Week End Blog – Commodity Blues hits Investor Sentiment

· by · in FINANCIAL MARKETS, MACRO. ·

What started as a friendly week, turned out to be an ugly one, instead. Another leg down in commodity prices triggered investor pessimism, which was reflected in falling equity prices around the globe. Lead by industrial metals, like copper, the Bloomberg Commodity Index, fell to the lowest level in over 15 years. Dragging energy and mining stocks along with it.

Oil prices also reversed their small gains of the last few months, as data indicates the supply overhang remains massive. Supply has outpaced demand for quite some time now, and, equally important, the gap seems to be growing. Oil inventories have reached extreme levels, causing even more pressure on prices.

Gold lost its shine, and touched a five-year low this week. This despite data from the World Gold Council showing that gold demand is the highest in over two years. Feel free to explain.

China data were again mostly below expectations. Only retail sales managed to meet forecasts, but industrial production and foreign direct investment trailed expectations. New loans also came in much lower than expected, although this should, perhaps, be greeted with enthusiasm, given the major debt pile of Chinese corporates. A longer-term perspective, however, reveals that China’s loan growth has not at all weakened, despite a slowdown in GDP growth from 12% in 2010 to 6.9% during Q3 of this year.

Chinese inflation also looks pretty worrisome at 1.3%. For a country that is still growing at around 7%, inflation levels of around 1% are too low. More stimulus expected.

The ‘cluelessness’ concerning China’s real GDP growth also keeps me guessing when China will overtake the US as the world’s biggest economy. Based on three growth scenarios I come to the conclusion that this will not happen for at least another 15 years. Somewhere between 2030 and 2038.

And, then, suddenly it was back. Peripheral risk. And it took most of us by surprise. Portugal’s government was ousted by a what is generally called an ‘anti-austerity’ alliance. This does sound a bit Greek to me. Spreads widened, as you would have guessed.

Did I mention Greece? The country managed to stay out of the Week End Blog for some time, but it re-enters this week. Capital short-falls of Greek banks and ‘austerity anxiety’ made headlines. Greek banks lost almost halve of their value within just two weeks. Peripheral risk is back, but is it with a vengeance?

Fortunately, The Eurozone has Draghi. Whenever he speaks the euro falls and yields go down. This week was no exception. Since Draghi delivered his ‘more QE’ speech back in October the euro fell more than 5%. In recent days the currency has regained some of the losses, but still a 4% depreciation, just by talking, is not a bad job.

Interest rates? Even with the Fed getting ready to raise rates, Draghi managed to push down short-term rates in the Eurozone even further. As a result the German 2-year bond yield fell to an all-time low of -0.37%. Zero is not the lower bound!

Eurozone GDP measured 0.3% in Q3, 0.1% shy of expectations. That was a bit disappointing of course, although the region is still growing. For 2016 GDP growth, there’s a windfall we haven’t seen for years. For the first time since 2009 austerity will no longer have a negative impact on growth.

All good things come to an end, right? This week, the commodity blues caused the S&P 500 index to fall more than 1% on Thursday. That marked the first 1%+ drop in 32 trading days, so perhaps we shouldn’t complain too much.

Especially when you take into account the Bitcoin investors. The crypto currency (yes. it’s not a currency) saw its value rise 85% in a couple of weeks, before it fell 35% in a matter of days. That puts that 1% decrease on the S&P 500 index into perspective, doesn’t it!

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

One response to “Week End Blog – Commodity Blues hits Investor Sentiment”

  1. Pingback: Entering a Late Cycle Market·

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