Tags: Barclays | Glionna | oil | food

Barclays: Slumping Commodities May Be Negative Signal for Stocks

By    |   Friday, 05 December 2014 02:24 PM

A broad decline in commodity prices may be bad for stocks and the economy even as consumers are welcoming lower energy prices, a Wall Street analyst said.

“Lower commodity prices may be a signal of slower global growth, which would have negative consequences for the S&P 500,” Jonathan Glionna, head of U.S. equity strategy at Barclays Capital in New York, said in a Dec. 4 report. “In the long run, commodity cycles often coincide with economic and business cycles.”

Gold has fallen 10 percent since June, corn is down 14 percent this year and iron ore has slumped by 20 percent in the past three months. Oil plunged about 40 percent from its June high as global demand shrank and the U.S. produced the most crude since the 1980s.

One significant worry is that any money consumers save on oil and gasoline gets spent on food, with costs surging for some items. Coffee has risen 34 percent in the past year and cattle has jumped 28 percent even as corn, wheat and soybean prices slumped from better crop yields.

“We calculate the increase in food costs so far this year has offset 90 percent of the benefit consumers have gained from lower gas prices,” Glionna said. “The average U.S. household spends twice as much on food as they do on gasoline.” A more pronounced benefit of lower gas prices may show up in future data on consumer spending, the report said.

China’s weakening growth and a stronger U.S. dollar are the primary culprits for the decline in commodities such as oil, gold, silver, copper, iron ore and tin. The decline is worrisome but doesn’t necessarily mean the stock market is going to slump, according to Barclays.

“While over the last 10 years commodities and the S&P 500 have generally trended in the same direction, the link seems to be vanishing in more recent times,” Glionna said. “Equities and commodities maintain a close relationship only during periods of elevated commodity price volatility.”

He pointed to the 2008 financial crisis, when the prices of many risky assets moved in tandem. Today's commodity price volatility remains modest by historical standards, he said. The tightest links between commodities and equities are seen in the energy and mining industries, while other industries have weaker relationships.

Barclays maintained its year-end targets for the S&P 500 of 1,975 for 2014 and 2,100 for 2015 based on estimates of limited revenue growth. The index closed at 2,071.92 on Dec. 4.

The decline in oil may end up being a short-lived phenomenon, according to Bill Greiner, chief investment strategist at Mariner Holdings, who said past declines like this year’s typically occur during a recession. He foresees oil rebounding to $80 a barrel from less than $70 currently as the global economy grows.

“The current price decline has been driven by an increase in supply and a slowing in the growth rate of demand,” he said in a column for Forbes magazine. “The most probable outcome is for oil production to continue falling until prices firm. Eventually oil prices should start rising again.”
 

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A broad decline in commodity prices may be a negative sign for stocks and the economy even as consumers are welcoming lower gasoline prices, a Wall Street analyst said.
Barclays, Glionna, oil, food
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2014-24-05
Friday, 05 December 2014 02:24 PM
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