WCU: Tight supply battles recession risks across key commodities

The commodity sector traded lower by around 7% in September with the weakness being driven by growth dependent sectors, like energy and industrial metals, in response to a deteriorating outlook for global growth. This deterioration was led by China’s weakness, due to prolonged lockdowns, and Europe remaining embroiled in a historic energy crisis. Adding to this, we have witnessed a month of turmoil across financial markets driven by a surging dollar and traders sending bond yields sharply higher in anticipation of further rate hikes from central banks, led by the US Federal Reserve.

The Fed hiking into strength forcing other central banks to hike rates into weakness

With the dollar’s real effective exchange at its strongest level since 1986 and with the yield on US Treasuries surging higher, the impact on global bond markets is clear as yields rise and currencies slumping – thereby creating a level of heightened instability in countries from the United Kingdom and within the European Union to China and emerging markets where rates are being hiked (although local conditions are much weaker).

All developments that are rapidly driving us towards peak hawkishness in the US, from where the dollar and yields will plateau before heading lower again. However, whether something breaks before the FOMC changes its tone remains to be seen but the risk to financial stability, as seen in the UK this past week, is real and one that may impact the outlook for several commodities, especially investment metals such as gold and silver.