Are Commodities Trying To Tell Us Something?

I leave it to my colleague Morten to be our expert on commodities, but I can’t help but wonder if the price action in commodities is trying to tell us something about the strength in the global economy?  According to the Wall Street Journal: oil prices continue to slide after completing their longest losing streak on record Monday.  The article also mentions that Copper is down 18% and Sugar is down 15% in 2018.  Traders and investors can look at this phenomena in a couple of ways.  On the one hand lower energy and commodity prices helps contain inflation and helps the global consumers due to lower prices.  Most industries that have commodities as an input welcome lower input costs.  On the other side of the coin, lower commodity prices could well be a reflection of weaker growth in the global economy as the demand side is the main driver of pricing.

There are many factors that affect the pricing of commodities these days, that differ from “normal times”

  • Trade wars and tariffs
  • Presidential Tweets: primarily oil markets
  • Global politics: has always been a driver, but is heightened by the various tensions around the globe
  • Sanctions:  difficult to handicap due to exemptions and ever changing dialog
  • Frontloading:  there was a push by countries and companies to beat the tariffs and that has affected the normal seasonal pricing to some extent

What does the trend in commodities mean for FX, Equity and Interest rate markets:

  • The Fed is very focused on holding inflation at the 2% level, lower commodity prices, although often factored out as being short term in nature, have an affect on inflation trends in an economy.
  • We look for the Fed to hike and 1 to 2 times in the New Year, if commodities are signaling slower growth, this may affect our hike scenario
  • Should the Fed become less aggressive, that will affect the strength of the USD
  • Lower commodities and lower USD are positive for Emerging Markets
  • Equity markets will benefit from a less aggressive Fed, but will be skeptical if it is due to slower U.S./global growth

For more detailed info on commodities we follow at Minter:

We have been watching the High yield market since the spring for signs that the economy and the market are beginning to weaken.  High yield in the U.S. has been performing well until the start of Q4.  Watch this space!

Fall in WTI Oil (Red) accompanied by fall in gasoline (Blue) will help consumers.

Cable (GBP vs USD) is in middle of 1.20/1.40 range and awaits news on the fate of Brexit.  We would expect test lower, but positive news on Brexit could give a bounce, so suggest avoiding until clearer picture.

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TickerDate OpenedEntry PriceStopTarget PriceCurrent Price
Long US500 CFD20/112676264027502673

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