Week End Blog – Commodity Collapse!

EUREKA! No Greece in this Week End Blog. But commodities are collapsing. Copper, gold, oil, they are all down. Just a few commodities have seen their prices increase since the beginning of this year. For the others, things look ugly.

To make things worse, for most commodities this year’s trend is a solid continuation of the one in previous years. As the graph below shows, gold and silver are both in a multi-year bear markets. Gold slumped below 1100 for the first time since 2010. Other commodities, for example copper, suffer the same fate.

Some of the recent commodity price pressure has to do with the strengthening of the US dollar. The trade weighted dollar is up more than 20% since the middle of 2014. Since commodities are mostly priced in dollars… Well, you don’t have to be a brain surgeon to guess what that does for commodities.

Lower commodity prices are hurting commodity exporters as well. The Australian dollar, for instance, is also at multi-year lows.

China, a major contributor to the overall health of the Australian economy, is caught up in a fight with its own equity market. After severe market interventions, the Chinese government seems to be winning this battle, while losing the war at the same time. Chinese stocks rose for six consecutive days before giving away some of the gains on Friday.

But, the major market interventions could have an ugly boomerang effect. At this point, roughly 20% of A-shares remain suspended for trading. This is not a ‘free’ market and this is certainly not the way that leads to MSCI inclusion.

What about China macro? That doesn’t look particularly healthy, either. The Caixin PMI Manufacturing Index, previously known as the HSBC PMI Manufacturing Index, fell unexpectedly to 48.2 in July. That’s the lowest level in 15 months. Add other indicators like electricity production, which is growing at the lowest pace in years, and we have to assume real GDP growth is probably not exactly 7.0%. To be continued…

Talking about PMIs, the Eurozone Manufacturing PMI fell for the first time in four months. I guess there has to be some Greece effect here, right? Still, at 52.2, the index remains at a very decent level.

Things look a bit less constructive for France, however. After a brief stay (exactly one month) above 50, the PMI Manufacturing Index slipped below that level again. The PMI index has come in below the 50 threshold in 14 out of the last 15 months.

Let’s move over to the other side of the Atlantic. Inflation in Brazil rose further and now equals 9.25%. True, inflation expectations have come down somewhat, but Brazil’s central bank could be forced to hike rates again. Meanwhile, the Brazilian real has, also, reached a multi-year low.

And Brazil is not alone! Emerging currencies in general have been under severe pressure. The JP Morgan Emerging Market Currency Index has lost one-third of its value since 2011. In recent weeks, as the US Dollar ‘recontinued’ its ascent, the fall in emerging currencies has intensified.

Compared to emerging markets the US is a more pleasant place to be right now. Initial jobless claims, an important gauge for the job market, have hit a 42(!) year low. That’s pretty impressive in any case.

An improving labor market is, next to inflation of course, the key ingredient for the Fed’s monetary policy. The table below shows that we are already nine years without a rate hike. That’s very long from a historical perspective. There’s a fierce debate on whether the first hike will be in September, but I think it’s fair to say that, relative to those nine years, a rate hike is imminent.

Hang in there, just a couple of ‘tweets’ to go. The first is on Tesla, which announced that the Model S now comes with a ‘ludicrous’ mode. This means that the Model S accelerates faster than pretty much all other cars. Business Insider found a 10 cars that are still faster, but they cost, on average, nine times more than a Tesla. Barry Ritholtz wrote an interesting piece on Tesla’s ‘ludicrous’ mode. You can read it here.

Now, for something truly amazing! Did you know that our current alphabet is based on an early Arabic geometric design. Within this design, each figure contains its own number of angles. I did not know that.

To round up this blog, I refer my previous blog – the average return doesn’t exist. This blog shows that the average long-term return on equities is rarely realized during a calendar year. And yet, each year, many investment ‘guru’s’ predict exactly this long-term average. It turns out you would have been (much) more successful by forecasting extremely optimistic or very pessimistic returns. Hence, the number of ‘doomsayers’ and ‘eternal optimists’ is probably not too high, but too low. Read more here.

Thank you for reading the Week End Blog. Enjoy your weekend!

2 responses to “Week End Blog – Commodity Collapse!

  1. dollar up,FOREX-Dollar steady before jobs data, sterling weaker,U.S. data in focus,Asian shares set for third weekly drop;Gold faces longest weekly losing run since 1999,

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