Have world markets turned the corner?

On the back of the strong (industrial) commodity market (from copper to oil), world stock markets have gained since March.

Emerging markets were the leaders with impressive gains of nearly 100%.

In the past weeks, China's stock markets took a breather and lost more than 20%, leaving question marks over whether the stock market rally might be overdone.

Taking a look at the current price developments of interest rates, shipping costs (Baltic Dry) and oil prices, I might conclude that smart investors think that the recent optimism of a world wide recovery was overdone.

First, interest rates have stayed low or worse, are coming under pressure again. The German Bund Future (10 years) and the US Treasury Bonds (30 years) are seen as the most important world interest bench marks in Europe and United States of America. These future prices are rising (again), thus driving interest rates lower. Recessions or worse, depressions, are normally accompanied by low interest rates. Nowadays we might even speak of a deflationary environment in Europe and the US.

Decreasing economic activity

Secondly, the Baltic Dry Index has fallen by almost 50% since the peak in June, which signals decreasing economic activity. Products are being shipped via vessels at half of the cost those in June. This means less demand for vessels to ship products around the world.

Last but not least, the WTI-future took a hit of approximately 10% from $75 in August. Many economic indicators from the USA and Europe have shown some 'economic green shoots' in the past few months, however 'hard indicators' such as the Baltic Dry do not support those signals. Worse, as long as commodity prices and interest rates do not rise, investors have to beware of too much optimism.

We are entering the notorious months September and October. We witnessed a brutal selloff at the world stock and commodity markets in the autumn of last year in the northern hemisphere. If history repeats itself, investors have to be aware of the risk of being fully invested without any protection.

We might again enter a very cold economic winter, unless the discussed 'hard indicators' show us that the 'green shoots' have developed themselves as a real sustainable economic recovery. Up to now, oil prices, interest rates and the Baltic Dry Index only show one thing: those green shoots might be short lived.