beyondbrics

The Baltic Dry Index is down 3 per cent today, extending to 28 per cent decline that started at the end of last month. For many observers, this is nothing: the index of international dry cargo shipping is notoriously volatile. Its current level of 3020 is well short of its 2010 peak of 4029 and comfortably above the year’s low of 2571. The all-time peak, in May 2008, was 11,700.

However, for other BDI followers, today’s drop is signficant: it takes the index below an upward trend line that extends back to September 2009. It could therefore signal a serious slow down in the world – and in emerging markets.

Nick Chamie of RBC argues in a note today that today’s fall “could herald a reversal in its upward trend – towards new lows” which supports RBC’s forecasts of a “deceleration in global growth in coming weeks/months.”

In an earlier June note, RBC warned that leading indicators in emerging countries – purchasing managers’ indices (PMI) – indicate that economic growth momentum has been slowing since the turn over the year. The bank suggested that the OECD leading economic indicator (OECD LEI) – a widely-followed forward-looking indicator – may have peaked in March, when it stood at a very high level above its long-term average.

RBC pointed out that since key emerging market equities and currencies follow the OECD LEI closely the LEI should be watched intently over the next few months. Unfortunately, the LEI is published only after a lag of two months, hence the attention RBC is paying to the emerging market PMIs.

The bank said:

A review of the return performance of emerging market equities, currencies and debt over the past 22 years reveals that assets post significant losses in the months following a peak in
the LEI. In fact, median returns are uniformly negative across EM equities and currencies in the 3, 6 and 9 months after the LEI peaks, and the median losses are particularly deep (-19%
and -18%, respectively) a year after LEI tops out when it peaks at least 1 standard deviation above its historical mean as is currently the case.

RBC said the picture for emerging market debt was similar. So, you can’t say you haven’t been warned.