Ever since global equities and other risk assets began a remarkable rally in March, despite the COVID-19 pandemic being far from over, some commentators who see the risks skewed more to the downside have questioned the rally’s sustainability. The market’s strength can largely be traced to central bank action, such as the Fed’s rate cuts and unprecedented asset purchases. In the meantime, more fundamental, macro-driven assets notably lagged behind. The copper-to-gold price ratio is one such example.
Refresh the chart in your browser | Edit the chart in Datastream
However, after ‘bumping along the bottom’ until the beginning of this month, that ratio has now edged higher, as many developed economies start to reopen their economies, and as the rise in the price of copper accelerates. This is indicative that markets may be starting to turn more positive on the fundamentals that ultimately will need to underpin the high valuations in risk assets seen since March.
As markets stumbled following the Fed’s sombre assessment last week, copper prices fell too. While the market reaction was unsurprisingly negative for macro-driven assets, liquidity-driven assets also failed to outperform. This might be signalling that, in addition to lingering concerns around economic growth, markets may be starting to gently question the Fed’s ability to indefinitely sustain asset rallies through liquidity alone.
__________________________________________________________________________________
Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.
Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
