Commodities

 

> on March 5, 2015 in Beijing, China.

President Xi Jinping (L) with Chinese Premier Li Keqiang  © Getty Images

It would be easy to dismiss the recent extreme turbulence in global financial markets as a dramatic, but ultimately unimportant, manifestation of illiquid markets in the dog days of summer. But it would be complacent to do so. There is something much more important going on, involving doubts about the competence and credibility of Chinese economic policy and the appropriateness of the US Federal Reserve’s monetary strategy. These doubts will need to be resolved before markets will fully stabilise once more.

The August turbulence was triggered initially by a renewed collapse in commodity prices. For the most part, this was due to excessive supply in key energy and metals markets, and the sell-off only became extreme when there were panic sales of inventories, and a final unwinding of “commodity carry” trades. This inverse bubble was a commodity market event, not a reflection of weak global economic activity. In fact, taken in isolation, it would probably have been beneficial for world growth, albeit with very uncertain time lags.

However, that reckoned without the China factor. Activity growth in China had rebounded slightly following the piecemeal policy easing in April, but the data available so far for August suggest that the growth rate has subsided again to about 6 per cent, roughly 1 per cent below target. Although this is very far from a hard landing, it undermined confidence. Read more

By far the most important event in the financial markets this week was the unexpected release of oil stocks by the IEA, which almost immediately reduced the global oil price by about 8 per cent. The motivation for this intervention might well have been Washington politics but, if the fall in the oil price persists, it will have a very useful effect on global economic activity, just when it is most needed.

Former US vice president Dick Cheney used to describe the release of oil stocks by the IEA as a “nuclear option”, which could almost never be used. The FT’s commodities editor Javier Blas says that it is now viewed as a “smart bomb” aimed mainly at oil speculators. But others, including this FT editorial, see the IEA’s tactics as pointless or self-destructive. So is it just a damp squib? Read more

Commodities have been the best performing asset class since the Fed announced QE2 last August. Even after the fall of 10 per cent seen this month, commodity prices are still 29 per cent higher than they were when Mr Bernanke spoke at Jackson Hole on QE2. But this has started to slow the growth rate of the world economy, raising doubts about the sustainability of the rally in all risk assets. So where are commodity prices headed next? Read more

This week, the dramatic events in Egypt failed to unsettle the global financial markets. Not only do investors believe that Egypt itself is not critical for global oil prices, they also seem to believe that there will be relatively little contagion to the more important oil producing states elsewhere in the Middle East. Read more

The era in which central bankers could apparently do no wrong ended emphatically in 2008. Since then, they have attracted plenty of criticism as they have adopted a succession of unconventional policies to stabilise the world economy and financial system. Read more

Commodities are very volatile investments, which may be appropriate only for professional investors. Like all other asset classes, timing is what matters most Read more