Commodity and stock markets shaping up to repeat history

The weakness in commodity prices witnessed during April has turned into a bit of rout during the last four days and have almost erased this year's gains. Weaker-than-expected growth in the US, continued anxiety about the eurozone - not least following the latest round of protest elections, softening geo-political tensions, and a slowing China have all been challenging the bullish convictions among traders.

As we wrote in our Q2 outlook we felt that the quarter could become a repeat of 2011 due to a weakening macro economic outlook with Brent crude in particular risking a correction back toward 115. Looking at the charts below it looks like we could have a potential repeat in the making, both for the S&P index and commodities.

The S&P Index lost momentum during Q2 in both 2010 and 2011 only to rebound stronger later in the year.

The same goes for commodities in this chart represented by the S&P GSCI Index.

For the move lower in commodities to continue we need to see additional weakness in the overall equity markets, particularly the energy sector. Following the recent rout which has taken WTI below par and seen Brent retrace 50 percent of its October to March rally, further downside may be hard to come by - unless we see the dollar break decisively higher, especially against the Euro.

Macro concerns have overtaken geo-political risk as the main driver but the meeting with Iran next week could change that. Hedge funds invested in energy are having a horrible time - just like last year, and many have still not recovered from the mid-year sell-off. Speculative longs will undoubtedly have been sharply reduced and this now leaves the market in a better position to respond to bullish news once it is presented.