Commodity Prices Fall on Demand Concerns
Commodities saw the biggest declines of the month after economic data out of the US showed that labor markets remain weak and this is helping to generate analyst expectations that this will weigh on consumer demand. Continued debt concerns in Europe are adding to this pressure on materials prices and this is leading energy and metals prices lower for the biggest drop since June 21st and this is being reflected in the S&P GSCI Index (which tracks the prices of 24 different raw materials prices), which is registering declines of nearly 2.5 percent.
When looking at this space, Gold and Oil prices tend to get most of the attention and these commodities are getting an even greater level of attention given that values dropped through key psychological levels during the week. Oil is now seen firmly below the $85 per barrel region while Gold has seen three consecutive failures at the 1630 area and are now trading just above 1580. But the declines in commodities were widespread, with many industrial metals (such as copper, lead and aluminum) showing similar moves.
Economic Data Creates Demand Concerns
Most of the commodities volatility last week was created by economic data that was released in the US last Friday. US employers hired only 80,000 workers during the month of June and with the negative trends that are being seen in the labor markets growth forecasts globally are being revised lower. Weakness in manufacturing data is contributing to these trends, as production decreases continue to be seen in both emerging markets and developed markets.
The sum effect of these events has been losses in commodities and equity markets and increases in bond yields in debt-laden Eurozone nations. The 10 year treasury bond in Sprain rose to 7 percent last week and the US Dollar reached new highs for the month. Since commodities are priced in US Dollars, this created a dragging effect that built on the losses for the year. Coffee, Oil, and Cotton are seeing the biggest declines, but the GSCI Index as a whole is lower by 6.2 percent so far this year, so the effects are clearly widespread at this stage.
The one area of the commodities sector that has managed to post gains recently was seen in grains, as a heatwave in the US is seen limiting supply and is driving up prices. As temperatures rose, wheat, soybean, and corn prices followed suit but this was not enough to produce gains for the commodities space as a whole.
Gold is heading lower after its latest failure at the 1630 double top. As long as this resistance level remains intact, the bias remains to the downside, with the next target seen at 1530. A break here will accelerate losses, as support below this region is extremely thin and long term indicators are beginning to show downside momentum within a massive uptrend. At this stage, selling rallies is the preferred strategy.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.