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Commodity prices hint at a possible dump on the horizon similar to 2008

Commodity prices hint at a possible dump on the horizon similar to 2008

On Tuesday, October 25, top bankers on Wall Street attended the Saudi Future Investment Initiative conference, where they sent a warning about the global economy, highlighting geopolitical tensions and interest rate hikes as the main culprits for an obscure economic future. 

Meanwhile, in the commodity markets, a sign of troubles ahead emerged, as the scenario last seen during the 2008 crisis is seemingly repeating itself. Namely, Bloomberg Intelligence’s Senior Commodity Strategist, Mike McGlone, took to Twitter on October 25 to warn of the correlation in the commodity markets with 2008.

“Commodity 2022 Performance Is Rhyming with 2008 – Commodity prices to Oct. 21 may be in the early stages of a typical dump that follows pumps akin to the peak in 1H. What’s different this time is the unprecedented spike in US money supply to the 2021 peak that’s plunging.”  

Bloomberg commodity spot index. Source: Twitter

Similar performance

Commodity prices seem to follow a similar trajectory to that which occurred in 2008, where the valuation was 1.6 times greater than its 40-month moving average, causing prices to drop. 

“We see parallels in the trajectory of commodity prices akin to 2008, the last time the Bloomberg Commodity Spot Index (BCOM) stretched to a similar 1.6x vs. its 40-month moving average as in 1H. The BCOM ended that year down about 30% after peaking up about 35%.”

McGlone concluded:

“The performance in 2022 has been unusually similar to 2008, albeit there are some differences. The crisis is global vs. US-centric during the financial crisis, and the Fed is tightening aggressively. The central bank started easing in September 2007. If commodities keep falling, it may be a top force to curtail central-bank restraint.”

Unclear future

It seems that the financial markets are headed into rough waters, where smooth sailing will no longer be an option for market participants. 

A crash in the commodity markets could spill over into other sectors, and with the rising interest rates, the outlook for stocks looks bleak at the moment. 

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