(Bloomberg View) -- The commodities market is on the move. It had one of its biggest gains of the year on Monday. Although the big jump in oil prices and metals goes a long way toward explaining why the Bloomberg Commodities Index has risen to its highest level since early March, the current rally is about much more than just energy.
The 11 percent surge in the Bloomberg Commodities index since late June is becoming more broad-based, with even some parts of the long suffering agricultural part of the market starting to see some strength. On the Chicago Mercantile Exchange, December cattle futures are up about 15 percent since the end of August. In short, it appears that commodities investors are starting to join with equity investors in buying into the rare, synchronized global economic recovery theme. Last month, the International Monetary Fund month boosted its 2017 global economic growth forecast to 3.6 percent from 3.5 percent. What makes the current rally all the more impressive is that it coincides with a rising dollar. Since commodities are largely priced in dollars, a stronger greenback tends to damp their appeal, but that's not happening.
Just take a look at the largest U.S. multicommodity exchange-traded product, the PowerShares DB Commodity Index Tracking Fund. Bloomberg News' Luke Kawa reports that the fund took in more than $128 million last week, its biggest weekly inflow since October 2014, a month before oil prices collapsed when OPEC failed to agree to production curbs. The fund is up 20.1 percent from its low for the year on June 22, topping the S&P 500 Index's 6.43 percent gain.
BONDS SEE BAD NEWS IN COMMODITIES
The rally in commodities is likely to reignite the debate about whether the rise in raw materials prices is inflationary or a drag on the economy. A look at the bond market suggests fixed-income traders are coming down on the side that higher commodities prices will act as a headwind on economic growth. That can be seen in breakeven rates on U.S. Treasuries, which give a sense of what traders expect the rate of inflation to be in the future. Breakeven rates have been stuck in a tight range since mid-September. Also, the yield curve has been shrinking, and is now the flattest since 2007. A narrowing curve is usually a predictor of a slower economy. The gap between short- and long-term rates is compressing largely because yields on longer-maturity debt are falling. The opposite would be happening if traders really thought inflation is about to accelerate, because then they would demand more in yield to compensate them for the risk of rising consumer prices. Also, bond market volatility has plunged to a record low, which is another thing that wouldn't be happening of traders though inflation was about to accelerate.
STOCKS GET A BOOST FROM COMMODITIES
Maybe the rally in global commodities won't lead to faster inflation, but the equities markets are signaling that the worldwide economy is certainly strong enough to withstand the gains in raw materials prices. The MSCI All-Country World Index of stocks rose for the eighth straight day, its longest rally since July. The benchmark is up 18.5 percent for the year, paced by emerging-market stocks, which have gained 31.5 percent. That makes sense because developing-nation economies largely depend on the production and sale of commodities. In its latest forecasts, the IMF said it expects emerging-market economies to expand 4.6 percent this year and 4.9 percent in 2018. The big winners on Monday were the large oil-service providers, which were having their best day this year thanks to a bullish forecast from Morgan Stanley and the announcement of a $3 billion share buyback from Baker Hughes. Bloomberg News' David Wethe reports that Schlumberger, Halliburton and Baker Hughes jumped as Morgan Stanley analyst Ole Slorer said Monday he now expects large contractors to benefit as international oil-field work begins to recover. The rally comes after investors last month punished the providers of drilling services and equipment for reporting lackluster third-quarter results.
DOLLAR POSITIONING
Where commodities go from here may depend a lot on the dollar. While the greenback was broadly lower Monday, large speculators such as hedge funds are starting to reverse bets that it will weaken. Since the first week of October, they've cut their net short position against the dollar by about 174,232 contracts to 92,788 contracts, according to Commodity Futures Trading Commission data. Dollar pessimism has ebbed as traders have priced in greater odds that the Federal Reserve will raise rates in December, according to Bloomberg News' Katherine Greifeld. A big driver of the Bloomberg Dollar Spot Index, which is up almost 4 percent from its lows in September, has been the higher yields global investors can get on dollar-denominated fixed-income assets relative to other developed markets. For example, Treasury two-year notes yield 2.38 percentage points more than similar maturity German bunds, up from 1.84 percentage points in January. The big gain last month in the dollar coincided with that spread topping its high for the year in March. The widening spread is why BlackRock global chief investment strategist Richard Turnill just wrote in a report that the firm sees "a modestly higher U.S. dollar ahead." "But we believe many of the asset classes that generally suffer when the USD appreciates -- including commodities and most EM assets -- will be more resilient this time around," Turnill wrote.
EARNINGS SURPRISE
Corporate earnings season is ending strong. Members of the S&P 500 Index are on track to deliver 6.4 percent year-over-year growth in earnings per share, according to Bloomberg Intelligence. That's well above forecasts of a 3.7 percent increase. Among the more than 400 companies that have reported results, 69 percent beat EPS projections while 18 percent missed, according to BI. Technology, health care and energy are notable outperformers, while industrials -- namely General Electric -- along with financials such as insurance companies, telecom and utilities are on track to miss sector forecasts. BI also notes that so far this earnings season, 197 S&P 500 companies have released outlooks on earnings and 145 for revenue, with positive guidance outpacing negative views on both the top and bottom lines. Technology has shown the most positively skewed guidance so far, with 40 percent of tech sector EPS guidance being positive, surpassing the 25 percent rate for the index at large, led by Activision and ADP. Overall, forecasts for fourth-quarter S&P 500 EPS have edged 0.6 percent higher in the past month, according to BI.
TEA LEAVES
China will be releasing data on its foreign reserves any day now, and the results will likely get more scrutiny than usual given President Donald Trump is heading to Beijing during his current trip through Asia. The consensus calls for a slight increase to $3.118 trillion in October from $3.109 trillion in September. Bloomberg Economics said China's reserves, which have steadily climbed this year from just under $3 trillion in January, will benefit from a stable yuan, steady growth, new controls on outbound M&A, and continued opening of the bond market. Although the increase in reserves largely tracks China's rising trade surplus with the U.S., which at $347 billion is a level Trump recently called “embarrassing,” the U.S. does benefit. China has been investing its reserves in U.S. Treasuries, helping to contain borrowing costs just as the Federal Reserve seeks to cut its holdings. Treasury Department data show China's holdings of U.S. government bonds rose $142.1 billion this year to $1.20 trillion through August. China accounted for 54 percent of the $263.4 billion of bonds bought by all nations.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
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