In the “Hell” section of Dante’s “Divine Comedy”, the poets arrive at the gate of Hell. They read an inscription: “’All hope abandon, ye who enter here.’” (Canto III, line 9)
CONCLUSION AND OVERVIEW
The monstrous price crash in commodities “in general” from their spring 2011 and mid-year 2014 peaks caused many bloodied commodity marketplace dwellers to abandon hope for an escape from the bear move. Commodities nevertheless probably are emerging from that hellish major bear trend and creating a sideways pattern which will persist for the next several months.
Use the S&P broad Goldman Sachs Commodity Index (“GSCI”) as a benchmark. In this perspective on the GSCI, much depends not only on world economic growth, inflation trends, and central bank and political rhetoric and actions. Given the very large share of petroleum within the GSCI, oil price trends and OPEC policy are particularly important for GSCI levels and trends.
The eventual top of the developing sideways trend for the broad GSCI admittedly is uncertain. However, it likely will be far below 6/23/14’s 673 summit. Also, around 460 (the 5/6/15 top was 459) probably will not be attained for quite some time unless OPEC surprisingly and significantly curtails crude oil production. However, around 380/400 currently is an arguably reasonable target for the range’s ceiling, particularly if prospects significantly improve for a decline in the substantial worldwide global oil oversupply. A fifty percent rally from the low achieved on 1/20/16 at 268 is 402. The January 2016 GSCI trough could be challenged over the next several months, but it is unlikely to be broken by much if at all.
Petroleum of course is not the whole world of commodities. Price adventures of the petroleum complex, particularly in crude oil, nevertheless often influence perspectives on, opinions regarding, and trends in other parts of the commodity universe. Petroleum inventories in the OECD realm are massive. Given current OPEC (especially Saudi Arabian) production policy and estimates regarding calendar 2016 global oil consumption and production, this oversupply situation probably will continue, or even worsen for at least several more months. Although the world is not in recession, economic growth (including Chinese) is relatively sluggish and probably will remain modest.
So what supports and encourages rallies in the commodities domain nowadays?
The highly accommodative central bank policies of the Federal Reserve Board, European Central Bank, Bank of England, Bank of Japan, and China play a key role in creating a commodities floor and offer hope for a sustained rally from the January 2016 lows. Many conjecture these long-running easing efforts (notably yield repression and money printing) will remain in place for quite some time, and may even expand (as in the Eurozone or Japan). About two weeks ago, note “OECD calls for action to boost growth” (Financial Times, 2/19/16, p2). At end February 2016, “China central bank unleashes $106bn to boost growth despite G20 warning” (Financial Times, 3/1/16, p1). The European Central Bank meets 3/10/16, the Bank of Japan 3/14-15/16, and the Fed 3/15-16/16. In today’s highly-indebted world, easy money policies aim to assist (favor) debtors and encourage spending.
That these widely-worshipped high priests of financial stability, true believers in their mandates, failed to arrest the commodities price decline well before early 2016 does not bar them from playing a role in creating near term support for the commodity complex.
Recent rhetoric and action by the dovish Fed and its brethren underline not merely their devotion to evading deflation and generating “sufficient” inflation These wizards also have embarked on a quest to arrest further declines in key global stock benchmarks in the United States and overseas, as well as to stop the broad real trade-weighted dollar (“TWD”) from ascending much (if at all) beyond its January 2016 highs.
A somewhat weaker dollar and stronger stocks (and very low interest rates, including negative yields on government debt in several key nations) encourage hope for commodity marketplace bulls. Highlight the similar first quarter 2016 timing of the high in the TWD, important lows in the S+P 500 and many other key stock marketplaces, the low yield in the US 10 year note, and recent bottoms in the broad GSCI (and the petroleum complex). For weary yield-famished “investors” (and speculators), at some point depressed commodity prices apparently may offer satisfactory potential for a good (decent, reasonable) return.
In addition, the central banking fraternity despite its rapt attention to notions of core inflation, nowadays finally confess that “too low” (collapsing) oil prices can endanger their devoted efforts to achieve their adored overall inflation targets and significantly influence the so-called “real economy”. In the Fed, ECB, and other central bank gospels, two percent inflation is good, “too low” inflation is bad, and deflation generally is very bad (or evil). These luminaries probably also admit that major commodity trends (especially in oil) often can closely intertwine not only with yield levels of debt securities, but also with foreign exchange patterns as well as emerging marketplace and advanced nation stock marketplace trends.
Central bankers consequently will tolerate, and arguably welcome, a sustained modest bull move in petroleum prices. A mild rebound in oil (commodity) prices probably will not inspire them to depart from their ongoing highly accommodative monetary schemes.
FOLLOW THE LINK BELOW to download this article as a PDF file.
Hellish Falls, Divine Rallies- Commodities in Context (3-6-16)