QNB Group’s weekly report revealed that the recent developments in commodity markets do not bode well for the global economic outlook. A sharp correction in cyclical commodity prices points to more headwinds to growth, while precious metals prices point to higher demand for non-US safe havens and continued inflationary pressures.
He added: Commodity markets have been witnessing significant volatility since the beginning of 2020. Initially, the negative shock in demand resulting from the Covid-19 pandemic led to deflationary pressures that quickly pushed commodity prices to their lowest levels in several decades. The Bloomberg Commodity Index, a leading indicator of general movements in commodity prices, experienced a decline from January to late April 2020. However, shortly thereafter, unprecedented stimulus policies led to a significant recovery in the global economy, providing support to commodity prices. After a period of strong economic recovery, excess global demand, combined with supply shortages and the shock from the Russo-Ukraine war, led to a spiral of price hikes in late 2021 and early 2022. Commodity prices appear to have peaked during the mid-2020s. Last year until its end, before witnessing the great correction process that is still going on.
The report emphasized that a closer look at commodity price movements can shed light on important aspects of the global economic outlook, as developments in some commodity prices provide macroeconomic information, including general sentiment and inflation trends, and usually lead or confirm cyclical turning points. . Our analysis focuses on three key messages implicit in the recent commodity price correction.
First, commodity prices seem to indicate that the global economy will slow further. Rising interest rates, liquidity withdrawals, tighter fiscal spending, and lower disposable income due to inflation are depressing aggregate demand, resulting in a slowdown in activity. This is evident in the significant correction in the prices of commodities that are more sensitive to cyclical fluctuations, such as energy and base metals. Although Brent crude prices are still slightly above pre-pandemic levels, they are down 38% from their recent peak. Copper and lumber prices, two important indicators of activity in China and the US, also declined from recent highs. Such a price performance suggests that headwinds and an ongoing slowdown in the US and Europe continue to dominate the global growth outlook.
Secondly, developments in precious metals prices point to a further decline in the value of the US dollar. Gold prices have recently outperformed long-term US Treasury bonds, indicating that foreign and domestic private investors prefer safe havens that are not issued by the US. A higher demand for non-US safe assets, such as gold, implies a potential decrease in the demand for the US dollar. In fact, the ratio of US Treasury bonds to gold is an important indicator of sentiment towards the US dollar, as a decline in this ratio often indicates a turning point in the US dollar cycle, from high sentiment towards the US dollar in the market to a decline due to the preference for other currencies. The depreciation of the US dollar is also a good indication of the strength of economic performance outside the US, and this can be particularly positive for emerging markets as it stimulates more positive inflows of foreign capital.
Third, precious metals also point to continued inflationary pressures, with gold prices near all-time highs. Moreover, silver prices, which are a key input to the new economy (technology and clean energy industries), have risen more than gold in recent months, indicating that some pressures remain on the real economy, despite the global slowdown. The falling gold-to-silver ratio amid a strong performance of gold is a sign that inflationary pressures are still not ready to fully abate.
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