While the Jury remains out on the situation in China, it is our opinion that most commodity markets have become too bearish toward near-term demand prospects and the global economy.
Make no mistake: The ebb and flow of Chinese physical commodity demand remain paramount to commodity price trends! Clearly Chinese growth has slowed, and clearly there has been an added fear of credit turmoil inside of China with their recent bond failure.
With several weeks of Dollar weakness, a series of new highs in global equity markets and significant volatility in the Goldman Sachs Commodity Index, one might view the next two weeks as extremely critical for commodity prices.
While Treasury and gold prices seem to think that the US economy is slipping back into a slow or no-growth posture, the odds are good that economic activity was merely crimped by one of the coldest and snowiest winters on record.
The price action in many physical commodities over the last two months has been very impressive, and that action is indicative of a global economy that is waddling its way toward recovery.
Over the last two months, the Goldman Sachs Commodity Index has racked up some fairly impressive gains, suggesting that commodities have been sensing improvement in the global economic outlook.
The overall outlook for commodities is slightly improved from last week’s dismal view. Clearly the US economy has remained suspect in the wake of the second disappointing Non-Farm Payroll result in a row.
With a second Fed tapering event recently, the reality of less accommodative US monetary conditions was mostly realized in the marketplace, and not surprisingly, equities suffered the brunt of the reality check.
Looking at the action in stocks last week, we might develop some concern for the pace of the US recovery, especially in the wake of a soft December Non-Farm Payroll result, sub-par sales guidance from a couple of bellwether US companies and from fears that the Fed might continue to taper even in the face of uneven US data.
Over the last two weeks, the outlook for the global economy has fostered some widespread confusion. The December US Non-Farm Payroll gain was clearly disappointing, but that news was countervailed by increased attention on the decline in the US unemployment rate.