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Spotting the big new themes

Commodity, energy and food prices are taking severe punishment; inflation scares and interest rate hike expectations should start retreating.

“Inflation” and “recession” have become such dominant themes in global consumer and investment markets that it would seem dangerous to even remind that tides do turn, don’t they? Just months ago, there were riots over high food prices right across the world, while at the same time, governments in resource rich counties remained silent as tax revenues from soaring energy and minerals prices went through the roof.

In mid-May, ever-perceptive global equity markets indicated that commodity prices of practically all kinds were going to soon hit choke points, and then decline. Since then, listed global resources stocks have been savaged to an extent that is difficult to overstate. Since mid-May, the world’s biggest 20 listed mining stocks have surrendered USD 600bn in market value; the top 20 listed oil stocks have seen USD 871bn of market value disappear into thin air.

The short history available suggests that crude oil prices hit a choke point in mid-July, after almost touching USD 150 a barrel. Since then, the price has been flirting with the USD 120 a barrel mark. In recent research looking at the very big picture, the Bank Credit Analyst asks whether a prolonged correction is now underway in commodity prices. The answer, in a nutshell, from BCA Research, is that global growth is downshifting and the cyclical economic backdrop is no longer supportive of further commodity price gains.

This is good news, even for producers of commodities. Soaring prices for, say, iron ore may be fantastic news for investors in listed producers, but the realization that mines (and oil rigs) also use steel (and many other commodities) has been given belated recognition by battered investors.

For BCA Research, the bottom line is that commodity prices are set to correct further, “and the inflation scare should retreat along with expectations for rate hikes”. If this is correct, the implications for consumer sentiment, and investment markets of all kinds, will be profound. Commodity prices in general have been on an upward trajectory since early 2002, characterised since then by both a dollar bear market and China’s voracious appetite for raw materials of all kinds.

If commodities in general are now into a bear market, investors will need to do far more homework than before. For one thing, inflation appears to have been misunderstood, or, at least, oversimplified. According to BCA Research, as commodity prices continue to correct, “it should become clear that prior price increases have not filtered into a generalized inflation upturn, and consumer prices remain under control (at least in developed countries)”.

Translating this into government actions on policy interest rates, cuts can now be anticipated, or at least a neutral to dovish outlook. That, in turn, should go one step further to thawing credit markets, which remain frozen in practically all leading capital markets of the world.

On the flip side, the global economy remains fundamentally weak. BCA Research notes that its proprietary Leading Economic Indicator (LEI) for the G7, the world’s biggest economies, “shows no signs that weakness is approaching an end and the emerging Asia LEI is warning of a cooling in the rapidly growing developing world, led by a softening in the Chinese economy”.

BCA Research comments that this weaker growth outlook, along with reductions in energy subsidies, and an essentially rearguard tightening in interest rate policy by several emerging market central banks (because of inflation concerns related to the commodity boom) will only reinforce the tendency for commodity demand growth to slow. Mixing the good and the bad news, it seems that commodity prices are due for a period of continued weakness.

SELECTED INDICES, SPOTS & FUTURES

 

 

 

UNIT

FROM

FROM

 

 

 

PRICE

HIGH*

LOW*

UNIT

CONTRACT

COMMODITY INDICES

 

 

 

 

 

Reuters/Jefferies CRB

416

-12.2%

39.1%

Index

Spot

S&P GSCI Enhanced

79

-14.9%

60.5%

Index

Spot

S&P GSCI GFI-Futures

763

-14.7%

61.4%

Index

Spot

Dow Jones AIG Commodity

204

-14.3%

27.6%

Index

Spot

Baltic Dry Shipping

8280

-29.8%

47.5%

Index

Spot

Baltic Capesize Shipping

12944

-34.3%

80.1%

Index

Spot

TRADE WEIGHTED DOLLAR

 

 

 

 

Dollar Index Spot

73.42

-10.6%

3.9%

Index

Spot

LEADING ENERGY PRICES

 

 

 

 

NYMEX sweet, light crude

125.10

-15.1%

82.3%

USD/bbl

1 month

Brent Crude

124.18

-16.3%

77.8%

USD/bbl

September

Natural Gas (US)

9.39

-31.7%

26.5%

USD/mmbtu

August

Heating Oil (US)

3.44

-18.0%

77.5%

USD/gallon

August

Coal (Appalachian)

118.50

-17.4%

138.6%

USD/t

December

PRECIOUS METALS

 

 

 

 

 

Gold

910.95

-11.8%

41.8%

USD/oz

Spot

Platinum

1656.50

-28.0%

35.4%

USD/oz

Spot

Palladium

368.75

-38.0%

16.8%

USD/oz

Spot

Silver

17.48

-18.1%

58.0%

USD/oz

Spot

KEY FOOD PRICES

 

 

 

 

 

Wheat

794

-37.9%

42.5%

USc/bushel

September

Thai white rice

21

-35.1%

52.8%

THB/kg

August

Soybeans

1365

-16.6%

64.6%

USc/bushel

November

Corn

585

-26.8%

55.8%

USc/bushel

December

Oats

388

-20.8%

36.4%

USc/bushel

December

BASE METALS

 

 

 

 

 

Copper

7900

-11.6%

25.1%

USD/t

3 Month

Aluminium

2934

-13.2%

23.5%

USD/t

3 Month

Nickel

18300

-47.9%

1.4%

USD/t

3 Month

Zinc

1840

-48.5%

5.1%

USD/t

3 Month

Lead

2126

-45.3%

38.9%

USD/t

3 Month

Tin

21550

-15.5%

61.4%

USD/t

3 Month

SELECTED STOCK MARKETS

 

 

 

 

S&P/Toronto Composite

13497

-10.9%

12.4%

Index

Spot

S&P/Australia 200

4904

-28.4%

2.4%

Index

Spot

MSCI Norway

2688

-23.2%

13.5%

Index

Spot

MSCI New Zealand

99

-31.0%

12.0%

Index

Spot

Brazil Bovsepa

57630

-22.0%

28.2%

Index

Spot

MSCI South Africa

657

-18.8%

6.5%

Index

Spot

Shanghai Composite

2802

-54.2%

9.2%

Index

Spot

Dow Jones Industrial

11326

-20.2%

4.6%

Index

Spot

FTSE 100

5355

-20.7%

5.6%

Index

Spot

* 12-month

 

 

 

 

 

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