COMMODITIESNOW
the point at which the resilience of the downintensified.WiththeUSeconomyaccountingforaround30%
global economy to withstand current of global GDP, the idea that the rest of the world could become
commodity prices runs out of steam” immune to, or sufficiently cushion the negative effects of a US eco-
[June 2008]. We suggest that recent nomic downturn has become increasingly unsound. Stock market
pricefallshaveoccurredforthreeprinci- investors were some of the first to realise this as evidenced by the
palreasons. comparative performance of equity markets so far this year.
Deteriorating economic data, particularly coming from the
1. ThePerfectStorm EurozoneandJapan,hasaddedtocontinuingeconomicwoesinthe
The‘perfectstorm’offinancialcrises, US.Countriesaffectedbythecurrentfinancialcrisesrepresentabout
collapsing house prices, rising inflation, 50%ofworldGDPbutonlyonequarterofGDPgrowth.Inthemar-
and soaring commodity prices (and its ket for commodities, the effects of a slowdown in the OECD were
global inflationary effects) has hit expected to be offset by continuing strength in the emerging
manyeconomieshard(theUSAandUK economies.Foritspart,Chinacontinuedtopoweraheadwithaccel-
in particular). The commodity prices erated domestic consumption (up around 23% year-on-year in H1
part of this equation has been perhaps 2008),hopingtooffsetweakerexternaldemand.Elsewhere,growth
the most difficult to fathom – certainly in the other BRIC economies points to decoupling. But the markets
for politicians who have only recently are sceptical and correctly do not see decoupling as a sustainable
got to grips with the unfolding seven- investment theme.
year bull market. The wall of money The developed world is experiencing a synchronised slowdown –
entering the sector over the last five andcommoditypricesarenowtellingusthatemergingcountrieswill
years has propelled many commodity not be immune.
products into the mainstream (particu- Anotherrecentkeychangeherehasbeenareversalinthefortunes
larly in the energy complex). oftheUSdollar.Therecoveryofthedollar–howeverillusoryfornow
Ascommoditypricesracedinexorably – has been the main reason for much of the recent fall in commodi-
higher, the hardship caused, particular- ty prices [see page 38].
ly to the world’s poor, brought about Thedecouplingtheorywasthebirthchildofglobalisation.Forcom-
increasing and (in the main) misdirect- modity markets it is becoming an illusion.
ed contempt for ‘speculative’ market
participants. Accordingly, the costs and WhereNow?
restrictions imposed on commodities Withthecreditcrunchnowintoitssecondyear,financialsectortur-
investors has intensified. And when the moil is descending into a real economic malaise. Emerging
going gets tough, the smart take prof- economies, with their concentration on investment, output and
its. And let’s not forget here the real exports – in both manufacturing and natural resources – could yet
reasons for the recent commodities come unstuck if export markets suffer as OECD consumption con-
price run, many of which you will find tractsfurther.For many it seems to be just a matter of how far past
emphasised and analysed in the pages the $US1 trillion mark financial sector losses and writedowns even-
that follow. tually get (particularly since there is no evidence yet that the US
housing market is approaching its lows).
2.ThePoliticalBacklash
Most politicians react to events and
“Thespeculativeepisodealwaysends,not
few have visionary or preemptive poli-
withawhimper,butwithabang”
cies. We suggest you start blogging on
this one for further elaboration. Like
JK Galbraith
many of you (no doubt), we think of In the immediate term at least, commodity ‘fundamentals’ have
mostofthemtobeanexasperatingbut been cast aside with the market reverting to ‘herd’ instinct.
necessary evil – particularly when it Remembering that many sectors in physical commodities are (rela-
comes to developing effective and effi- tively speaking) minuscule compared to their bigger brothers –
cient market mechanisms. That said, in equities and IOUs – prices can correct rapidly. For traders, this is
thedevelopingworld,recentcommodity nowamarketforstrongstomachs,precisenerveandtheavoidance
price increases should have crystallised of TV pundits.
political thinking. Authorities here have Expectations are everything, and behaviour based on past experi-
had the wake-up call and should start ence could count for nothing. The current commodities boom is not
seekingbetteradvicetoreorganisemar- over,butinaglobalrecession(ifthat’swhereweareheaded)where
ketsforthenewglobalera. thehopeofeconomicdecouplinghasbeendashed,manycommod-
ity prices are unlikely to recover to levels seen earlier this year for
3.Decoupling&TheUSDollar some time. This is perhaps why many price forecasts for 2009 are
The popular notion of decoupling now being slashed
•
(from the US) began to unravel earlier
this year as the effects of a US slow-
www.commodities-now.com
8 SEPTEMBER 2008 COMMODITIESNOW
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