Commodities are apparently doing well, due to the easing by the central banks and the improvement in the global manufacturing. Inter-market analysis shows that the commodities are the last to turn in a cycle and they appear to be at a bullish inflection point at the moment. With the US stock markets up from the October lows, commodities have joined the party better late than never. That said and done, it isn’t commodities that are improving. Commodity producers appear to be bottoming, with precious metals and oil names leading the pack.

A technical analyst by the name of John Murphy had done a lot of technical analysis in the recent memory. One of the subjects he wrote a book on is Inter-market Technical Analysis. Inter-market Technical Analysis is the study of the relationship between the four major financial markets: Stock, Bonds, Commodities and Currencies. There is indeed several key relationship that bind these four markets together. These relationships are as follows:

• The inverse relationship between commodities and bonds
• The inverse relationship between bonds and stocks
• The positive relationship between stocks and commodities
• The inverse relationship between the US Dollar and commodities

The inter-market analysis is a lot better explained by the interest rates cycle. Rates do down as a central bank becomes accommodative during weaker economic conditions. This causes bond values to increase. The currency fails due to interest rate differentials (i.e. the Fed lowers interest rates but the ECB holds rates causing strength in the euro). As the currency fails, goods become attractively valued and manufacturing picks up despite heavy slack. As manufacturing picks up the concerned indicators improve and the equity markets turn bullish. As the slack in commodity is removed, commodity pricing pressure arises. Finally central banks remove the accommodation measures and begin raising the interest rates to control price inflation until something breaks. Bond values drop as rates rise, just as the currency rises due to better interest rate differentials; thus making goods less attractive overseas. The economy slows down and stocks roll over. The slack begins anew in manufacturing and commodity prices follow stocks lower. That’s inter-market analysis in a nutshell.

The business cycle suggests that commodities are the last asset class to rise as conditions improve. Monetary policy across the globe is easing with major policy changes that are inflationary in nature. Commodities had rallied since December, but many are facing secular downtrends or breaking out above them at this point. Its’ all wait-and-watch for the investors at the moment!