The BDI/Hang Seng correlation

A post from Pragmatic Capitalist mentioned what was once a strong correlation between the Baltic Dry Index, an indicator for global shipping and the Chinese market, in this case, the Hang Seng is used.  Recent observations convey a divergence between the two leading to the question, which one is it gonna be? Will shipping, via the Index, be increasing or is the Hang Seng, the index for the Hong Kong market, positioning for a drop?

Look at the following chart and see how both measures moved in sync for most of the time until sometime in June when the divergence seems to have begun.

PragCapBDIHangSeng

I’m looking at the possibility of both moving in the opposite direction again – the Hang Seng coming down and the Baltic Dry Index moving back up before the two begin their positive correlation once again.  My rational: the drop in BDI is without a doubt the result of inventory reductions in companies that have been strongly hit by the weakened demand all over the world.  But that doesn’t mean the Hang Seng needed to take the same direction.  Markets were down significantly because of the crisis; the index is still just about halfway through the peak in November of 2007.  While this rally continues till now, it is bound to correct sooner or later and that’s when the HSI will begin to move the opposite direction as the BDI.

Meanwhile, I’d like to think of the drop in the Baltic Dry Index as a result of reduced effects of stimulus in many countries – the rise preceding it similarly caused by the massive infusion of money in the global economy.  But as the effect of the stimulus wanes, inventories begin to reach the more appropriate levels, and demand begin to pick up again a few months from now (although not significantly), the BDI should go up just the same.

By the time we reach the point where economies begin to stabilize again and the temporary bear market rallies are gone, I believe it is not unreasonable to expect the two to move in the same direction again.

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