What’s Going On Here?The Chinese government announced over the weekend that they’re doing all they can to make commodities’ recent hot streak fizzle out. What Does This Mean?Between strong demand on the back of the global economic recovery and supply issues on the back of that strong demand, commodity prices have hit their highest levels in almost a decade. And that’s not cool with China, which is by far the biggest consumer of raw materials in the world.
The government, then, is in damage control mode. It summoned the top execs from the country’s metal producers to a meeting on Sunday, and made three demands of them: no colluding with one another to manipulate prices, no spreading misinformation about levels of supply and demand, and no hoarding materials to drive up prices. Investors, at least, got the message loud and clear: prices of commodities including iron ore, aluminium, and steel initially dropped on Monday. Why Should I Care?The bigger picture: Who isn’t afraid of inflation?
There’s a reason China’s so nervous. If the prices of commodities climb too high, it’ll push up manufacturers’ costs and, in turn, encourage them to charge customers more for the finished products. That climb in prices – i.e. inflation – could put customers off spending their money, which would be bad news for economic activity and, in the longer term, China’s economic growth.
For markets: Long live the underdog.
Commodity prices might be surging, but they’re still trading at their biggest discount to stocks on record. At the same time, they’re actually well-positioned to close that gap and overtake their higher-profile counterparts. See, if inflation edges up too high, too quickly, the world’s central banks might hike interest rates in a bid to cool down the economy. And since stocks are vulnerable to higher interest rates, investors could ditch them in favor of commodities – and looking at the recent tech sell-off, that might already have started happening. | 