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Equity split from commodities may be short lived

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The often close correlation between equity and commodity prices has faded. World equities are up 15 percent since August while commodities have barely moved. Is this a paradigm shift? Probably not, though shale gas is rattling energy markets. Equities may simply have run too fast on the back of quantitative easing while commodity investors have hesitated over global growth worries.

As long as QE keeps fuelling global liquidity, investors in both asset classes can remain relatively sanguine. The big new factor is Japan’s entry into the money-printing race. For risk assets such as equities and commodities, the QE competition between the United States and Japan is a boon. The U.S. Federal Reserve is printing $85 billion in new money per month. According to Masaaki Shirakawa, the governor of the Bank of Japan, the BOJ’s “unlimited easing” will consist of around 50 trillion yen ($550 billion) in funds in 2013 and a still-higher 13 trillion yen ($143 billion) per month from January 2014.

Commodities may be lagging in part thanks to the dollar. In previous “risk on” episodes the greenback tended to weaken, pushing up commodities, which are mostly priced in dollars. But in 2012 the dollar appreciated slightly, and Japan’s fresh monetary stimulus is directly targeted at weakening the yen. The dollar has softened against the euro, but the currency has been stable since September against the trade-weighted basket of international currencies.

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