Faced with high inflation not seen in decades, the Federal Reserve officially launched a “violent” interest rate hike of 75 basis points this week, the largest rate since 1994. At the same time, market concerns about economic recession are also rising, and the performance of commodities is generally sluggish.
The intensity of interest rate hikes not seen in decades has a clear impact on the market, and economic slowdown or even recession is bound to have an impact on commodity demand. Taking crude oil futures as an example, Brent crude oil and WTI crude oil have fallen for three consecutive days this week. Due to market concerns about declining demand after the Federal Reserve raised interest rates by 75 basis points, Brent crude oil futures and WTI crude oil futures both fell by more than 2% on the 15th, and fell again on the 16th.
Commodity markets are already feeling the pressure as the Federal Reserve aggressively raises interest rates. But on the other hand, commodities are more focused on pricing supply and demand, while the market as a whole is still in short supply, while the rebound in demand in China has also provided support.
On the one hand, market supply is still tight, and on the other hand, the Federal Reserve’s continued aggressive interest rate hikes will also suppress future demand. Will the “bull market” in commodities end here?
impact or limited
It should be noted that commodities experienced their best quarterly performance in more than 30 years in the first quarter of this year due to geopolitical conflicts exacerbating the shortage of supply and demand. The S&P Goldman Sachs Commodity Index soared 29% in the first quarter, its largest gain since 1990.
The stunning rally contrasts with the commodity’s slump over the past decade. At that time, years of oversupply and sluggish demand dragged down prices. Low commodity prices also prompted manufacturers to cut capital expenditures on major resources by nearly half, and once caused industrial metal inventories to shrink to 20-year lows. The prices of various commodities Supply has been reduced.
After the epidemic gradually stabilized, the global economy recovered rapidly. At the same time, supply problems emerged one after another, and commodities finally broke out of their years of decline. However, as the Federal Reserve begins a violent 75 basis point interest rate hike this week to combat inflation, market concerns about an economic recession are also rising.
Wang Youxin, a senior researcher at the Bank of China Research Institute, told a reporter from the 21st Century Business Herald that for the commodity market, the Federal Reserve has accelerated its tightening of monetary policy and the US dollar index has rebounded strongly again. Commodity prices are usually negatively correlated with the trend of the US dollar index, from the pricing currency perspective will have a negative impact on commodity prices.
However, from the perspective of supply and demand factors, Wang Youxin emphasized that the Federal Reserve’s too rapid interest rate hike cannot change the current supply bottleneck problem in the commodity sector. Therefore, after a short-term correction, commodities are expected to still rise to highs under the influence of supply and demand imbalances. Especially considering that major economically developed countries such as Europe and the United States will enter peak power consumption in the second half of the year, energy shortages will continue. In addition, as the global food crisis and trade protectionism become increasingly prominent, food prices are likely to continue to rise, and there will still be upward pressure on commodity prices in the second half of the year.
Zhang Zhuran, chief researcher of Qilian Cloud, told a reporter from the 21st Century Business Herald that the Fed’s vigorous interest rate hikes have little impact on commodities as a whole. The trend of commodities is affected by multiple factors such as demand, supply chain, and finance. It is still not possible to say that the commodity bull market is over. It’s too early.
On the other hand, the continuous development of new energy will also stimulate demand for commodities. In Zhang Zhuran’s view, the rise in crude oil prices will stimulate the development of the new energy industry, and the great development of the new energy industry will continue to stimulate many varieties such as non-ferrous metals, causing price increases. At the same time, multiple industries such as non-ferrous metals and energy chemicals will also resonate and further stimulate the overall upward trend of commodities. At this time, the intervention of financial institutions will further intensify its rise and form a similar “reflexive” rising result.
The bull market is unlikely to end in the short term
The combination of soaring inflation and the Federal Reserve moving further and further down the hawkish path has resulted in frequent “stock and bond kills” in the market this year, causing heavy losses for investors. Commodities are often seen as an effective hedge against rising prices, and Wall Street favors them.
Bank of America’s latest monthly fund manager survey released this week showed that investor concerns about stagflation have reached their highest levels since the 2008 financial crisis, and optimism about global economic growth has fallen to historic lows. Against this background, long oil and commodities have become the most crowded trades at present, and fund managers generally believe that crude oil will perform well in 2022.
Jeffrey Currie, head of commodity research at Goldman Sachs, said that as central banks hit the brakes to control inflation, the market has few other options to hedge macro risks, and the performance of financial assets will continue to be worse than real assets such as commodities.
Currie believes that the next round of commodity gains may come from investors’ hoarding behavior. “As we saw with the gasoline market in 2006, when investors experienced a period of shortages and price volatility, market participants began to accumulate spare inventories to hedge against future shortages. This is now happening across commodities. In this case, the Russia-Ukraine conflict triggered a behavioral shock that prompted policymakers and upstream manufacturers to build richer and more resilient supply chains and build precautionary stocks of everything from soybeans to crude oil.”
On the other hand, overall commodity inventories and idle capacity are at low levels, and even minor supply-side shocks may continue to have a huge impact on prices in the future. With �Taking oil as an example, the total OECD commercial oil inventory in April was 2.628 billion barrels, 287 million barrels less than the same period last year, 332 million barrels less than the average level for the same period in the last five years, and less than the average level from 2015 to 2019. 299 million barrels. And low inventory also means worse impact resistance.
At present, the overall commodity market is still in a state of short supply. As the global economic growth slows down, demand gradually weakens. How will the balance of supply and demand tilt in the future?
Wang Youxin told reporters that under the influence of the Federal Reserve’s continued substantial interest rate hikes, global economic growth will continue to decline, and the demand side will gradually fall back, which will help promote the rebalancing of supply and demand. Judging from the current global and national economic recovery trends, this situation is more likely to occur in 2023. The slowdown on the demand side and the easing of supply-side bottlenecks may ease the imbalance between supply and demand in the commodity field, and prices are expected to fall from high levels.
Looking into the future, Zhang Zhuran believes that the gradual exhaustion of the rising power of commodities will take a long time period, and at least for now, there is no end in sight. Although the Federal Reserve’s interest rate hikes have increased the cost of funds and funds have recently flowed out of the stock market, bond market, and emerging markets, funds are still flowing into commodities, and this process will not end in the short term. Generally speaking, the current rise in commodities is a very complex systemic event that will not end easily in the short term. It is too early to talk about the turning point of the commodity bull market.
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