Commodity Markets, Optimism on the Wane

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Cigdem/Adobe Stock

It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

Even during his year-end transition period, the president’s team downgraded investment plans from vague promises of $1 trillion to $550 billion. This week, comments from the White House suggest there may not even be any federal money at all for infrastructure projects, and that the administration is looking for the private sector to come up with the cash.

But the private sector will only fund what it can earn a return from and a recent Telegraph article quotes Ed Rendell, the former governor of Pennsylvania and chairman of the Building America’s Future Educational Fund, who said, “We have 60,000 structurally-deficient bridges in America and only 100 of them have enough traffic to sustain tolls, so how are you going to get private companies to invest in this?”

With the potential for stimulus to the economy from tax cuts appearing to be bogged down in Congress and the latest figures for the jobs market falling to the lowest in five years, optimism is escaping like air from a leaky balloon.

Commercial and industrial loans have fallen steadily since November, casting doubt on the business community’s confidence in the prospects for strong growth.

Not surprisingly, the prevailing mood is turning increasingly negative for commodities.

The FT reports European exchange traded funds (ETFs) the tractor commodities markets have seen the largest outflow in six months. Commodity ETFs in Europe sort outflow of $150 million in the week to June 2, while the U.S. saw outflows of $72 million. Even gold and silver ETFs, which have benefited from a flight to safe havens following the Qatar blockade, have seen weekly outflows of $52 million and $26 million, respectively, as investors take profits.

With that said, that doesn’t mean the U.S. or global economies are about to tank. European growth has been much better this year and Japan is expected to improve further, while the World Bank is predicting an unchanged 2.7% global growth this year in its latest report.

An explanation for the diving commodities markets is investor expectations had got ahead of reality and what we are seeing is a readjustment in the light of better understanding of what campaign policies will likely translate to when politicians take office.

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