The Australian Dollar, Baltic Dry Index & Equity Indexes

The Baltic Dry Index ($BDI) measures the daily cost of shipping raw materials by boat around the world. The index tracks dry bulk cargo vessels used for transporting commodities like iron ore, coal and agricultural products. It specifically measures is shipping demand against the worldwide available capacity on dry bulk ships. When the $BDI rises, it indicates a rise in global demand for raw materials and commodities and when it falls, it indicates lagging demand for these items. And demand for raw materials is a predictor for future economic activity because when producers want to build cars, roads, or buildings, they order more raw materials required for their products. These orders lead to increased shipping activity and the index rises.

Rising industrial activity usually points to economic growth and rising stock and commodity prices and so that's why many economists and analysts tracking this index, will tell you that moves in this index precede moves in the stock market, both up and down, because global demand for raw materials is an early warning indicator of future economic production.

The primary advantage of the $BDI over other leading economic indicators is that it is a very clear indicator of supply and demand in global shipping. The supply of freighters is very stable and so when freighter demand rises, the index climbs because shippers don't book freighters unless they actually plan on using them and there is no element of speculation in this index.

A rising Baltic Dry Index typically points to increased global economic activity, increased production, rising stock prices, rising commodity prices, rising interest rates and rising value in commodity based currencies like the New Zealand and Australian Dollar. And a declining Baltic Dry Index indicates the opposite elements of global economic contraction.

The chart below has the $BDI as well as the Australian Dollar ($XAD), the S&P500 ($SPX)and the Value Line Arithmetic Index ($VLE). I ran the 150 day moving average on all of the indexes, a down trending moving average is bearish/ up trending bullish. My only concern is the daily move down in the $BDI since June, while the $XAD & stock indexes rose. The index had benefited recently from a rebound in commodity purchases (particularly iron ore) by China. However, it is likely that Chinese fiscal stimulus may have led to a stockpiling of ore which will need to be worked down. The recent weakness in the $BDI may be corroborating this view. That divergence has made me cautious & why I believe a pullback in the equity markets is possible in the near term.

*click on chart to expand image