China is the biggest consumer of commodities, but its COVID-zero policy, cracks in its real estate sector, and the troubling effects of its crackdown on its tech and education sectors have all but halted its growth.
The US dollar’s rise is not helping China, whose currency has fallen just a fraction below the Chinese-defended level of seven yuan to the dollar (it temporarily fell above that level last week). in the past.
Chinese authorities would be less concerned about the inflationary impact of a 9 percent depreciation of their currency against the dollar this year than about the impact on inputs into their vast industrial base, with the currency effects dampening the benefits of lower commodity prices.
Even the price of gold, once considered a great hedge against inflation, has plummeted this year.Recognition:Louie Douvis
The global increase in real interest rates has another effect. Since the beginning of this century, commodities have increasingly become a financial asset class – they have been “financialized” – as investment banks, hedge funds and, through exchange-traded funds, other institutions and individuals have viewed them as an alternative to stocks. bonds and property.
Increasingly, the level of diversification they once offered has been reduced and their performance has become more closely correlated with other asset classes. Because of the funding costs associated with holding physical stocks, they have also become more sensitive to interest rate movements and the availability of liquidity.
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As interest rates have risen and central banks have begun withdrawing liquidity from financial markets, which they overdosed on cheap liquidity at the start of the pandemic, financial investors have begun to retreat to the sidelines. The commodity markets have consequently become more illiquid and volatile.
Even the price of gold, once considered a great hedge against inflation, has plummeted this year. In March it was trading around $2043 an ounce. It’s about 18 percent lower now, about $1680 an ounce.
(Bitcoin, the other major perceived inflation hedge and diversifier, has imploded along with other riskier assets. From nearly $70,000 last November, the price has fallen to less than $20,000. It is currently trading around $19,400.) .
Copper, seen as the metal most sensitive to the economic outlook, is down about 28 percent from this year’s March high.
Iron ore – the most important commodity for the Australian economy – was still trading for over US$150 a tonne in May. It’s now under $110 a ton.
The rising US dollar is having a worrying impact on the global economy.Recognition:AP
The apparent coincidence of some commodities that peaked in March is actually no coincidence. In March, the Fed kicked off this cycle of rising interest rates, announcing plans to shrink its balance sheet (and drain liquidity from financial markets) by phasing out the massive holdings of bonds and mortgages it had amassed through its quantitative easing programs.
Russia’s invasion of Ukraine at the end of February may also have had an impact, particularly on commodity price volatility.
It sent energy and soft commodity prices soaring and was clearly grim news for Europe’s prospects. Both energy (particularly oil) and agricultural commodity prices have fallen significantly since – oil is down 29 percent from its peak in March – but remain well above their pre-invasion levels.
It is an open question whether the US will be pushed into recession by the Fed’s efforts to contain inflation that has not responded to past rate hikes.
It seems inevitable that Europe, plagued by its energy crisis, exacerbated by a currency near record lows, will experience one.
China may be avoiding a recession, but barring the initial impact of the pandemic, its growth rate is weaker than it has been in decades.
Japan is also being weighed down this year by a more than 20 percent depreciation of the yen against the dollar.
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Under these circumstances, it would have been surprising if commodity prices had held up. If they develop as expected, only the end of this interest rate cycle will be in sight before they and subsequently (commodities are leading indicators) the global economy experience a real revival.
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