"Inflation" and "recession" have become such dominant themes in global consumer and investment markets that it would seem dangerous to even remind that tides do turn, don't they? Just months ago, there were riots over high food prices right across the world, while at the same time, governments in resource rich counties remained silent as tax revenues from soaring energy and minerals prices went through the roof.
In mid-May, ever-perceptive global equity markets indicated that commodity prices of practically all kinds were going to soon hit choke points, and then decline. Since then, listed global resources stocks have been savaged to an extent that is difficult to overstate. Since mid-May, the world's biggest 20 listed mining stocks have surrendered USD 600bn in market value; the top 20 listed oil stocks have seen USD 871bn of market value disappear into thin air.
The short history available suggests that crude oil prices hit a choke point in mid-July, after almost touching USD 150 a barrel. Since then, the price has been flirting with the USD 120 a barrel mark. In recent research looking at the very big picture, the Bank Credit Analyst asks whether a prolonged correction is now underway in commodity prices. The answer, in a nutshell, from BCA Research, is that global growth is downshifting and the cyclical economic backdrop is no longer supportive of further commodity price gains.
This is good news, even for producers of commodities. Soaring prices for, say, iron ore may be fantastic news for investors in listed producers, but the realization that mines (and oil rigs) also use steel (and many other commodities) has been given belated recognition by battered investors.
For BCA Research, the bottom line is that commodity prices are set to correct further, "and the inflation scare should retreat along with expectations for rate hikes". If this is correct, the implications for consumer sentiment, and investment markets of all kinds, will be profound. Commodity prices in general have been on an upward trajectory since early 2002, characterised since then by both a dollar bear market and China's voracious appetite for raw materials of all kinds.
If commodities in general are now into a bear market, investors will need to do far more homework than before. For one thing, inflation appears to have been misunderstood, or, at least, oversimplified. According to BCA Research, as commodity prices continue to correct, "it should become clear that prior price increases have not filtered into a generalized inflation upturn, and consumer prices remain under control (at least in developed countries)".
Translating this into government actions on policy interest rates, cuts can now be anticipated, or at least a neutral to dovish outlook. That, in turn, should go one step further to thawing credit markets, which remain frozen in practically all leading capital markets of the world.
On the flip side, the global economy remains fundamentally weak. BCA Research notes that its proprietary Leading Economic Indicator (LEI) for the G7, the world's biggest economies, "shows no signs that weakness is approaching an end and the emerging Asia LEI is warning of a cooling in the rapidly growing developing world, led by a softening in the Chinese economy".
BCA Research comments that this weaker growth outlook, along with reductions in energy subsidies, and an essentially rearguard tightening in interest rate policy by several emerging market central banks (because of inflation concerns related to the commodity boom) will only reinforce the tendency for commodity demand growth to slow. Mixing the good and the bad news, it seems that commodity prices are due for a period of continued weakness.