A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
I still believe, like former U.S. Treasury Department economist and hedge fund manager Mark Dow, that weakness in commodity markets is caused by the unwinding of a decade-long, credit-driven expansion and that resource prices are not headed back to post-crisis highs for a number of years.
That said, in the energy space there are subjective signs of capitulation that support the notion of a short term bounce higher. In sum, traders, analysts and strategists have given up trying to find the bottom in the crude price, as Reuters reports:
"Time and again in recent months, traders have sought to identify levels that might mark a bottom, or bet that the Organization of the Petroleum Exporting Countries' resolve to do nothing would eventually crumble, forcing supply curbs.
But with no sign of the cartel bending, each pause has been followed by a new wave of selling. Most traders now appear to have either given up, or are riding the frenzy lower."
Global research houses have also thrown up their hands.
"'It's pointless to speak about the point of reversal,' Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, wrote in an e-mail Jan. 5. 'It's unpredictable and fundamentally not identifiable.'"
With buyers out of the market, the odds that energy markets are "washed out," or soon will be, are paradoxically higher.
"With oil freefall unrelenting, traders quit betting on bottom" – Reuters
"Oil holds gains after rebound spurred by drop in U.S. stockpiles" – Bloomberg
See also: "Understanding the plunge in oil prices: Sources and implications" – World Bank
China was the primary driver of the commodity supercycle but the emergence of the resource sector as a viable asset class for major pension fund allocations was also a big tailwind. The theory was based on an important paper by academics Gary Gorton and Geert Rouwenhorst published in 2004.
Reuters' columnist John Kemp proves that hindsight is 20/20 as he discusses what went wrong with the commodities-as-asset-class trend.
"The real problem has come from the roll yield, or more precisely the idea that the price of a basket of commodity futures contracts should tend to rise over time to compensate investors for assuming price risk from commodity producers… So what changed between 1959-2004 and 2004-2014? The most obvious answer is that it was the popularity of commodities as an asset class, and the influx of new investment as a result, which transformed the way futures prices behaved."
"Facts and fantasies about commodities (revisited)" – Kemp, Reuters
The Financial Times published a brilliantly concise update on the major trends in global commodity markets. These trends include the usual suspects – China, OPEC and U.S. shale production – and also this interesting tidbit regarding a shrinking surplus in copper markets:
"The closure of Chinese smelters and the slower-than-expected ramp-up of new mining capacity forced analysts to pare back copper surplus forecasts in 2014. And they could be taking the red pen to forecasts again if demand in China picks up."
"Ten things to watch in commodities in 2015" – Financial Times (subscription may be required)
Tweet of the Day indicated panic buying in the global bond market: "@barnejek The market is showing signs of "I hated those bonds at X per cent but give me all you got and some more at X/2 per cent/"
Diversion: New York Times columnist Leon Wieseltier discusses the huge, ongoing technology-based disruption in music, movies and broader media. Mr. Wieseltier is talking his book, clearly, but I still found the essay highly worthwhile.
"Among the disrupted" – New York Times
Follow Scott Barlow on Twitter @SBarlow_ROB
Scott Barlow