As we enter a new financial year it’s a good time to step back and look at some global economic indicators to try and get a grasp on any trends that might be emerging. Are there some signs of economic life out there or any hints of a global economic recovery that might help stock market investors some hope for the second half of 2012?
Firstly let’s look at one of my favourite indicators – the Baltic Dry Index (BDI).
Baltic Dry Index (BDI) – 1 year price chart
A few weeks ago I attended a two day shipping industry summit in Shanghai and the mood was decidedly downbeat. The president of a Chinese shipyard for example said he expected many shipyards in China not to survive the current downturn in the sector and mentioned that some yards were even taking orders at a loss.
What was more of a surprise to me was that shipping company executives from Asia & Europe stated that there was still a surplus capacity of around 25% across the world’s merchant shipping fleet. As a result, supply & demand fundamentals had dragged down the BDI in the last 12 months to almost the lowest level since its inception in 1985 & shipping lines the world over are struggling.
Since around 90% of world trade by volume moves by ship, this does not bode well for the global economy for this year but perhaps during 2013 the shipping market might start to recover.
At the moment the Baltic Dry Index is just above the 1000.00 USD level – well below the 52 week high of 2173.00 but thankfully clear of the 52 week & multi-year low of 647.00.
If the BDI is around 1500 or higher near the end of the year then that would start to give me some confidence that the shipping market is beginning to recover and that we might see the global economy stabilize in 2013.
Remember – “keep an eye on the BDI!”
Next let’s have a look at how the oil & gas market has been faring.
S&P/ASX 200 verus AMEX Oil & Gas Index – 1 year price chart
The chart above shows the AMEX Oil & Gas Index (xoi) plotted alongside the S&P/ASX 200 Index and as you can see there is a pretty tight correlation between the two.
Oil & gas prices have been moving around quite a bit over the last twelve months as investors react to global economic developments and geopolitical tensions in the Middle East.
At this stage it’s difficult to read much into the chart above since I can’t see any clear trend either up or down. There is also a huge amount of LNG supply planned to come online over the next few years so it’s hard to see LNG prices soaring to new highs any time soon, although oil prices will get a boost if supplies from the Middle East are disrupted.
Now to get the big picture view we can look at a chart of commodity futures.
Commodity Futures Indexes – 1 year chart
The chart above shows the movement in prices for the following commodity indexes: UBS Bloomberg CMCI, S&P GSCI, RJ/CRB Commodity & Rogers Intl.
Generally speaking prices for most commodities have been falling over the last twelve months although they have been give a boost recently since the Europeans appear set to borrow & spend again.
However I don’t expect we are on the verge of a major rally across the commodities markets and reckon that coal & iron ore for example, have further to fall this year.
If that happens it will be bad news for commodity export dependant economies like Australia & Canada, but it will be good news for the world economy in general. A period of lower commodities prices is just what is needed to help get the global economy back onto a more sustainable growth path.
Finally let’s look at gold prices in Australian dollar terms.
Exchanged Trade Fund (ETF) Gold – 1 year price chart
I am not a gold trader or investor at this time so I will refrain from writing too much about the chart above. I have simply posted it here because the ASX Listed ETF GOLD is a good indicator of the gold price in AUD terms.
Clearly the run up in the gold price from early July to August 2011 could have made some short-term gold traders happy, but since then the price has drifted back down again.
Where will gold prices be at the end of the year? Well I’m a gold bear and expect gold prices have further to fall but I know plenty of people are still bullish about the prospects for gold prices, so I welcome them to share their views in the comments area.
In summary the economic indicators above suggest that the global economy is still struggling and that there is no clear sign yet that a recovery is in progress. However the Baltic Dry Index may be in the early stages of a longer term recovery & that is something I will be watching closely over the next few months.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp