As investment banks cut ties with their commodities units, commodity prices are beginning to show a lower correlation to the equities market. Investors can benefit from the greater diversification qualities of the asset class through related exchange traded funds.
David Bicchetti and Nicolas Maystre, economic affairs officers at the United Nations Conference on Trade and Development in Geneva, pointed out that the correlation between U.S. equities and corn, cattle and wheat dipped to less than 0.05 in January from 0.3 in 2008, reports Isaac Arnsdorf for Bloomberg.
“Now, we’re getting back to where strict supply-demand gives us truer pricing and hopefully better ability to look ahead,” Richard Nelson, chief strategist at Allendale Inc. said in the article.
According to a London Business School study, the increase in large speculators amplified the “unusual” boom and bust in the commodities market. Suleyman Basak and Anna Pavlova argued that institutional investors helped push up higher prices, volatility and correlation with other financial markets.
Now, the UN economists found that commodities are beginning to move more independently of stocks as banks like Barclays Plc, Deutsche Bank, JPMorgan Chase & Co. and Morgan Stanley have been exiting or diminishing their stake in the commodity markets in light of more stringent regulations, rising capital requirements and a tapering commodities super cycle, Reuters reports.
Under the new Vocker Rule, banks are restricted from trading their own account and the regulatory reforms expanded oversight of commodities derivatives.