Is The Baltic Dry Index A Consistent Leading Indicator For Risky Assets?

• In the past few weeks, the surge in geopolitical uncertainty amid Russia-related tensions, concerns over Fed tightening cycle and fading growth expectations have led to a global risk-off environment with US stocks consolidating by over 10% since their record high reached earlier this month.
• The retracement in high-beta growth stocks (i.e. FANG+ index) was even more significant with a consolidation approaching nearly 25% from peak to trough (peak in growth stocks was reached in early November 2021).
• Interestingly, the recent move in risky assets followed a massive drop in the Baltic Dry Index (BDI) in the past few months.
• The BDI index, which some investors view as a proxy for world trade and therefore for the global economy, is down over 75% since its October high.
• Even though most of the fall was attributed to the winter shipping bottlenecks and the significant deceleration in Chinese economic activity, it has historically shown some strong relationship with asset prices.
• For instance, the chart below shows that some of the corrections in the S&P500 were preceded by a sharp fall in the BDI index.
• Hence, with more and more ‘leading’ indicators standing a ‘depressed’ levels, it will be interesting to see if the Fed maintains a ‘hawkish’ stance given the elevated inflationary pressures.

Source: Bloomberg/MNI