One of the most closely watched correlations with respect to global growth over the past few years has been the relationship between the Reuters CRB, copper and equity markets, with the performance of the CRB acting as a fairly accurate benchmark for growth in the global economy and as such demand for raw materials and performance in equity markets, particularly the FTSE100 which is heavily dominated by basic resource stocks and cyclical pro-growth indices like the DAX and S&P500.
It is therefore with some surprise to note that while equity markets have performed relatively well in 2012 it is with some surprise to note that the Reuters CRB and Copper has not, with demand for growth commodities lagging significantly behind equity market performance. This suggests that the effects of the large amounts of policy stimulus over the years is now starting to lose its effect as ultimately for any recovery to take hold, the demand for commodities and raw materials needs to translate into consumption.
Last week's Fed minutes in my opinion were notable for the fact that there appeared to be a growing acknowledgement that stimulus was starting to reach its effective limits as illustrated by the apparent splits on the committee with respect to the timing of a paring back of the current asset purchase program.
Last year the FTSE100 rose 6%, the DAX rose over 25% and the S&P500 rose 14%, while the Reuters CRB index is actually below the levels it opened 2012 while copper also gained 6%.
Gold, a little surprisingly given the amount of fiscal stimulus this year, only gained around 7 trading over $100 below its highs this year as the yellow metal has traded broadly sideways.
The risks remain to the downside for now given the lack of upside momentum since the October highs at $1,796.
The break below the support comes at the 200 day MA at $1,660 could well herald a move through $1,630 and could well see further losses towards the August 2012 lows at $1,585.
Any break here could well trigger further selling towards the lows last year at $1,528.
The performance of Copper this year has been somewhat perplexing given its close correlation to the growth cycle and its link to equity markets and the recent moves higher in stock markets on both sides of the Atlantic.
Even the publication of much more positive Chinese data hasn’t been enough to shake the copper price out of its recent sideways trading range with significant upside resistance above the $3.75 level.
The actions by the Fed to embark on further easing measures along with a pickup in Chinese economic numbers has helped pull Copper off its November lows, however with demand set to remain subdued across Europe next year, and US growth set to remain below trend, there does appear to be limited scope for further gains in the short term, even allowing for further easing measures.
A break through $3.80 could well see a return to the $4 mark, while a break below $3.45 could see a sell off back towards $3.25.
One of the big stories of 2012 continued from 2011 and surrounds the continued divergence between US WTI prices and Brent prices with US prices down over 10% last year, where lower costs here have no doubt helped the US economic recovery in that regard.
Brent prices on the other hand have had to contend with geo-political concerns in the Middle East, as well as supply problems caused by maintenance shutdowns in the North Sea.
As can be seen from the chart Brent prices are unchanged to slightly higher year on year, while US prices are over 10% lower.
That’s a big difference when looking at getting goods and services to market, and thus helps partly explain the slightly better performance of the US economy.
The differential between the two had remained until recently stubbornly above the $20 mark which to all intents and purposes should be unsustainable. Part of this can probably be attributed to the shale story in the US where we’ve seen widespread optimism about an oversupply problem in the coming years.
The outlook for global commodities is likely to remain uncertain in the next twelve months with low growth hampering demand especially in Europe, however food prices look set to continue their recent gains, fuelling inflationary pressures with corn, up 11% and wheat and soybeans up over 20%.
Coffee drinkers will be glad for small mercies with the price of that particular tipple down 35% on the year to date.