Commodity prices are down, and the question is, are they accurately predicting a downturn in the economy, or reflecting irrational fears of a slowdown? Ira Iosebashvili writes in The Wall Street Journal:
Many key commodities are on track to notch declines this year, underlining how fears of slowing growth, global-trade tensions and a persistently strong dollar have hammered prices for raw materials.
The Bloomberg Commodity Index is down by more than 6% this year, led by a nearly 13% fall in oil prices. Other raw materials are also headed lower: Copper is off almost 16% this year, while iron ore has lost nearly 6%. Gold prices have declined by around 5%, and lumber is down by almost 28%.
Those slumps have come as investors pulled just over $11 billion from commodity-focused funds over the last six months, according to fund tracker EPFR Global. Net bullish bets by hedge funds and other speculative investors on oil prices stand at their lowest level since August 2016, data from the Commodity Futures Trading Commission showed.
Driving the declines are fears that trade tensions between the U.S. and China will hit global growth at a time when expansion outside of the U.S. is already lackluster. Investors worry that slowing growth would likely dent demand for commodities, which are used extensively in manufacturing and construction. A composite index of global manufacturing activity produced by J.P. Morgan and IHS Markit stood at a 23-month low in November.
Those concerns might not dissipate soon. China, a top consumer of many raw materials, may be limited in the range of economic stimulus measures it can deliver after months of fighting to rid its economy of excess leverage, analysts said. The eurozone’s economy notched its weakest quarterly growth since early 2013 in the three months through September, and some investors are concerned that U.S. growth—a standout among major economies—may have peaked.
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