Fear of recession causes panic in commodity markets

The energy sector fell 5.8 percent and materials stocks 5 percent. Beach Energy fell 8 percent to $1.61 and Woodside Energy 6.9 percent to $30.20. It was the industry’s worst one-day loss since May 2020.

However, the four major banks recovered from the improved outlook for credit gains when they passed on the half-point increase from the Reserve Bank of Australia to the official spot rate

The sale took place in Asian stock markets, with Japan’s Nikkei 225 on track for a loss of 1.1 percent, Hong Kong’s Hang Seng index 2.3 percent and China’s CSI 300 index 2%.

Sentiment was shaken by the news that Shanghai has launched massive COVID-19 tests in nine districts after detecting cases in the past two days, fueling concerns about a return to lockdown in China’s financial center.

Citi warned a recession could see crude rise to $65 a barrel by the end of the year and fall further to $45 a barrel by the end of 2023, without OPEC+ intervention and a drop in investment in short-cycle oil.

“The drop in oil prices tells us a lot about fears of a slump in demand linked to mounting concerns about not just a US recession, but a global recession,” said Ray Attrill, Global Head of FX Strategy at National Australia Bank.

“That’s an environment where the Australian dollar never does well; when global concerns are at the forefront.”

Commodity market instability dragged the Australian dollar to a two-year low at 67.62¢ before rising further to 67.79 on Wednesday afternoon. The safe-haven US Dollar Index rose 1.3 percent to 106.5, a new record in two decades.

Commonwealth Bank warned that the Australian dollar could fall to US65¢ by the end of this year as a result of lower commodity prices in a slowing global economy and rising interest rates.

Copper, widely regarded as an economic factor, fell 4.2 percent on Tuesday to its lowest level in 19 months. The metal fell a whopping 4.9 percent to $7291.50 a ton on the London Metal Exchange on Wednesday, before settling for about $7440 dollars.

Other metals followed as aluminum fell 2.9 percent and tin 2.3 percent. Both fell further on Wednesday.

“The market appears to be fully focused on concerns about the economic slowdown and its impact on metals demand in the short to medium term,” said Warren Patterson, ING’s head of commodity strategy.

“If the tests uncover more cases, Shanghai could see restrictions increase, weighing on China’s economic growth and demand for raw materials,” said Vivek Dhar, Commonwealth Bank mining and energy analyst.

“However, as long as China’s COVID-zero policy is in place, it is unlikely that Chinese demand for raw materials will increase enough to offset weaker demand elsewhere in the world.”

In fact, gold as a safe haven was dragged into sales, falling to its lowest point in more than six months as the US dollar rallied.

The bearish mood in the markets eventually overpowered any positivity sparked by reports Tuesday that the Biden administration is considering cutting tariffs on Chinese consumer goods.

Wall Street was dragged along the chaos in commodity markets, with the Nasdaq gaining 1.8 percent and the SP500 rose 0.2 percent as technology stocks led a mid-session recovery and cyclical stocks were penalized. The Dow Jones was the only major benchmark to fall, losing 0.4 percent.

Energy crisis

European equities bore the brunt of the sale as the Euro Stoxx 50 fell 2.7 percent and the FTSE 100 index fell 2.9 percent.

This was attributed to European gas prices rising to a four-month high when oil workers in Norway launched a strike over a wage dispute. The strike was forcibly ended with government intervention.

“The overlay from the energy crisis could explain the more bearish tone in Europe,” analysts at the National Australia Bank said.

Fears about the European economy, coupled with the strength of the US dollar, dragged the euro to a 20-year low against the dollar. The European currency is moving closer to parity with the US dollar, with 1 euro trading at about $1,027 dollars.

“For oil, the historical evidence suggests that oil demand only turns negative during the worst global recessions. But oil prices fall to about marginal cost in all recessions,” said Francesco Martoccia, energy strategist at Citi.

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