Markets reflect their economic and geopolitical contexts. As we head into 2022’s final four months, many factors indicate an increase in market volatility. The recent price corrections in the commodities asset class could be temporary as supply-side inflation caused by geopolitical turmoil remains a clear and present economic danger.
First, a look at the markets. Energy commodities remain at multi-year highs. NYMEX crude oil pulled back from over the $130 per barrel level in March to $93 per barrel. Coal and ethanol prices have pulled back from the 2022 highs. The volatile natural gas futures market flirted with the $10 per MMBtu level on the nearby futures contract during the week of August 22. As of August 25, the XLE, oil and gas ETF, was 49.3% higher in 2022, even though the S&P 500 has declined by 14.9%.
Meanwhile, agricultural products are at elevated price levels. Nearby CBOT wheat futures traded to over $14 per bushel in 2022 and have pulled back to the $8 level. Nearby CBOT soybean futures reached the highest price since 2012 at over $17 per bushel this year and pulled back to $14.60. Nearby CBOT corn futures moved to over $8 per bushel in 2022 and were at over the $6.60 level on August 25. On August 25, shares in ADM and BG were 32.5% and 9.6% higher in 2022, respectively, despite the decline in the S&P 500 index.
As volatility continues, buying during corrections, establishing new long positions, or adding to existing risk positions, could be the optimal approach for the coming months.The Chart XLE - $91.24 1.87 (2.008%) , Chart PICK - $46.95 0.70 (1.469%) ETF, and companies like Chart ADM - $83.62 1.28 (1.508%) and Chart BG - $97.58 2.17 (2.175%) will likely continue to benefit from the economic and geopolitical landscapes. Here’s why:
Reason 1: Geopolitics impacts the supply-side
- The war in Ukraine is creating shortages in energy and agricultural markets.
- China is the world’s leading commodity producer and consumer.
- Deteriorating relations between China/Russia and the US/Europe interfere with commodity supply and demand fundamentals.
- Supply-side economic issues created by geopolitical tensions can have immunity to monetary policies.
Reason 2: Inflation is a challenging beast and the Fed faces conflicting pressures
- The July CPI, PPI, and PCE came in slightly lower than the June levels and the market’s expectations.
- The inflation barometers remain at the highest level in four decades.
- Q2 US GDP data was the second consecutive decline in economic growth, the textbook definition of a recession.
- The world’s central banks are battling inflation and an economic slowdown, requiring different mutually exclusive approaches, and creating uncertainty in markets across all asset classes.
Reason 3: Bull market trends since 2020 remain intact
- Commodities have been in a bullish trend since the 2020 lows.
- Commodity producers are profiting from prices at multi-year highs despite rising production costs.
- Energy and food commodities are weapons in an economic war between China/Russia and the US/Europe.