Commodity prices have experienced a significant decline over the past month, indicating weakness in the global economy despite the U.S. stock market rebounding from recession fears. The Invesco DB Base Metals Fund has fallen more than 7% in the past month, while crude oil futures dropped 14% from July 5 to August 5. Analysts are observing this decline in commodity prices as a warning sign about the state of the economy, with copper, in particular, being seen as a signal of economic trends. The copper market, which was initially driven by expectations of a supercycle due to its importance in growth industries like electric vehicles and renewable energy, has seen a significant pullback in recent months, with futures being down nearly 12% over the past month.
The weakening of commodity prices has been attributed to the sluggish performance of the global economy, with a focus on China as the world’s second-largest economy. Weakness in China, along with underwhelming global manufacturing data, is affecting markets like copper and oil. Surpluses are likely contributing to the decline in copper and oil prices, defying expectations of a tight market. While geopolitical tensions in the Middle East have provided some support for oil prices, weak demand in China has been a persistent issue. OPEC recently lowered its global oil demand growth forecast for the year, citing softened expectations in China. The ongoing trade tensions between the U.S. and China, coupled with protectionist measures, are also impacting commodity markets.
The imposition of tariffs by the U.S. and the EU against Chinese products like electric vehicles, batteries, and semiconductors is further exacerbating the economic situation. These tariffs restrict the free flow of goods and could lead to higher prices, ultimately dampening demand. The market is eagerly awaiting the latest reading of the consumer price index and commentary from the annual meeting of central bankers in Jackson Hole, Wyoming. While a rate cut by the Federal Reserve in September is expected, there are uncertainties about the impact it will have on the economy. TD Securities is pricing in a 25 basis point cut, but there is a possibility of a more significant cut if the CPI data shows weakness.
Overall, the downward trend in commodity prices is pointing towards a slower economic environment with reduced demand growth and increased risks of undersupply conditions. The uncertainty surrounding global trade tensions and economic outlooks is creating a sense of caution among investors. While the U.S. stock market has shown resilience in the face of recession fears, the broader economic indicators suggest underlying weaknesses. The market will be closely monitoring the developments in the coming weeks, particularly in relation to central bank policies and trade negotiations, to gauge the future direction of commodity prices and the global economy.
