What’s going on in the commodity markets?
After the Federal Reserve took charge in March of this year, commodity prices seemed to be on the rise.. And, they did rise through to the end of last week.
During this time period, the US stock market rose. Things seemed to be quite positive.
As reported in the above-cited post, the value of the US dollar declined.
The basic feeling was that the Federal Reserve actions were producing an asset price swing in commodities. Even Warren Buffet got in on the rise in gold prices.
But, this seemed to be bad news for the US dollar as this kind of a monetary policy was not conducive to a stronger value for the currency. In fact through the end of August, the value of the dollar against the euro declined by almost 11 percent since March.
The commodity market reversed itself toward the end of week.
The Bloomberg Commodity Index (BCOM) closed the day on Friday at 72.97.
The BCOM dropped the following three days and was opening on Thursday morning further down.
But, the price of oil was also down through the same time period as was the price of gold.
All three seemed to move in parallel with each other. There were similar general movements throughout the market.
It should also be noted that the US stock market followed in the same direction.
The direction of the dollar also reversed course. It had seemed as if all factors were pointing toward a continued decline in the value of the dollar through the end of the year. However, the trough for the week in the dollar came on Friday and the dollar’s value has risen since then.
No Further Government Spending Package
Analysts have suggested that the reaction in the markets was due to the fact that there would probably be no additional government spending package coming out of the US Congress before the presidential election takes place.
Meanwhile several officials at the Federal Reserve continue to call for further government stimulus.
It seems to me that some kind of additional fiscal stimulus might have been forthcoming but now with the fight over a supreme court nomination taking over center stage it appears to be much less likely that congress would have any time to give attention to the economic situation.
Thus, some of the stimulus that had been expected no longer exists.
US Dollar Strength
The interesting thing is that investors are apparently interpreting this failure to act on the part of the US Congress as something positive, something that calls for a stronger dollar.
The only argument that seems available to support this move to a stronger dollar is that investors are becoming to be more concerned about the fiscal deficits the government is amassing. Just this week the Congressional Budget Office came out with new projections for the deficit and they, to say the least, are mindboggling.
This argument seems to be the only one that is consistent, however, with falling commodity prices and a rising value to the dollar. And, it is consistent with the move over the past five months of rising commodity prices and a falling value to the dollar.
Investors still seem to believe that a strong dollar is important and will support the dollar when possible. This would imply that investors still would like to see the US government’s budget policy become more disciplined, fiscally.
The next six weeks or so is going to be dominated by the presidential election and the events surrounding the appointment of a new Supreme Court Judge. This is not going to be a pretty time.
It is not going to be a time when the politicians give any attention to fiscal prudence…and this will be the case from both sides.
And, regardless which side wins, the next president is going to have to spend some very serious time putting the United States budgeting process back together again.
The new projections relating to the debt imply, to me, that the election promises will be irrelevant because the budgetary concerns will be so great that whoever wins will have a massive job in getting the government budget under control. And, there is still the concern with Covid-19.
And, there is the concern with putting the US economy back together, again. It is going to be a new era and things are going to have to be done differently.
The Commodity Markets
The commodity markets, right now, are just an indicator of what is going on in the economy. I think we understand why commodity market prices took off in March through August. The performance here told us something about what investors were looking at.
I think the current move also gives us some further information on investor thinking.
But, things are going to be volatile over the next couple of months. If your investment strategy is groomed for movements… up and down…then I think you will be satisfied. If you like a little less change…well, you are just going to have to live with it.
It is still good for us to understand, as well as we can, what is going on and that is why we need to keep abreast of what markets are doing currently. But, look forward, be set for quite a ride.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.