I’m late to this item, which appeared in the Financial Times on Thursday, but according to Google News, was not reported elsewhere, so I thought it was still worth featuring.
The IMF warned that commodities prices include a speculative element as investors are treating it as a new asset class and a safe haven in a time of declining dollar.
One could cynically argue that the IMF is talking its book, since the rapid rise in commodities prices in the last two months is destabilizing. However, the sharp, across the board basic materials price declines in the wake of the Fed delivering a mere 75 basis point cut lends creedence to the IMF’s warning.
From the Financial Times:
The strength of commodities prices, such as crude oil, this year is explained in a large part by speculative factors such as investors piling into the new asset class and the weakness of the US dollar, the International Monetary Fund said on Thursday.
The warning came as commodities prices fell across the board, with oil prices dropping below the $100 a barrel level, gold prices tumbling 10 per cent from their recent record above $1,000 a troy ounce and sharp falls in base metals and grains…..
The IMF said that the constellation of dollar depreciation and falling short-term real interest rates “has pushed up commodity prices through a number of channels, including by enhancing the attractiveness of commodities as an alternative asset.”
“Overall, these financial factors seem to explain a large part of the increase in crude oil prices so far in 2008, as well as the rising prices of other commodities,” it said.
It added that as global economic growth is widely expected to decline this year and in 2009, “prices of most commodities should eventually start easing.” However, it added that “unless there is a substantial global downturn, however, the extent of easing may be small, given the current tight balances in some commodity markets.”
The IMF said that in all recent global downturns, commodity prices declined sharply, “suggesting a disconnect between commodity prices and the ongoing slowdown.”
However, it added that much of the apparent disconnect reflected the fact that developing countries, which have been responsible for the bulk of recent commodity demand growth, have so far been less affected by the slowing growth.
We have noted before that commodities prices are very much influenced by GDP growth in emerging markets. We expect they will slow down in the third or fourth quarter of this year, as the US slowdown take hold and starts to affect demand for imports.
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This post must go with this other story, http://www.ft.com/cms/s/0/265ef4b0-f61f-11dc-8d3d-000077b07658.html?nclick_check=1
“Global trade slowed almost to a standstill over the new year, threatening to shrink for the first time since the US economy went into recession in 2001.
An indicator produced by the Bureau for Economic Policy Analysis, a Dutch research institute, showed that in the three months to January world trade in goods rose at annualised rate of 0.2 per cent over the previous three months.
The equivalent growth rate in the three months to October was 6.9 per cent.”
Copper’s low was about 70c/pound at the beginning of this run 5-6 years ago. Take into account currency changes that puts it at say double, $1.40. That probably isn’t a sustainable price, but the $3.50 or/lb it is now is still a fairly strong price, meaning earnings are bloated…
Indeed, all the financial reports I’ve looked at for 4th quarter for base metals show that they took a killing. I seriously doubt the economy will allow prices to remain strong.
Yves,
What think of this:
The 2 year Treasury yield Thursday is @ 1.58% while the 3 year is @ 1.46%; a month ago. I don’t see anyone picking up on this!
Shortly after Katrina, the yield of the 2-year U.S. Treasury note was briefly and temporarily higher than the yield of 3-year Treasury.
Also see: Although many interest rate analysts prefer to study the 2 versus 5 year Treasury notes and the 5 versus the 10 year Treasury note comparative returns, there is much evidence that the shorter end of the yield curve is the more telling portion of the curve. This part of the interest rate spectrum appears to be the most useful in telegraphing the earliest warning signs of an impending downturn in the economy.
One more addition; just found this cool dynamic yield curve:
http://stockcharts.com/charts/YieldCurve.html
When you set up the animation, you can freeze the year around 2007/2008 and then increase the tail length to max, then slide the red bar back and forth to see the tail changes.
Seems obvious we have recession problems, but fun chart. It would be nice to be able to adjust the calender though!
Hate to be a pain, but also, look at 3 month treasury yield drop like a rock in this chart; very strange!
http://stockcharts.com/h-sc/ui?s=$UST3M&p=D&b=5&g=0&id=0
doc,
I never looked at 2 year vs. three yields, will keep an eye out.
doc,
The treasury discontinued the 3 year note a while ago. The 3 year quote you see probably has a lower duration than the 2 year. I would ignore it.
fullcarry,
n order to promote large, liquid sizes in its benchmark securities and in light of potential reduced borrowing needs in the near future, Director Ramanathan noted that one possible option would be to discontinue the 3-year note following the May 2007 auction. Director Ramanathan noted that current issuance sizes across bills and coupons may be approaching their lower limits. Discontinuing the 3-year note would promote liquidity in bills and other benchmark securities and eliminate the need for Treasury to resort to larger cuts across the curve which could impede market efficiency.
One member raised caveats including uncertainty about the Alternative Minimum Tax provisions, war expenditures, and cash outflows starting in 2008 and 2009. This member noted that if the fiscal situation becomes more pessimistic, the discontinuance of the 3-year note may put significant pressures on other instruments. This same member noted, however, that outlays remain below trend, and this might continue into the 2008 elections as Congress potentially remains in gridlock.
Re: May 2, 2007
HP-376
Minutes Of The Meeting Of The
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 1, 2007
Oh well, thet are still out there, but…
2 year yield = 1.5876
3 year yield = 1.7019
Nothing to see there.
“I think a temporary tax on speculative trading in commodities and energy futures needs to be implemented.”
Another bonehead idea from someone who doesn’t understand the value of liquidity.
Commodity futures are exchange traded, so unlike OTC markets, liquidity is not a major concern (except in very long dated futures, where the market is thin).
John Dizard has said that $1.5 billion is lost annual as commodities index investors roll their monthly contracts and large traders engage in what is known as “date rape”. That was as of a year ago; the numbers are no doubt bigger due to larger trading volumes.
Having said that, there is not neat way to separate speculators from investors. The simplest way to cut back on speculative froth is to raise margin requirements. If commodities resume their parabolic rise, this is just about certain to be implemented. The political pressure to do so would be enormous.
Cassandra had a funny post on that idea.