The Great Commodity Divide

The global economy has been divided along emerging and developed market lines for the past 15 years. Now there is a line and offers a clearer way to view what's underway in 2016. There are currently 5 trades open in the Premium Insights, 3 of which are GBP related. More equity indices trades will be included next week, tactically leading the month's meetings of the ECB, BoC and the Fed.

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The inclination is to blame the United States, the Eurozone or China for any major market developments and in general that's proven true. Alternatively, 'emerging markets' often get the blame.

The market driver at the moment is none of them, nor is it Japan. It's commodities. The four largest economies are facing various challenges and slowing growth but there is no obvious crisis unfolding.

The divide that matters in the global economy right now is 'commodity extractors' versus 'commodity consumers' and it helps to explain how none of the usual suspects are flashing warnings signs but markets are in disarray.

Any single commodity exporter is a small factor in the global economy. The largest is Brazil and its economy is just a quarter the size of China. Add in fellow exporters like Canada, Australia, Mexico, Indonesia and Saudi Arabia and they equal size of China's GDP. Include other exporters in Africa, the Middle East and Latin America and they equal the United States.

The commodity crash is hitting all those countries hard along with the multitude of over-leveraged companies in the resource industry.

The sensitivity is high at the moment. The Canadian dollar was down for a record tenth consecutive day on Thursday. Even in a situation like an oil rout and a central bank that could surprise with a rate cut, that may be too far, too fast.

On Thursday sentiment staged a recovery and in a rare divergence, the Australian dollar was the top performer.

The flipside of the commodity crash is that the commodity consuming countries will benefit from cheaper raw materials. At the moment, the rapid change is causing dislocations but as it unfolds in the year ahead, expect a continuing ebb and flow.