QNB: Commodities Price Action Not a Good Omen for Global Economy
The recent developments in commodity markets do not signal robust global economic strength, despite the strength in the U.S. consumption sector and the acceleration of the American economy in the third quarter of 2023, according to QNB.
The bank said that the sharp correction in prices of cyclical commodities indicates more growth headwinds. Meanwhile, precious metal prices hint at increased demand for safe-haven assets.
The report emphasized the heightened uncertainty in global economic forecasts, with commodity prices suggesting that the worst phase in economic activity hasn't ended yet. It also noted that commodity markets have been experiencing unprecedented volatility and disruptions since the onset of the COVID-19 pandemic in early 2020. The shocks in these markets have been substantial, with prices fluctuating between highs and lows relatively quickly in recent years.
The bank said that the negative demand shock triggered by the COVID-19 pandemic led to deflationary pressures, rapidly driving commodity prices to their lowest levels in several decades. The Bloomberg Commodity Index, a key indicator for general commodity price movements, witnessed a decline from January to late April 2020. However, substantial stimulus policies later spurred a significant recovery in the global economy, supporting basic commodity prices.
It noted that, after a period of strong economic recovery, global demand surplus, combined with supply shortages and the shock from the Russo-Ukrainian conflict, led to a surge in prices in late 2021 and early 2022, reaching their peak from mid-last year until the end, before a significant corrective phase. The slowdown in Chinese economic performance, high inflation affecting real incomes, and an unexpected increase in oil supplies due to strategic inventory utilization were cited as reasons behind this. The report emphasized that price movements provide essential insights into the global economy, reflecting trends in sentiments and inflation, often acting as indicators for forthcoming expectations.
The prices seem incongruent with the soft landing scenario, suggesting at least a mild recession in major advanced economies. This is evident in the significant correction seen in highly volatile commodities such as energy and essential metals. In the energy sector, Brent crude oil prices dropped by 37% from their recent peak, although they still remain slightly higher than pre-pandemic levels. As for essential metals and forest products, copper and lumber prices, vital indicators for activity in China and the U.S., tumbled from their recent highs, indicating that headwinds continue to dominate global growth expectations despite the recent acceleration in the U.S. economy.
Secondly, precious metal prices point towards global economic weakness. While gold prices near all-time highs, silver, crucial for new economy sectors like technology and clean energy industries, are significantly lower than their recent highs, signaling a notable decrease in recent months due to cyclical factors.
Thirdly, the alignment of robust gold prices with declining 10-year U.S. Treasury yields in recent months suggests growing investor belief in heightened uncertainty and further global economic slowdown. While gold seems disconnected from inflation trends post-pandemic, it remains a traditional safe-haven asset amid uncertainty and negative macro developments.
In conclusion, the bank's weekly commentary said that recent movements in commodity markets indicate a lack of global macroeconomic strength despite robust U.S. consumer trends and the re-acceleration of the world's largest economy in the previous quarter. The significant correction in cyclically affected commodities and the high demand for safe-haven precious metals reflect prevailing uncertainties. The prevailing uncertainty in commodity prices indicates that the downturn in economic activity might not be over yet.
