Well everyone is talking about commodities.
And that’s good, because the entire complex is collapsing on itself. Generally speaking, that’s worrisome if you’re long the global reflation trade. Nothing says deflation like commodities in free fall.
Clearly, there are supply/demand dynamics at play. We went over this earlier today in our overnight recap.
But as former FX trader Richard Breslow writes in what we assume will be his final missive of the week, the real culprit may be policy uncertainty. More on that – and witches – below.
Commodities have been getting clubbed. The interesting question is whether this hammering is trying to evolve into a candlestick rather than a sledge. It has to pique your interest that the Bloomberg commodity index saw the headlines that it had slumped to its lowest level in a year and promptly decided to stage a nice one-percent-plus rally.
- Stopping after slicing through, but very near, significant lows from last May, September and November. What is one trader’s, “this thing is never going to go up again, so sell any bounce” is another’s, “wow, did you see that quadruple bottom?” The fact that the rally happened almost simultaneously with the Salem, Massachusetts witching hour will certainly get the attention of market forecasters who use methods other than strictly orthodox technical analysis
- The implications of whether this is a pause, or indeed a reversal, are quite important. In its May Statement on Monetary Policy released earlier today, the RBA lowered its Brent oil assumption used for its forecasting by some nine percent from where they had it as recently as February. How’s that for government work?
- They use this data to feed their models. Why did they do it? Because they know they can’t forecast oil prices better than anyone else (excluding the men from Hacienda, apparently), so they just use the futures prices of the moment. This is a common practice among central banks, despite the importance of this input across the board. Think about this the next time we parse quarterly forecasts as far as three years out looking for subtle changes. It’s a fool’s errand. And if you ever needed a strong argument to allow intuitive versus model-based monetary policy-making, use this
- But why are we getting this kind of commodities moves? They’ve been broad-based and go way beyond some shale producers cutting their vacations short. Sure there are reasons you can select for each individual commodity, but do you really believe in coincidences? The reason is increasing policy uncertainty. Which isn’t a bad thing in and of itself. But there are externalities and we’ve been seeing them in commodity prices and we very well may begin to see them in market volatility in general
- Is the Fed on a hiking mission? Was the ECB’s Peter Praet hinting at anything yesterday, with his data-dependent comment? That’s a biggie. Is China struggling or merely tightening policy to wring out excess? Will global trade actually thrive, let alone survive, all the populist screeching? And what does that mean for emerging market rate policies? Are commodities the canary in the global rates mineshaft?
- It’s an undeniable fact that, taken in aggregate, global economic numbers have been getting better. I can mention it without jinxing it. But if it holds, don’t believe for an instant that it won’t be accompanied by knock-on effects radically changing the investing paradigms of the post- financial debacle world