The third quarter of 2011 has turned out to be grim for most markets. The FTSE 100 had its worst quarter since the dotcom bubble deflated in 2002, losing more than 14%. American stocks have fallen nearly 20% from their 2011 peak – so they’re close to official bear-market territory. And commodities have joined the rout. The Standard & Poor’s GSCI Index of 24 raw materials has slumped to a ten-month low. It’s down 22% since its near-three-year high in April. Copper has slid to a 14-month low.
The latest grim news has included the worst slide in German retail sales in four years and the Economic Cycle Research Institute’s US recession call. The global manufacturing downturn continues, with the sector currently shrinking in Europe and China and slowing in Asia. The global manufacturing PMI, an index tracking the sector’s health on a worldwide basis, fell just below 50 in September, signalling a contraction. What’s more, the new orders sub-index of the global PMI, the most forward-looking, fell furthest, notes Capital Economics.
For investors in raw materials, the worry is that “another demand-sapping global economic crisis may be at hand”, say Javier Blas and Jack Farchy in the FT. Demand certainly appears to be falling away in the oil market, says Commerzbank’s Eugen Weinberg. US oil demand fell by 4% year-on-year in July, according to the US Energy Information Administration. Petrol demand fell to the lowest July level in 11 years.
Data provider Platts recently estimated that Chinese oil demand hit a ten-month low in August, while China’s apparent slowdown also bodes ill for base metals, where China is the main driver of demand. Emerging economies are slowing and some of them, including China, “have less room to repeat their 2008-2009 stimulus because of the debts that splurge left behind”, says The Economist. So the “cushion emerging markets provide” to global growth, and hence to commodities demand, is getting “thinner”.
Thus while the supply of some metals looks constrained, the prospect of fading demand is likely to keep worrying commodities markets, especially while Europe’s debt crisis drags on, fuelling fears of a banking crisis. Markets will “be held hostage by growth concerns for the rest of this year”, reckon HSBC analysts. They suggest reducing exposure to metals and oil – and buying more gold.