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WHAT ARE COMMODITIES TELLING US?

February 8, 2013

Since mid-2011, the euro area crisis dominated trends in many commodity prices that are usually far more responsive to China, U.S. dollar developments, and supply trends. The concern is that a breakup of the euro would do major harm to the global economy and, consequently, commodity demand.
-Mark Luschini, chief investment strategist, Janney 

Since mid-2011, the euro area crisis dominated trends in many commodity prices that are usually far more responsive to China, U.S. dollar developments, and supply trends. The concern is that a breakup of the euro would do major harm to the global economy and, consequently, commodity demand. However, there appears to have been a structural downshift in the risk of a currency union breakup after the ECB policy shift under Draghi. And even though Europe’s adjustment is far from over, structural imbalances within the euro area are slowly correcting (Europe’s exports have risen steadily while imports have stagnated). Germany, the key driving force of Europe’s economy, appears to have passed the worst. Importantly, the obsession with “austerity to fix the problem” has moderated (a positive for Italy and Spain). In summary, Europe should experience a sluggish recovery this year and this will allow commodities to return to their traditional correlation with the dollar, China, and supply trends. As a result, commodities are in a position to benefit from generous global monetary conditions and a firmer Chinese economy.

 

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