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Are Commodities Correlated to Equities?

13 October 20234 mins read by Angel One
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A trader continuously seeks new variables to estimate the movements of stock prices efficiently. While earnings, momentum, charts, and volumes are common indicators, another way to observe equity is via the association with commodity markets.

From a financial perspective, commodities are ores and minerals that have been extracted from the terrain. A few of the most dominant commodities in the international market are gold, iron ore, zinc, and copper. Sail through this blog to get the details!

How Is Commodity Trading Unique?

A commodity is special with respect to its pricing and its supply/demand dynamics. Most commodities are perceptive to supply and demand factors. Hence, new, innovative applications for a commodity or the introduction of new mines can have a significant influence on commodity supply and demand.

Further, a commodity doesn’t depend on brand value parameters. So, its price is based on supply and demand factors. The price will be stable until supply and demand are somewhat equivalent. With a shift in either the supply or demand, there’s a substantial implication in price. This phenomenon was visible at the time of the oil price crash in November 2014.

Finally, a commodity market is vast worldwide, and there are hedgers, traders, and speculators continuously working with this market.

How to Link Commodity Trends With Equity Trading?

Commodity prices influence equity prices in two different ways. At first, there are entities that only deal with commodities. Entities that produce zinc, copper, iron ore, and aluminum are some examples. Additionally, gold mines and oil extractors are also the producers of commodities.

Such companies are synonymous with output-sensitive stocks, in which the commodity’s price determines their business performance. When a commodity price rises, they tend to perform well.

Another group of companies in which commodity prices influence equity are called input-sensitive stocks. Such firms are into businesses that utilise commodities as their inputs. As such, the paint sector utilises oil as a significant input, and when the commodity input’s price falls, these firms tend to outplay.

Bottom Line

Investors can opt for share price screens and commodities’ price screens on their trading platforms. In most situations, a short-term perspective can mislead an investor and may offer only short-term trading predictions.

However, when there’s clarity in long-term trends such as metals during 2017 or oil after 2014, investors may confidently take equity positions. An investor needs to know whether he or she is playing the input effect and the downswing or the output effect and the upswing. Either way, it’s a foolproof and simple process to deal with the fluctuating market.

You can follow Angel One blogs for more stock market, IPO, and business-related news.

Frequently Asked Questions

1. Does copper influence Vedanta’s performance?

Vedanta, with exposure to crude oil, copper, aluminum, and zinc, is an international commodities conglomerate. Copper has a great influence on Vedanta’s performance.

2. How are copper prices and Vedanta’s stock related?

While prices of copper hiked around 40% in the previous year, Vedanta’s stock grew 55%. The copper prices have surged because of improvement in China’s growth and the US’s expected construction boom.

3. How did the price of crude oil relate to Asian Paints’ price?

In the five-year tenure (2013-2017), the Brent crude’s price dropped by nearly 44%, whereas Asian Paints’ price hiked by 200%. That means Asian Paints benefitted from the drop in oil prices.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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