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commodities

Amid Worsening Commodities Rout, Agriculture Index Dives To Record Low

"Escalating global trade tensions bring a risk of demand destruction across commodity markets."

Are you looking for more signs that the prospect of a trade war is weighing on market sentiment and posing a threat to global growth?

Probably not. That is, you’re probably not looking for “more signs” because the signs are everywhere, with the trade tension manifesting itself in the Chinese yuan, in emerging market assets more generally and in European automakers, just to name a few.

And if anecdotal evidence is more your speed, well you needn’t listen very hard to hear the veritable chorus of cat calls from the peanut gallery, whether it’s comments filed by GM with the Commerce Department, Daimler’s profit warning or Harley-Davidson’s announcement that the company will be moving some production to Europe to mitigate the expected hit from tariffs.

Hell, even America’s largest nail manufacturer is at risk.

But if all of that isn’t enough to satisfy you in your quest for coal mine canaries, you might also look at commodities (and there’s a fun commodities pun in there somewhere).

On Monday, Australia’s Department of Industry, Innovation & Science delivered their latest “Resources and Energy” quarterly report (embedded in full below) and it contains the following warning:

Trade tensions between the US and its major trading partners present potential risks to confidence and global economic growth.

Australia is of course a country that knows a thing or two about commodities and Trade Minister Steven Ciobo, at a speech in Tokyo on Monday, echoed the sentiments from the report mentioned above.

“Escalating trade tensions, potentially, will harm global growth [and] of course there’s a correlation between global growth and trade volumes”, he said, before reiterating the importance of Trump sticking to WTO norms amid rumors that the President is increasingly irritated by America’s relationship with the organization.

The Bloomberg commodities index is sitting near its lowest levels of 2018, after suffering through its worst month in nearly two years in June:

BCOM

With U.S. tariffs on Chinese imports set to take effect on Friday (and with them, inevitable retaliatory measures from Beijing), the outlook appears grim.

“Risks to are building,” Morgan Stanley said late last month in a note documenting the bank’s May “China tour”. Here are some further excerpts:

Our price deck remains characterized by weakening outlooks across most commodity markets into 2019.

Escalating global trade tensions bring a risk of demand destruction across commodity markets as costs rise for end-users and access to materials is restricted.

As well as the direct hit to steel and aluminium, tariffs on end markets such as electronics, machinery and autos risk weakening demand for the commodities that feed them.

And while every commodity has its own story to tell and we don’t pretend to be telling all of those stories simultaneously here, it is worth noting that on Monday morning, the Bloomberg agriculture subindex fell to a record low:

Aggs

(BBG)

Full report from Australia’s Department of Industry, Innovation & Science

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