The Daily Prophet: If You're Long Commodities, Our Condolences
It would be an understatement to say it was an ugly day for anything related to commodities. The Bloomberg Commodities Index tumbled 1.82 percent, its biggest drop since November. Energy markets, agriculture-related raw goods such as wheat and cattle, and metals such as copper, nickel and the iron ore used to make steel were all hit hard. Even gold dived. Economists like to say commodities are not the referendum on the global economy they once were, but it’s hard not to notice how closely the recent weakness tracks the drop in the Citi Economic Surprise Index, which measures the data that exceed forecasts relative to those that miss, to its lowest level since the start of the year.
OPEC HAS FAILED -- AGAIN
The oil rally following OPEC’s deal to curb supply has disappeared. Futures on both sides of the Atlantic dropped to their lowest since late November on growing signs that the group’s production cuts are failing to clear a surplus of crude, according to Bloomberg News' Mark Shenk. Oil stocks felt the pinch, with the S&P Oil & Gas Exploration and Production Index slumping as much as 4.9 percent Thursday to the lowest since August. "Evidence is mounting that the OPEC agreement, and the market’s reaction, were much ado about nothing," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. U.S. crude output has risen to the highest since August 2015 as shale drillers add rigs every week. In response, OPEC is likely to extend the 1.2 million barrel-a-day cut agreed to in November for six months, according to Nigerian Oil Minister Emmanuel Ibe Kachikwu. OPEC will meet May 25 in Vienna to make a decision. Russia is said to support prolonging the curbs, according to a government official.
COPPER, NICKEL AND IRON ORE TAKE A BATH
Copper posted the biggest two-day loss since 2015, as industrial metals plunged amid concern over demand in China and speculation that the Federal Reserve is intent on raising interest rates two more times this year. Demand concerns are mounting just as copper stockpiles tracked by the London Metal Exchange jumped 25 percent in two days, the most since March, signaling ample supplies, according to Bloomberg News' Susanne Barton and Mark Burton. The Bloomberg World Mining Index of equities fell for a fourth day as iron ore tumbled in Dalian and steel plummeted in Shanghai. Metals have come under pressure after data this week signaled a slowdown in China’s manufacturing, with the LMEX Index of six major metals tumbling 2.5 percent on Wednesday and a further 0.8 percent Thursday. Iron ore is in full-scale retreat, with futures in China plunging to end limit-down on investor concern about the outlook for demand in the world’s top user, fresh signs of burgeoning supply from Australia and the hostile backdrop of a broad-based sell-off in base metals, according to Bloomberg News' Martin Richie and Jasmine Ng. “Iron ore’s center of gravity is constantly moving lower,” said Zhao Chaoyue, an analyst at China Merchants Futures Co.
WILL THE DEFLATION TALK HEAT UP AGAIN?
The drop in commodities prices is leading bond traders to reduce their outlook for inflation. Breakeven rates on five-year inflation-protected bonds, or the inflation rate that traders see over the life of the securities, have fallen to their lowest levels since November. That's significant because it’s believed that rising inflation expectations were one key variable that allowed Fed policy makers to suggest in early March that they were ready to accelerate the pace of interest-rate increases, which they did on March 15. Although the Fed left rates unchanged Wednesday following its policy meeting, the central bank issued a statement that said “inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective.” The Fed may be looking backward, but the bond market looks forward.
EUROPE IS HOT!
One group that is all smiles is euro traders. The shared currency soared as National Front leaders are beginning to acknowledge that the euro skeptic Marine Le Pen may be headed for defeat in Sunday’s French presidential election after she failed to land the decisive blow in Wednesday’s television debate that she needed to overtake Emmanuel Macron, according to Bloomberg News' Helene Fouquet, Mark Deen and John Follain. The Bloomberg Euro Index jumped to its highest level since early November, and is up 3.26 percent from its closing low this year on April 14. It gained against all 30 major currencies tracked by Bloomberg. Scoring 40 percent in the runoff “would be an enormous victory,” the candidate’s niece and a fellow National Front lawmaker Marion Marechal-Le Pen, told website Boursorama Thursday. The optimism extended to European stocks and bonds, where French 10-year yields fell to within 42 basis points of German bund yields, down from about 75 basis points last month and the narrowest spread since December.
CAN ANYTHING STOP BITCOIN?
Those who say that you're never able to identify a bubble until after it bursts have never seen bitcoin. The digital currency keeps flying higher and no one seems to know exactly why. The price of one bitcoin surpassed $1,600 today for the first time, before easing back to $1,540 and bringing its gain since late March to more than 50 percent. A year ago it was traded for a little more than $400. In its short history Bitcoin has been known for rapid spikes followed by rapid descents. Its backers say the digital currency has become a haven along the lines of gold. That would make sense given the concerns about China and commodities, but gold has been tanking. Another explanation for the recent leg up has been the U.S. Securities and Exchange Commission's decision to review a ruling made on March 10 that blocked a proposal by the Winklevoss twins for a publicly traded fund based on the digital currency. Bloomberg Intelligence says that the SEC's approval of the first quadruple-leveraged ETFs on May 2 may provide hope to backers of bitcoin ETFs.
It seems as if whenever the Fed feels the economic data isn’t coming in as strong as it would like, whether it be sluggish growth or rates of inflation that are too low, it trots out the word “transitory” to describe the conditions. It has used that word a lot in recent years, including yesterday when the Federal Open Market Committee said after deciding leave interest rates unchanged that “the committee views the slowing in growth during the first quarter as likely to be transitory.” The April employment report to be released Friday will either ratify that statement or raise questions of whether the weakness is extending into the second quarter. The median estimate of economists surveyed by Bloomberg News is for an increase of 190,000 jobs last month, up from the disappointing 98,000 in March.
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