The North Korean situation flared up again with fresh threats from their leader, and while the markets have taken these types of threats in stride before, there will be some anxiety that affects risk sentiment.
By many measures the world economy continues to recover. The pace is apparently disappointing to commodities but not to equity markets.
Despite the Treasury market’s strange reaction to the much better than expected US nonfarm payroll result for April, the overall outlook for the US and global economy was improved markedly by that data released last week.
The outlook for China seems to have improved enough for them to raise short-term interest rates. In the wake of this general progression, growth-sensitive industrial commodities like crude oil and copper have already benefited.
The outlook for the global economy and commodity markets in general continues to improve, but some might fret over the looming FOMC rate decision, while others might be concerned over the prospect of a firming dollar in the event the Fed does make a move to hike rates.
We are not sure if the signals being thrown by Treasuries this week are a sign of a longer term change or if we are “putting the cart before the horse.”
The US Jobs situation continues to underwhelm along with most US economic readings, making it problematic for the Fed to hike rates in September.
With the US payroll report surprising the trade with better than expected results for the month of July, new highs in US equities and anecdotal evidence of a possible bottoming in the Chinese economy (positive Alibaba earnings and a rise in iron ore and copper imports), it would seem like the groundwork has been laid for an improvement in “animal spirits.”
Since the March lows, several physical commodities have forged rallies that few expected, and with even fewer anticipating the magnitude of those rallies.
Seeing silver, sugar and soybeans forge strong price gains has historically hinted at inflation, but that type of forecast seems foolhardy in the current environment.