As 2016 begins, the commodity bears are getting close to a “perfect storm” from all directions.
The US Federal Reserve appeared to be “threading the needle” with their narrative supporting a December interest rate hike, as they emphasized that the future rate path will be slow and gradual.
Economic skies continue to brighten as some of the most troubled areas of the world (the Euro zone and Japan) are beginning to show some improvement and the only major nations that appear to be degrading are Brazil and Russia.
Not surprisingly, the Euro zone debt crisis continues to linger, and the situation in the Ukraine remains highly fluid.
An impressive January rally in gold, a shift from a spec and fund net short position to a net long in US Treasury Bonds and a dramatic downside extension in the Canadian Dollar on its monthly charts suggests that global economic sentiment is factoring in a fall back towards recession.
Global economic activity remains disappointing, but medicine in the form of another wave of central bank easing, cheaper energy prices and currency exchange windfalls for the weakest areas of the developed world are in place.
The US recovery has continued and Euro zone 3rd quarter growth has been slightly better than some expectations, but global economic sentiment is still not strong enough to temper bearish sentiment toward most commodity markets.
The recent market action appears to have been a capitulation event that has exaggerated global slowing fears.
Negative headline news has reached a fever pitch, seasonal commodity price pressure remains in place, adverse Dollar action dominates, and perhaps most importantly, the international economic outlook continues to deteriorate.
The tone of the global economy has deteriorated over the last month, and it has become apparent that portions of the Euro zone were much softer than expected during the second quarter.