End of Commodities Supercycle In A New Era Of Global Monetary Easing

  • commoditieLast week the Dow Jones and S&P 500 reached new highs and the U.S. dollar strengthened versus the Japanese yen which came on the heels of  a strengthening U.S. job market and interest rate cuts from central banks across the globe.

The European Central Bank (ECB) cut interest rates to a record low last week to help revive a sluggish economy in the 17 member euro-area currency bloc that is still facing stubbornly high unemployment levels and governments from Athens to Madrid that are struggling to come to terms with demands for fiscal belt tightening and debt to GDP target dates that won’t be reached.

During the G-7 meeting on Saturday outside London, ECB President Mario Draghi acknowledged that major central banks did not face any new calls to do more to boost the world economy when Group of Seven (G-7) finance officials met.

“There wasn’t any call to do more,” Draghi announced to reporters after the meeting.

“It is quite clear that all central banks have done a lot, each one within its own mandate. So (the meeting) was just taking note of this … All of us have really been active” he added later.

Among the list of active central banks that have done a lot to provide monetary stimulus includes the Bank of Japan which has already signaled a commitment to support a doctrine of loose monetary policy to avert deflation and a further slowdown in their stagnant economy which is beset with weaker growth across parts of Asia, declining birth rates in Japanese society, and a costly Japanese pension system for their greying population.

This year alone the yen is down over 15 percent against the U.S. dollar and 30 percent since November 2012 while the Japan’s Nikkei has just reached a five year high.

On Friday the U.S. dollar hit a five year high versus the yen.

Economists and investors across the globe are keeping their eyes fixed on the U.S. Federal Reserve to watch for any signs that the Fed has future plans to reduce its own monetary stimulus program to keep the federal funds rate at zero to 0.25% and extend monthly purchases of $40 billion in mortgage backed securities and $45 billion in longer-term Treasury securities, as long as the jobless rate remains above 6.5% and inflation remains below the 2 percent target.

The Fed’s monetary policies, which were intended to create higher levels of household wealth and increased consumer spending, are now drifting in uncharted territory where controversy lurks behind each new landmark.

The  Fed has officially shed their old model of aligning the tapering of monetary stimulus to U.S. GDP targets.

The new litmus test for the Fed to taper their asset purchases is a 6.5 percent jobless rate which most economist don’t expect to occur for many more months even as the Fed expands its balance sheet to over 3 trillion amid some shouts in the distance from Fed hawks that the unwinding and exiting of those huge purchases will take many years and impact future inflation.

Despite the downside risks, the U.S. labor market is clearly in a cycle of improvement and the overall U.S. economy is recovering.

The U.S. unemployment level in April dropped to 7.5 percent, the lowest level since 2008.

The Department of Labor reported that 165,000 jobs were added to the U.S. economy in April, beating the consensus forecast of 140,000 after a revised 138,000 jobs gain for the month of March.

In April it was also reported that U.S. inflation rose to just 0.9 percent, the smallest increase since early 2012 and safely below the Fed’s inflation target of 2 percent.

During the depths of the Great Recession, the U.S. unemployment rate climbed to 10.2 percent in October 2009, reaching double digits for the first time in 26 years as equity markets plummeted.

Since 2008 U.S. equity markets have benefited handsomely from the Fed’s loose monetary policies to help spur hiring and economic growth through accommodative monetary easing.

In 2013 alone all three U.S. equity indices have surged to between 13 and 15 percent.

Investment strategists are expecting a sharp sell-off after the Fed begins to signal that they will taper their asset purchases of securities which may come as early as the end of 2013.

While U.S. equities have reached new heights as the overall U.S. economy improves, the commodity market has been heading in the opposite direction, showing that global demand is weaker than many had expected for 2013.

In 2013 copper is down -9.3 percent, oil is down -9.3 percent, and gold is down – 10.6 percent.

Some of the reasons for the commodity selloff  in 2013 includes slower global growth, an excess in supply, and a stronger U.S. dollar.

According to Edward Morse, Citi’s Global Head of Commodities Research, the recent breakdown of commodities from equity markets signals the end of the commodity super-cycle of the past decade.

In his 2nd quarter Commodities Market Update Morse wrote:

Citi expects 2013 to be a year in which the death bells ring for the commodity super cycle after its duly noted sunset, ushering in a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities and currencies.”

Morse continued, “It will be a period of focus on individual commodity ‘unicycles’ and new relations emerging between and among commodities and other asset classes from fixed income to foreign exchange to global stock markets.”

Morse expects a greater level of divergence in the performance of individual commodities.

For the next few years, each commodity looks more likely to be sitting on its individual supply/demand fundamentals than on more general factors affecting all of them. This means that…for some prices will rise while for others they will decline, and investors across commodities will be able to take advantage of alpha return strategies focusing on long versus short positions, other relative value relations across the commodity space as well as across time spreads, changes in momentum and volatility

Week Ahead

Unlike last week, the approaching week is expected to have more economic data for investors to digest, including some important information about retail sales.

Retail sales figures for April will be released.

Empire State Manufacturing and Philly Fed Index figures for May will be released.

The U.S. government will release April data on import prices, consumer prices and housing starts.

Some of the big corporations reporting earnings includes a basket of retailers including Wal-Mart, J.C. Penney, Nordstrom’s, Kohl’s, and Macy’s.

This week five regional Fed bank presidents are scheduled to speak.

Federal Reserve Chairman Ben Bernanke will make an address at Bard College at Simon’s Rock in
Massachusetts next Saturday.

** I am hoping to create an app for Schweitzfinance in the future although it will require some additional tech support and financial assistance. I can be contacted on Twitter (I barely use it ) and will soon establish a Facebook page where I can also be reached. Comments have been turned off here at Schweitzfinance due to the high level of spam I received. -Johnathan Schweitzer





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