Even commodity futures are not safe from the fears of inflation plaguing global markets. Oil fell 7%, coffee had its biggest loss in two months, while corn and copper also plummeted.
New concerns that the Federal Reserve will let inflation accelerate have generated a liquidation of most risky assets on Thursday. US stocks fell from the books and Treasury yields increased. These movements have spread to commodities, with physical demand strongly linked to global growth expectations.
Still, it was a bit of a paradox for commodities. Markets can sometimes benefit from an inflationary environment, as investors think of raw materials as a good place to find produce. But the inflation equation needs to be correct: a lot, especially if it is associated with concerns about economic growth and a higher dollar, and rising inflation quickly becomes an obstacle amid deflated demand expectations.
Commodities had a supercharged at the beginning of the year that saw crude oil rise more than 30% by Wednesday. Corn, soybeans and copper reached multi-the year’s highs and timber prices have skyrocketed. The Bulls took over such a command that some traders were gearing up for a new extended earnings super cycle.
The reason why commodities continue to grow? They are a home to surrender
That enthusiasm was halted this week, as the slow release of vaccines has raised concerns about how long it will take for energy, metals and grains to return to pre-pandemic levels. This was compounded by the dollar’s gains, which make commodities with dollar prices less attractive as a store of value.
“Treasury yields and the dollar are responding to the Fed, and this is currently having a negative impact on commodities,” said Arlan Suderman, chief commodity economist at StoneX, in an email.
The Bloomberg Commodity Spot Index fell 2.4%, the biggest drop since mid-September.
West Texas Intermediate oil futures fell for the fifth session, the longest period of daily losses in more than a year. Global oil demand will not return to pre-pandemic levels until 2023, and growth will be contained thereafter amid new work habits and a shift in fossil fuel use, the International Energy Agency said this week.
Grain prices have also fallen. There are signs of improvement in cultivation conditions for some agricultural producers. Beneficial rains for soybeans in Argentina weighed heavily on the market, while favorable weather in the US, Russia and Ukraine put pressure on wheat prices.
Meanwhile, gains from Treasury yields have hampered demand for alternative interest-free assets such as gold and silver.