Falling commodity prices signal potential global economic weakness despite US stock market recovery
Commodity prices have experienced a significant decline over the past month, indicating potential underlying weakness in the global economy, despite a recent recovery in the US stock market, as reported by CNBC.
While US stocks have rebounded from losses triggered by weak labour and manufacturing data, the downturn in commodity markets suggests a different narrative.
The Invesco DB Base Metals Fund has seen a drop of over 7 percent in the past month, and crude oil futures have fallen 14 percent from July 5 through August 5.
Rob Ginsberg, managing director at Wolfe Research, noted in a research note that “the entire asset class is coming under pressure,” highlighting that outside of gold, finding a positive setup in commodities is challenging.
Ginsberg views the broad decline in commodity prices as a warning sign about the state of the global economy.
Copper, often seen as a bellwether for economic activity, has particularly drawn attention. Bart Melek, global head of Commodity Strategy at TD Securities, explained that copper futures have pulled back 21.4 percent from the 2024 high of $5.19 per pound on May 20, trading at $4.089 as of Monday morning.
The futures are down nearly 12 percent over the past month. Earlier this year, copper surged on expectations of a super-cycle driven by demand from growth industries such as electric vehicles, semiconductors, and renewable energy.
However, this narrative has quickly faded, with Melek noting that the super-cycle idea is no longer widely discussed.
The weakness in China, the world’s second-largest economy, is contributing to the decline in copper and oil prices, Melek said. He added that global manufacturing data has also been underwhelming.
Analysts like Melek suggest that copper and oil might be facing surpluses rather than the tight markets that were anticipated. Expectations of supportive fiscal stimulus from China have not materialized, leading to disappointment among those who had bet on a significant economic boost.
Oil prices, despite some support from ongoing geopolitical tensions in the Middle East, have also been weighed down by weak demand in China.
The Organization of the Petroleum Exporting Countries (OPEC) lowered its global oil demand growth forecast by 135,000 barrels per day, reflecting softer expectations for China.
Melek pointed out that the US’s increasing protectionism, including tariffs on Chinese goods like electric vehicles, batteries, semiconductors, and solar modules, further complicates the economic landscape.
The European Union’s recent tariffs on Chinese electric vehicles and China’s complaint to the World Trade Organization add to the tensions. Melek explained that these tariffs could lead to higher prices and reduced demand.
Market participants are now awaiting the latest consumer price index reading and commentary from the upcoming annual meeting of central bankers in Jackson Hole, Wyoming.
A rate cut by the Federal Reserve in September is widely anticipated, with TD Securities pricing in a 25-basis point cut. However, if the consumer price index data is weak, the Fed might consider a more substantial 50 basis point cut.