Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
What Is the Commodities Complex Telling Us About the Global Economy?
What a volatile week this has been in the commodities complex. With the exception of safe-haven gold and an extreme tightening of the supply/demand balance in palladium, the selling in commodities and related stocks was relentless. Crude ended the week down 8 percent, and “Doctor Copper” had the worst week since mid 2018. Nickel closed the week at the lowest levels since the middle of last year.
Much of the narrative in the media was around the outbreak of the highly contagious coronavirus (nCoV) in China, and concern that the spread of the disease across China and other regions could hamper global growth and impact commodity demand. As of this writing, the death toll in China has reached 25 people. Although an exact count is not entirely known, there are over 500 confirmed cases of the disease in China, and it is believed that the number of infected people is in the many, many hundreds. It is true that a quarantine such as the one we are seeing in China is unprecedented in the modern era, and transportation across many provinces in that country have ground to a halt. This has brought about a sharp bout of risk-off sentiment after many weeks of complete euphoria in the broader markets.
Oil has had an impressive several weeks before this one, and CFTC crude speculative long positions have been elevated coming into this week given concerns around supply disruptions, putting an end to the fledgling rally. Even a modest positive inventory surprise could not compete with the black swan of a possible deadly pandemic, and this proved a recipe for a fairly violent sell-off. Copper also saw a confluence of headwinds as LME stockpiles grew, and that metal hit a 6-week low. The timing was a particular challenge as the Lunar New Year tends to be a quiet time in the industrial metals markets in China. Iron ore and metallurgical coals also sold off on concerns around delays in construction activity and the possibility of growing stockpiles as a result. Even in the strong lumber markets, which have seen significant momentum on low stockpiles and market tightness, we began to hear rumblings of a possible slowing in demand.
We do not wish to minimize the situation in China. However, panics such as these have a history of being somewhat short-lived as it pertains to their impact on the overall capital markets and the global economy. Thus far, the somewhat comparable SARS disease from 2002-2003 was a far more deadly virus in terms of lost lives as SARS reached 26 countries and infected 8,000 people. We remain hopeful that a true pandemic will ultimately prove to be unlikely and can be averted. We note that the policy response is much more aggressive than in the case of SARS, and perhaps this will serve to contain the spread of the disease quickly. The actual SARS impact on the global economy was estimated to be $40-60 billion dollars[1] in a global economy of $38.9 trillion at that time[2], or about .10 percent to .18 percent of global GDP. The current market has gone up so sharply in such a short period of time, it is reasonable to think that at least some of the sell-off we are seeing is digesting the incredible gains and making a healthy correction in an extremely overbought, liquidity-driven market environment rather than an extended risk-off move due to the coronavirus outbreak.
Best Regards,
David McAlvany
Chief Executive Officer
MWM LLC
