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Fears of protectionism weigh on prices

The Fed’s decision to hike its target rate by 25bp and the announcement that the US was going to press ahead with a 25% tariff on imports of Chinese goods prompted a rally in the dollar, which in turn weighed on commodity prices. China has already said it will retaliate, notably with a 25% tariff on soybeans, which was a key factor in the 4% slump in their price this week. Softer Chinese activity data for May, released on Thursday, also worried investors, particularly in the industrial metals markets.
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More from Commodities

Commodities Update

The outlook for staple agricultural commodities

We think the prices of agricultural commodities will fall back in the coming months, but most will remain historically high owing to tight supply, concerns about future supply and high energy prices.

24 June 2022

Commodities Weekly Wrap

Non-energy prices only have so much more to fall

Most commodity prices fell this week as demand concerns picked up due to ongoing monetary policy tightening by major central banks. Speaking to the US Senate Banking Committee on Wednesday, Federal Reserve Chair Jerome Powell underlined his “strong commitment” to bringing current multi-decade high inflation back to target. A notable exception to this trend, however, was a rise in natural gas prices in Europe and Asia owing to fears that Russia could potentially further cut gas supply to Europe. If demand concerns intensify, further falls in commodity prices could be in store. However, we don’t think there is a great deal of room for prices to fall in the near term for a couple of reasons. First, energy prices will remain historically high due to supply constraints, putting a floor under other commodity prices. Second, stocks of many commodities, particularly industrial metals, are low, which will further underpin prices. And finally, China’s economy should recover somewhat in the second half of this year. Looking ahead, G7 leaders begin a three-day meeting on Sunday, during which they will discuss sanctions against Russia and how to support the long-term reconstruction of Ukraine. Any new sanctions coming out of that meeting could affect commodity prices. Data-wise, the EIA should get back to releasing weekly oil inventory data next Wednesday, after missing this week’s release due to technical reasons.

24 June 2022

Commodities Weekly Wrap

Supply concerns to dominate in gas markets

European natural gas prices surged this week on renewed supply concerns, as Russia once again cut gas supplies to Europe and the US Freeport LNG export facility closed for six months. The huge price move emphasises how volatile natural gas prices can be, particularly in the current environment when global supplies are tight. High volatility is likely to persist as news on gas flows develops but we’re forecasting the European natural gas price to remain high, ending the year at €120 per MWh. Meanwhile, the financial market backdrop has become less favourable for commodity prices. Global monetary tightening and concerns about global growth have hit risky assets like equities and non-energy commodities this week. Genuine supply concerns are keeping prices of certain commodities elevated, but there is the potential for large price falls if some of these fears ease or prove unfounded. Next week, we don’t think there is much chance of a cut to China’s Loan Prime Rate, to be announced on Monday and the published agenda for the National People’s Congress Standing Committee doesn’t indicate that any extra financing for fiscal support will be discussed. Without significant stimulus, we think that soft demand from China will weigh on industrial metals prices this year.

17 June 2022

More from Capital Economics Economist

US Economics Weekly

Stronger growth not generating major imbalances

After the Fed’s decision to raise interest rates by another 25bp, Fed Chair Jerome Powell claimed in the post-meeting press conference that “the economy is doing very well” – we couldn’t agree more. That view was bolstered by May’s retail sales figures, which suggested that both consumption and GDP growth will rebound strongly in the second quarter, to above 4% annualised. The Fed’s financial account data, released last Friday, illustrate that the economic expansion is not being accompanied by a sharp rise in private sector debt. Rising household wealth is prompting households to save less of their incomes and firms have plenty of resources to fund investment, not least thanks to the 2017 tax reform. The main vulnerability is a renewed surge in Federal debt, but even that wasn’t as bad as it looked, because it was boosted by the suspension of the debt ceiling and partly matched by a rise in assets held in the Treasury account at the Fed.

15 June 2018

Canada Economics Weekly

Household debt will remain a risk for years to come

The news earlier this week that household debt had edged down to 168.0% of disposable incomes in the first quarter, from 169.7% in the final quarter of last year, was greeted by some as confirmation that the Bank of Canada had somehow engineered a soft landing in the housing market. It hasn’t. Debt usually surges in the fourth quarter ahead of the Holiday season and falls back in the first quarter, as people pay down their credit cards. Moreover, by focusing on debt exclusively, those commentators also conveniently failed to note that overall household net worth declined to a two-year low of 857% of disposable income.

15 June 2018

China Economics Focus

Headwinds mount

A trade spat with the US is one of a number of headwinds facing China’s economy over the coming year. They point to a slowdown not a slump. But the outlook further ahead is no better. Policymakers’ reluctance to allow market forces to determine economic outcomes is eroding the advantages that have kept China an economic outperformer for so long. China’s average growth over the coming decade is likely to be much weaker as a result.

15 June 2018
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