Thursday, September 25, 2014

"Falling commodity prices flash warning on widening global divergences"

The thing I don't get about some commodity "specialists" is why they can't make money in down markets.
I mean you can trade from either side but for some reason the mean-reverting nature of commodity prices seems to challenge some folks who really should know better.
From the Financial Times:

Price slide reveals mounting concern about China.
Global gloom-mongers have something new to worry about – falling commodity prices. The closely watched Bloomberg Commodity index, which tracks 20 commodity prices, has dropped this week to a fresh four-year low.
Tumbling prices for metals, oil and agricultural products fit with a narrative of a slowing China and of growth spluttering in advanced economies, despite exceptional levels of central bank support. It is hard, however, to find anyone in equity, bond or currency markets getting seriously concerned – yet. If anything, the opposite is the case.

Of course, falling commodity prices should feed through into higher real incomes and thus boost economic growth prospects. What matters as much, however, is the effect on inflation gauges watched by central banks. Falling commodity prices have this week helped push lower expectations about inflation rates to be priced into bond and swap markets.

That increases the chances of central bank interest rates remaining at historic lows for even longer – in turn, supporting elevated bond and equity prices. As one analyst puts it: “Asset reflation is here to stay.” (Readers are forgiven for feeling confused at this point: it was not so long ago that central banks were criticised for driving commodity prices higher.)

Another reason suggested for ignoring the most recent falls in commodity prices is that they result from an exceptional confluence of unrelated factors that is unlikely to last. Grain prices have fallen on bumper harvests – which are entirely unrelated to worries about credit bubbles in China which have hit metals. Oil prices fell as tensions in the Middle East and over Ukraine failed to hit production, as well as on demand concerns. 

But the general price falls are flashing warning signs. They highlight widening faultlines between the world’s biggest economic regions. Such divergences are already driving currency and bond markets – and could become a bigger feature as quantitative easing by the US Federal Reserve ends next month. ...MORE