Commodities already down 20% in one month on recession fears

RIO DE JANEIRO, BRAZIL – Commodities, one of the most resilient sectors of the financial market this year, are now also being devastated by recession fears. A leading indicator of commodity prices has plummeted since reaching an all-time high just a month ago.

The Bloomberg Commodity Spot Index, which tracks 23 energy, metals, and crop futures contracts, has lost more than 20 percent after hitting a record high in June.

Prices for everything from copper to soybean oil sank, concerned that a stagnant economy would hurt demand. While commodity supplies remain tight, the pullback may provide welcome relief for consumers facing skyrocketing inflation.

Commodities had been advancing since the early days of the pandemic as massive government spending and ultra-low interest rates boosted demand while production was limited. Russia’s war in Ukraine further exacerbated the supply problems.

But sentiment has changed as fears grow that the Federal Reserve will not be able to tame the highest inflation in four decades without plunging the U.S. economy into recession.

A stronger dollar – which makes it more expensive to buy commodities priced in the U.S. currency – also weighs on global commodities traded in Chicago and New York.

Fund managers recently reduced their bets on higher prices to the lowest level in nearly two years.

Still, a recession is a “highly anticipatory concern,” and markets have “clearly overreacted” to bringing commodity prices back to pre-war levels, even as supplies of raw materials such as oil remain tight and vulnerable to disruptions, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pimco.

While the recent rise in energy and food costs has acted as a “very high tax” on consumption, demand should pick up again in the coming months and keep markets tight as China’s economy recovers, Sharenow said in an interview.

With information from Bloomberg