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A reassuring message from commodities

This chart compares Bloomberg's Constant Maturity Commodity Index (white line) to the S&P 500 Index (orange line). From last November through April, these two indices were almost perfectly correlated, suggesting that both were reacting to the same economic growth fundamentals. The correlation broke down over the past month or two, however, as equities were overcome by fears that a collapse of the Eurozone banking system could have serious repercussions for the global economy. Commodities initially shared in the onset of panic, but have since bounced back, and today are trading a little above their average for the year to date.

The action in the commodity markets suggests that the economic growth fundamentals have deteriorated much less than the behavior of the equity markets would suggest, and that the fundamentals have actually improved in recent weeks. This is an important development, of course, since growth can trump lots of problems. The Eurozone is far from conquering its sovereign debt problems, but commodity markets suggest that there is at least some concrete hope for a solution.

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