This analysis is by Bloomberg Intelligence Senior Macro Strategist Mike McGlone. It appeared first on the Bloomberg Terminal.
Rising elasticity, the unprecedented liquidity pump that’s dumping and a potential paradigm shift in Chinese demand all point to more declines in commodities in 2024. When prices spike akin to the peaks in 2022, supply often rises vs. demand. What’s different this time is that technology is advancing faster than ever, accelerating supply responses, and the stock market is carrying an inordinate burden in supporting commodities. China’s need for economic stimulus seems to confirm the path.
We have been early, but our bias is WTI crude oil, copper and corn are likely to return to enduring support pivots around $40 a barrel, $3 a pound and $4 a bushel in 2024 absent supply shocks. A primary force for lower prices may come if the US stock market stops going up. Gold is poised to remain a top commodity performer
It was almost two years ago when we started pointing out the propensity for commodities to return to enduring pivot levels following spikes akin to 2022, and 2024 may be fill-or-kill for the proposition. At the start of 2023, the US stock market was at an ample discount from record highs, which may underscore trickle-down deflation risks in 2024.
World-order shift and commodity-reversion room
The lowest Hang Seng Index (HSI) to S&P 500 (SPX) ratio since 1975 at the end of January may portend reversion potential and downside risks for commodity prices. In the process of retracing the rally to the 2022 peak, the Bloomberg Commodity Spot Index (BCOM) appears to have ample reason to continue in 2024 with China in decline. Sharp bounces from such depressed levels should be expected in the HSI/SPX ratio, but our graphic shows what could augur a paradigm shift in the world order, on the back of President Xi Jinping’s “unlimited friendship” with President Vladimir Putin in 2022.
Supply shocks are a top factor that might stop the BCOM from falling about 40% to its uptrend line since 2008, but it was the Russia-Ukraine war, potentially akin to Iraq-Kuwait in 1990 that put in the 2022 peak and unprecedented liquidity.
Commodities could get swallowed by the crocodile
The crocodile-jaw pattern of the rising US stock market vs. falling commodity prices may show a potential lose-lose for the BCOM. Deflating commodities are doing their part to help revive the global economy and encourage central banks to pivot. Upward trends in production-estimate revisions vs. downward for global economic growth could portend organic demand-pull forces as unlikely to buoy commodities, which leaves supply shocks as the main thing that might. Our graphic shows the downside room in the BCOM and a top force that may fuel it — some back-and-fill in the S&P 500 (SPX).
The need for US equities to lift all boats may be an inordinate burden. The 120-month BCOM-to-SPX correlation at about 0.45 vs. minus 0.10 at the start of the millennium shows the deflationary-domino risks if the US stock market declines.
Can the US stock market lift all boats?
The BCOM spot index was down about 10% on a one-year basis to Jan. 30, notably because it went up too much to the 2022 peak. That spike was for a good reason, but so may be the reciprocal reversion process, and this time it’s coming amid a potentially overdue hiccup common in rapidly growing emerging markets. China has fueled rising commodity prices and demand, notably since joining the World Trade Organization in 2001. What appears unsustainable in 2024 is commodities and US Treasury bonds at the bottom of our one-year scorecard with Bitcoin and the S&P 500 at the top.
The crypto is a leading indicator and has about a 3x beta to the stock index. Gold appears as a top candidate to keep advancing, particularly if the US follows deteriorating economic-growth leanings in Europe and China.
Stock discount gone, China stimulus dependence
A year ago, commodities were looking forward to recovery in China, and the S&P 500 was at about a 25% discount from its peak. Declining materials prices appear at risk of accelerating in 2024, notably due reversion risks in the record-setting US stock market and increasing dependence on stimulus from Beijing. This tilt is clear in our commodity dashboard showing precious metals on the top and grains, industrial metals and energy on the bottom. It makes sense that the most supply-elastic sector is the worst performing, and it typically takes prices to reach too cheap for bottoms to form.
In the three Cs — crude oil, copper and corn — the enduring pivot/mean levels are around $40 a barrel in WTI, $3 a pound in copper and $4 a bushel in corn. Gold may be transitioning what was $2,000-an-ounce resistance into support.
Bloomberg
Source link
