|
February 8, 2008
Contemplating Commodities
Five weeks into 2008 and things have gone almost exactly according to plan: equity prices are lower across the board with U.S. stocks generally outperforming, many central banks have taken a more aggressive posture in lowering interest rates, and the U.S. dollar is still around. However, commodities are one notable area of the marketplace that continues to confound. To be sure, despite some volatility commodity prices have performed exceptionally well in the face of the U.S. slowdown.
 |
While the headlines are telling us that some potentially transient events have been impacting numerous commodities of late - including bad weather in China and power disruptions in South Africa - the underlying question is nonetheless the same: Can commodity prices, being underpinned by strong demand in developing countries, avoid going bust if the U.S. economy enters a severe recession? Historical precedent says no, but perhaps China has broken the mold on historical precedent….
For the record, there has been some ‘slow down’ related weakness in certain commodities, in particular oil. But this weakness has not been sustained, and has yet to show itself in economically sensitive commodities like copper.
 |
 |
Under the assumption that the U.S. recession will be a lasting affair that seriously impacts global growth, commodity prices will likely be challenged in the coming months. But what this general forecast does not do is focus on specific storylines keeping the excitement level and rotation levels in commodities high. For example, with agricultural commodities roaring today and things like gold/platinum trading near record highs, there is still plenty of excitement to be found. Moreover, there is little question that this excitement can feed on itself, eventually bringing about a disconnect between price and fundamentals (i.e. wheat may well be in short supply, but there comes a point when a skyrocketing wheat price no longer relates to the fundamentals. See Copper in 2006).
What can be questioned is how things like base metals and oil will react if, and more likely when, the demand side of equation deteriorates. It goes without saying that in order for commodities-land to get considerably less exciting, the U.S. recession must intensify and/or spread.
|
