Commodities: More Falls Ahead
As I have been saying repeatedly in this space, commodity markets continue to look weak across the board, as the outlook for global economic growth deteriorates. Poor US economic data in recent weeks and lower than anticipated growth in the Eurozone (which contracted by 0.2% q-o-q in Q208) helped pull the S&P Goldman Sachs Commodities Index (GSCI) down by 20.8% to 706 from its all-time high of 890 earlier this summer. Also, bear in mind that the multi-year commodity bull-run coincided with a weakening of the US dollar; thus, the current commodity correction has been coupled with a dollar bounce, with the greenback hit a multi-month high against the euro of US$1.4628/EUR at one point during trading yesterday.
It is also worth noting that some commodities have fared better than others. Indeed, the relative performance of Goldman Sachs’ sub-indices for agricultural goods, industrial metals and energy tells a different story. While all three sub-indices are down from their May-June highs, energy has held up much better than agriculture and industrial metals. Year-to-date energy is still up 29.8% while agriculture and industrial metals are up by 8.3% and 10.3%, respectively. This however, is not entirely surprising given that crude oil is down by ‘only’ around 20% since June, while base metals such as three-month LME nickel, lead and zinc are down by 41%, 47% and 38% respectively from their February highs.
So, where do we go from here? I do not rule out a short-term bounce for commodities as the dollar gives back some of its recent gains against global currencies and dip buyers enter the market. However, I believe such respite for commodity markets would only be short lived, as underlying fundamentals remain weak. Indeed, Business Monitor International‘s medium-term view is for further dollar strength, possibly to US$1.4000/EUR by year end, which will certainly put additional pressure on commodities. Moreover, the reduction of fuel and food subsidies in Asian countries and tighter monetary policy across emerging markets, combined with demand destruction and slower global economic activity, will also continue to dampen the global commodity outlook for months to come.
S&P Goldman Sachs Commodities Index
August 20th, 2008 at 6:08 pm
This is an excellent blog, Watchdog, but I suspect (unusually for BMI), you’re being a touch conservative on the FX scenarios. The feeling this side of the pond (eastside) is that the we’ll see the dollar advance to 1.30 against the euro this year and sterling will sink below 1.70. Even at those rates, the dollar arguably remains undervalued.