The threat of stagflation is becoming clearer

The war in Ukraine is the black swan that has accentuated the rise of commodities but has violently reversed the improvement trend of European banks. In just one month, commodities rose by 15% while European banks collapsed by 27%.?

We started the year with a rotation in favor of value, but now the rotation has shrunk to only a single segment of Value: oil companies and commodity producers. Since the beginning of the year, only the two commodity sectors remain positive with respective performances of 10% and 13% on oil and basic resources. Apart from these sectors, it is now a debacle: Retail -24%, Technology -23%, Consumer goods and luxury -21%, Banks -12%...?

Over the last 5 years, commodities have already overtaken European equities, are outperforming the bond markets, and could even dethrone the S&P 500, which still dominates the hierarchy of financial assets. Since the beginning of the year, oil is up 45%, European natural gas is up 83%, aluminum is up 22%, nickel is up 130%, gold is up 9%... Agricultural commodities are also affected by 25% for corn and soybeans and 44% for wheat. These increases threaten the energy sovereignty of many European countries dependent on Russian gas, including many Eastern European countries, Italy and Germany, which in 2020 will import more than 45% of their gas consumption from Russia. This dependence has led to a tripling of spot electricity prices since the beginning of the year. Moreover, as Russia and Ukraine are respectively the first and fifth largest wheat exporters in the world, providing 25% of global exports, the surge in commodity prices poses a major problem for the food security of African and Asian countries (Egypt, Tunisia, Indonesia) and therefore increase the geopolitical instability of the world. Finally, the explosion of raw materials increases the cost of components (lithium, graphite, cobalt, nickel) of electric car batteries compared to thermal cars and will delay the adoption of electric technology (currently representing 10% of global sales) in the car fleet.?

The most remarkable observation is that commodities are now negatively correlated with equities, which means that, in the context of the Ukrainian war and the sanctions applied against Russia, commodities, along with equity volatility, have been the benchmark haven asset since the beginning of the year: this behavior is unprecedented since the pre-crisis period of September 2008 when oil reached USD 140 per barrel.?

At the same time, risky debt bonds (high-yield corporate debt, emerging debt, European sovereign debt versus Germany) are in a long-term downtrend. With inflation at a 40-year high in the US and threatening in Europe, central banks lack the monetary ammunition to prevent the necessary purge of private debt that is coming.?

Commodity prices (source: Bloomberg)?

Evolution of the main commodities (source: Bloomberg)?

Share of Russian gas imports in European supply (source: Statista)

Dependence of world countries on Russian and Ukrainian wheat (source: Observatory of Economic Complexity)

Main wheat exporters in the world in 2019 (source: Observatory of Economic Complexity)

?Increase in the price of electric battery components (source: Reuters)

?Comparative evolution of stock market indices, European banks and commodities over the last 5 years (source: Bloomberg)?

?Sectors performance of the Stoxx 600 Europe since the beginning of the year (source: Bloomberg)?

?250-day and 60-day rolling correlations between commodities and equities (source: Bloomberg)?

Positioning of commodities in the asset classification (dendrogram, source : Ai For Alpha)?

?Asset mapping by Principal Component Analysis on two axes (source: Ai For Alpha)?

?Evolution of high yield and emerging market risky debt since the beginning of the year (source : Bloomberg)?