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Good morning. A good old money-throwing contest over a merger target ought to be good for the market’s spirits, and we have a doozy going now, as Netflix and Paramount fight over Warner Brothers. But it wasn’t enough to keep stocks from slipping a bit yesterday. Email us: unhedged@ft.com
Commodities and the economy
After several sideways years, commodities have hit a notable rising trend since late summer. The Bloomberg Commodity index, the most popular aggregate, is at its highest since early 2023. The internal composition of the rally is interesting, too:
The rally is quite broad across energy, hard and soft commodities, but crude oil has, notably, been left behind (I’ve also left precious metals out of the chart, both because I think they have become speculative momentum plays and because they have risen so much that adding them would make the changes of everything else hard to make out).
Particularly notable among the rises are, first, copper:
And, second, the US natural gas price (unlike crude oil, natural gas is not, or not yet, a global market):
The reason these two are interesting is that they are closely associated with economic growth. The copper price is known as “doctor copper” because it is said to have a PhD in economics, given its purported ability to forecast economic expansions and contractions. Natural gas, in addition to its use in heating, is a key industrial input.
This has led several people to speculate that the rally in commodities (save oil) is presaging a re-acceleration of growth in 2026, in the US or worldwide. Donald Rissmiller of Strategas, for example, cites the copper price in a note called “Are markets sniffing out a global turn up?” Other positive factors supporting the narrative include: sustained low unemployment claims, “adequate” holiday retail results, faint signs of life in the mortgage market, strong jobs reports in Canada, improved industrial production in Germany, and improving business and consumer confidence in Japan.
Torsten Sløk, Apollo’s chief economist, contributes another piece to the “turn up” case: default rates for both corporate loans and high-yield bonds are falling, despite the “credit cockroaches” scare of a few weeks ago.
Another bit worth slotting in, alongside the commodities rally, defaults and the other indicators, is the recent behaviour of US stocks. Not just miners, but economically sensitive transports and small-capitalisation companies have outperformed the wider market in the past few weeks:
This is a nice optimistic story. The commodities specialists I spoke to yesterday did not, however, entirely buy it.
They started by dispensing with the idea, which has been circulating recently, that high natural gas prices reflect the strength of energy demand driven by US artificial intelligence data centres. Andrew Gillick of Enverus says the idea is “misguided”, because the much stronger driver of the natural gas price and incremental demand is exports, in the form of liquid natural gas. Enverus estimates LNG exports will double over the next five years, adding 15bn cubic feet a day of new demand to the market, whereas gas energy generations will add 1-2 bcf/d over that time. “Data centres are the shiny new toy — but LNG is the gas market’s future bread and butter,” says Gillick’s colleague Al Salazar.
So it appears to be underlying demand growth from LNG exports, plus the normal seasonal worries about a cold winter, that have driven the US gas price up — rather than an uptick in the nation’s industrial demand.
The point is underlined by crude oil’s absence from the rally. In that market, supply holds the whip hand, after the Opec+ group lifted production curbs several times in recent years. The new supply overwhelms the growth in oil demand, which Michael Haigh of Société Générale says is running at about 1 per cent a year. For Opec, higher production and low prices are a stone that kills several birds. It keeps US shale oil investment under pressure; it keeps President Donald Trump, who is keener on cheap petrol than shale drilling, feeling sweet about the Saudis; and, as Rory Johnston of Commodity Context pointed out to me, it punishes Opec+ members who have not been disciplined about production, such as Kazakhstan.
The copper rally is also more about the long-term demand growth story — which Unhedged has written about several times — than a near-term change in demand. Haigh says “most people are forecasting a deficit in copper next year. The reality is that it has many forces that add to demand” from wiring for data centres to green energy to European rearmament. “Globally, we consume and produce 30mn tons of copper a year, and we think the market will be 200,000 tons in deficit next year. That’s not a very big percentage, but the market is finely balanced, and it is very highly concentrated in where it comes out of the ground: Chile, Congo and Indonesia.” Overall, he says, the price increases are “totally fundamental” rather than driven by speculation.
So we have to be careful about reading an economic resurgence into the size and synchronicity of the commodities rally. But pointing out the idiosyncratic supply and demand factors for the various commodities does not deprive the wider picture of all economic significance. Yes, evidence that industrial demand has hit an upward inflation point recently is a bit thin. But we can at least reach a negative conclusion: aggregate demand is not so weak as to undercut the forces that are pushing industrial commodities higher.
One good read
Language, gentlemen!
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