tend to put money into safe-haven assets while withdrawing money from riskier assets such as stocks and commodities. Moreover, it usually indicates slower economic growth, which translates into slower demand for commodities and industrial metals.
Chinese Markets Also on the Rise
iShares China Large-Cap ETF (NYSE:FXI)
China’s stock market is possibly the best benchmark for China’s economy, or at least investor sentiment about the Chinese economy. The slowdown in the Chinese economy (weak demand with too much capacity) explains why industrial metals peaked in 2011.
China’s stock market bottomed out earlier this year (coinciding with a bottom in metal markets) thanks to China’s stimulus measures that fueled demand growth. Chinese shares have risen over the past few weeks to the highest levels in six months as investors expect its central bank to ease monetary policy again.
Some might argue that these rallies are speculative and growth is slowing down. However, when it comes to managing commodity price risk, we wouldn’t argue with the market. The recent recovery in global stock markets favors a continuation of this year's metals bull market.