Taking stock of the slide in commodities

LONDON: Don’t be fooled by the relative calm across financial markets: the inputs in the global supply chain are flashing warning signs.

Commodities have approached correction territory, under pressure from a resurgent dollar and global trade tensions. Among recent milestones: copper dipped below $6,000 a tonne, West Texas Intermediate crude tested $70 a barrel, and gold crashed through $1,220 an ounce.

The metal moves, in particular, are the key. Prices in the sector can be used to predict the pace of global growth before other measures, like business surveys or trade data, even become available. They would have presaged the upturn that few analysts saw in early 2016, for instance, according to Bank of England economist Tom Wise.

“Metals prices are timely, highly correlated with world economic activity and perform well at predicting short-term movements in GDP,” Wise wrote on the central bank’s blog. “Consumption moves very closely with GDP.”

As the drop in the Bloomberg Commodity Index nears 10% from its three-year peak, the moves are showing up in equity markets, with miners the worst performers in the Stoxx Europe 600 Index.

Miners’ exposure is predictable, but the dependence is growing. A 10% move in the LMEX Index of six base metals corresponded to a 7% move in the Stoxx Europe 600 Basic Resources sub-index in the past year — more than during the preceding decade.

The weakness in material prices is spilling over into the currencies of producer nations. Almost all of the 22 raw materials comprising the Bloomberg Commodity Index have fallen since the May peak. Copper, often used as bellwether for the global economy due to its wide-ranging industrial applications, fell 18% in the period.

The same picture is seen in emerging-market currencies, where 21 out of 24 tracked by Bloomberg declined. The biggest losers included South Africa, a producer of base and precious metals and coal; Brazil, which exports iron ore, agricultural and petroleum products; Chile, a major copper producer; and Russia, which relies on natural gas, metals and other commodity exports.

In a vicious circle, both the currencies of producer nations and commodities face not only the threat of a protectionist-driven slowdown, but also the strengthening US dollar. The greenback is getting a lift from the trade dispute, as American growth remains robust and investors switch into US assets.

In any case, the pass-through of commodity prices to other markets is not straightforward because raw materials have a dual role as an input cost as well as a barometer of demand. When prices fall it can feed into the real economy, working against inflation and potentially resulting in easier monetary policy — which could ultimately help spur financial assets.