In a major shift in economic trends, prices of raw materials started surging in October, possibly signaling that emerging economies are finally regaining strength after going through a distinctly rough patch.
The shift may be behind the recent stock market rally and the jump in long-term interest rates in the U.S.
While the surprise outcome of the U.S. presidential election triggered wild movement in stock, bond and currency markets, commodities have been mostly insulated from its impact.
The CRB BLS Raw Industrial Sub-index, which traces the overall direction of commodity prices, took an upturn early this year after plunging until the end of 2015. The index, a measure of nearly two dozen basic commodities excluding precious metals and crude oil, then began soaring in late October.
Meanwhile, U.S. long-term interest rates shot up after Donald Trump’s unexpected win in last week’s presidential election.
The upswing in interest rates has been attributed by many to concerns over an increase in the U.S. budget deficit due to the president-elect’s campaign promises to both cut taxes and increase public spending.
While such concerns may very well be a factor contributing to higher long-term rates, they do not paint the entire picture. A “bad rise” in the cost of borrowing due to expectations of a government spending spree is not entirely consistent with the rally in the U.S. stock market.
Yields on 10-year treasurys appear to be following the CRB index. The main factor pushing up the CRB commodity prices yardstick is the apparent bottoming-out of key emerging economies.
In China, for instance, investment in electric machinery, publicservice, construction and other sectors is rebounding, shored up by massive government spending on infrastructure.