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Summer is slowly coming to an end and we are all gradually turning our attention, with one eye already looking at the autumn ahead. And there, it seems, the same problems await us as before the summer. The geopolitical chess game is still being played, global macroeconomic prospects have worsened or, at best, are not optimistic, inflation and the recession narrative remain part of our everyday vocabulary, and the light at the end of the tunnel is still not in sight.
In such an environment full of uncertainty, it is no surprise that commodity prices are highly volatile, with large ranges between minimum and maximum levels. Although we have moved far away from the historical maximum levels achieved last year when looking at price levels, there is still concern that a scenario could emerge in which everything could explode again in a very short time.
On the other hand, a scenario is also not excluded in which, due to a lack of negative news, prices could further drop to pre-pandemic levels. As for some general indicators, the dollar index DXY is above 103 points, the S&P 500 index is below the level of 4,400 points, and the fear index VIX is above 17. The Goldman Sachs Commodity Index (GSCI) in the new week is above 580 points, while the Bloomberg Commodity Index (BCI) is slightly below 105 points.
Geopolitics continues to have a significant impact on the movement of everything, including commodities. Besides the events in Russia, in this initiated process of re-bipolarization of the world, we have several points in the world (Africa, the Middle East, Taiwan) that could easily become new hotspots of conflict (if they are not already). One move too many by someone in this global chess game and here we are in a new whirlpool of chaos. This is directly reflected in global currencies.
The Chinese yuan has fallen to its lowest level in the last nine months, the Russian ruble has fallen to its lowest level in the last 17 months (for the first time worth less than the Indian rupee), and the EUR/USD ratio has fallen below 1.09. Last week marked the 52nd anniversary of the termination of the Bretton Woods agreement. It was the end of the “gold standard” and the beginning of fiat currencies. This unilateral choice by the USA has led to the creation of enormous global debt and a sovereign debt crisis, led by the USA and China. In the last two thousand years, no currency has exceeded 50 years of life. We are in the twilight of the fiat system and at the dawn of CBDCs, central bank digital currencies.
Central banks around the world are still mainly pursuing a restrictive monetary policy, with the primary goal of curbing inflation, with no signs of a turnaround and/or reduction in interest rates, something the market has been dreaming about for months. At the end of the day, inflation will sooner or later statistically come within the targeted two percent, but the prices of everything on the shelves will be double what they were before the pandemic. Some would say the operation was successful, the patient died.
Chinese Enigma
China and the future of its economy in the short/medium term are becoming an increasing enigma on a global level. Things are happening that China has not faced for decades – a decline in economic activity and recession, all as a result of reduced exports and the collapse of the real estate sector (bubble).
Concerns about the Chinese population remain justified, birth rates are down 40 percent compared to five years ago (it seems that it is rooted in Chinese society that they still prefer to have one child rather than the current possibility of having more children), and a healthy economy always needs more workers than retirees.
Unemployment (especially among youth) is becoming an increasing problem in China. We must remember that the main bullish argument for the market is demand in China and Chinese policy measures to stimulate economic growth, so everything happening there has a significant impact on the supply/demand structure, and thus on the prices of physical goods.
Meanwhile, the credit rating of the USA has been downgraded, and the same will happen to China. Last week we had new downgrades of credit ratings for smaller banks in the USA, but now Fitch warns that it may be forced to downgrade the ratings of larger banks like JP Morgan!?
Brent crude oil futures rose at the beginning of the new week above $85/bbl, on rising optimism that Chinese authorities will introduce more policy measures to stimulate economic growth. Over the weekend, the Chinese central bank urged banks to increase lending in an attempt to strengthen the economy. The central bank also lowered the one-year loan base interest rate by 10 basis points to a record low of 3.45 percent on Monday, while keeping the five-year loan base interest rate unchanged at 4.2 percent.
Signs of tightening in the physical market have also driven oil prices, with US crude oil inventories recording another significant reduction in the latest report, while the production cuts by leading OPEC+ countries Saudi Arabia and Russia continue to be felt.
European natural gas prices rose above €38/MWh at the beginning of the week amid new risks of low supply. Reports indicated that a new round of workers in Australia could start a strike on Wednesday if the operator of the Woodside Energy Group export plant does not reach an agreement with the unions, adding to the voices of potential strikes for workers in Chevron’s plants announced last week. Any supply disruptions would result in the largest European gas consumers competing with Asian countries for LNG imports, raising gas reference values worldwide.
However, sharper growth was prevented by news of large inventories. It was reported that gas reserves were filled to over 90 percent, the highest recorded for this time of year and significantly ahead of the EU’s goal to reach current storage filling levels by November 1. Germany, Italy, Spain, and the Netherlands are among those that have exceeded the target, while French reserves lag at 84 percent.
Grains Also Depend on Geopolitics
In the agricultural world, there is considerable uncertainty, with bearish and bullish influences alternating, but generally, in August, grain prices suffered a significant decline. The main factors were the weather and the question of the future of commodity exports from the Black Sea. Mutual shelling of export ports in the Black Sea only increases market tension and fears that there could be a complete blockade of commodity exports from the Black Sea. The latest in a series was the attack on the Russian city of Novorossiysk, Russia’s main grain terminal, on Friday.
As a result, along with the drought that hit Canada and the central USA, prices are rising. Bad weather has also affected the quality of the harvest in both Europe and Australia, so the overall supply of feed wheat in this new season is greater than in recent years. Geopolitical tensions are also reflected in corn, so its price has followed the rise in wheat prices, although the critical phase for corn development is behind us and any adverse weather conditions no longer have a significant impact on corn.
However, this does not apply to soybeans, which are now in a sensitive flowering phase (in the USA, the second-largest producer in the world), so prices have risen to the highest level in the last three weeks. Dry and hot weather is forecasted until the end of August. The direction in which grain prices will go will primarily depend on geopolitics, while for soybeans it will depend on the weather in the USA primarily, and later on policies regarding renewable sources. Currently, on Matif, wheat is around €230/t, corn around €215/t, both about €30/t lower than levels at the beginning of the last week of July.
Gold below $1,900/t.oz, close to the lowest levels in five months as investors prepare for the annual gathering of central bank leaders in Jackson Hole later this week, to steer economic prospects and interest rate outlooks. Metals have also faced pressure after speculation began that there could be further interest rate hikes due to inflation growth risks.
In the physical market, gold premiums in China jumped last week to the highest since December 2016, while lower domestic prices have brought some buyers back to India. Copper futures fell to $3.7/lbs in August, the lowest level in over a month, as new data raised concerns about China’s economic recovery and further diminished demand prospects for base metals in the world’s largest consumer.
However, the decline was limited by evidence of lower supply, leading to the risk of a significant shortage as economies transition to green technologies with intensive copper use. Codelco’s production fell by 14 percent in the first half of the year. Additionally, the latest data shows that global inventories have fallen by 26 percent since the beginning of the year.
