Rising Rates Should Accelerate Equity, Commodity Price Divergence

China's recent decision to raise the one year Yuan lending rate 25 basis points to 6.06% last night, most likely to fight increases in consumer prices, is an obvious attempt to cool down a rapidly expanding economy. It may also cause the highly correlated commodity and equity markets to de-link from one another, a trend I discussed in February's Searcing for Alpha newsletter. 

Still swooning over the strong earnings recovery in the United States, domestic stocks continue to shrug off bearish news. Commodity investors, however, should eventually realize the importance of the Chinese economy, which according to the International Energy Agency will account for 30% of oil demand growth in 2011 (as well as import a huge amount of other raw materials). It will be interesting to see which asset class folds.