Commodity prices – on a knife’s edge

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The prices of industrial metals find themselves at crucial levels as indicated by the Economist Metals Price Index in U.S. dollar – the latest number is my estimate. The upward trend since the market bottomed in the first quarter of last year is currently being challenged.

Sources: I-Net Bridge; Plexus Asset Management.

The U.S. dollar prices of industrial metals are heavily influenced by the US$/euro exchange rate, but the drop in the Metals Index significantly outweighed that of the strength of the U.S. dollar. The drop in the Metals Index resulted in a break in the uptrend of the Index in euro.

Sources: I-Net Bridge; Plexus Asset Management.

The marked drop in metal prices, especially those of aluminium and nickel, was also echoed by very weak steel and stainless steel prices.

Sources: I-Net Bridge; Plexus Asset Management.

Sources: I-Net Bridge; Plexus Asset Management.

Bulk shipping rates such as the Baltic Dry Index are in a free fall, while Chinese containerised freight indices continue to head south, with downward momentum on the U.S. West Coast route accelerating.

Sources: I-Net Bridge; Plexus Asset Management.

Sources: chineseshipping.com; Plexus Asset Management.

In my view the decline in non-U.S. dollar metal prices together with declines in bulk and containerised shipping rates are proof of a sudden weakening of global demand. The manufacturing PMIs for November (to be released next week) are likely to disappoint on the downside. I am still very concerned about how markets will react when China’s non-manufacturing PMI is released by the end of next week. If the seasonal trend over the past two years holds true the number is likely to indicate contraction in China’s services sectors.

I therefore expect volatility to increase in most financial markets over the next two weeks. Regarding short-term market movements, a possible scenario is as follows.

Stronger markets:

•  U.S. dollar

•  Yen

•  Swiss franc

•  Mature-market bonds

Weaker markets:

•  Industrial metals

•  Silver

•  Platinum

•  Emerging-market equities

•  Mature-market equities

•  Commodity-related and emerging-market currencies

•  Euro

•  British pound

Neutral markets:

•  Gold bullion

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