Tuesday, July 7, 2015

Commodities: Commotions Across the Oceans (excerpt)

The latest Greek crisis in the Eurozone and the wild roller coaster ride in Chinese stock prices are boosting the US dollar and unsettling commodity markets. In addition, a possible deal with Iran over its nuclear program is depressing the price of oil, which is also boosting the US dollar, which is also weighing on other commodity prices. Consider the following:

(1) CRB industrials & gold. Interestingly, the commotions across the oceans have failed to lift the price of gold. Previously, I’ve observed that the price of gold tends to follow the underlying trend in the CRB raw industrials spot price index. The latter fell to a new cyclical low last Thursday, led by its metals component. Copper, tin, and zinc prices have been particularly weak lately.

(2) The dollar and commodity prices. The CRB raw industrials spot index is highly correlated with the inverse of the JP Morgan trade-weighted dollar. Among the weakest currencies currently are the commodity-related ones, including the Australian and Canadian dollars.

(3) The price of oil. An even higher correlation is between the price of a barrel of Brent crude oil and the inverse of the trade-weighted dollar. I still believe that the price of oil is likely to be range bound between $47 and $68. Right now, it seems to be heading from the top of that range towards the bottom. Helping to push it down is the ongoing ascent in US oil field production to 9.6mbd during the last week of June. In addition, there was a small uptick in US petroleum stocks of crude oil during the last week of June. That was the first increase in nine weeks. However, it is still 21% ahead of last year’s comparable week.

(4) The meaning of life. What does it all mean? Investors may be starting to fret that the Greek crisis and the Chinese stock market roller coaster ride could weaken global economic growth. It is a legitimate concern.

Today's Morning Briefing: Pass the Ouzo. (1) Greek in one lesson. (2) Ouzo is good pain medicine. (3) First two Greek bailouts were comparable to QE. (4) Weinberg’s Lehman-style scenario for Greece. (5) ECB could make pain in the periphery go away with more QE. (6) Scams as a way of life. (7) Is paying taxes really austerity? (8) Strengthening dollar is depressing commodity prices including oil prices, which is strengthening the dollar, again. (9) The commotions across the oceans in Eurozone and China raising risk of weaker global growth. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

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