- Oil and copper prices have remained weak lately despite China’s reopening from COVID-19 restrictions.
- This is a signal that a global recession is on the horizon, according to an economist.
- But liquidity problems triggered by rising interest rates could also weigh on commodities, another economist told Insider.
Oil and copper prices remain weak even as China’s economy rebounds from a coronavirus-fueled slowdown, suggesting a global recession is underway, economists say.
Since mid-January, the two commodities have fallen by around 6% and 5% respectively. And this despite the fact that China, the world’s largest buyer of crude and red metal, has flip-flopped on its strict zero COVID restrictions.
“Whatever is happening in China, there is no indication that the end of zero-COVID is driving global growth, based on commodity prices. Oil prices have never risen and copper prices are falling after the initial excitement over China’s reopening subsides. The global recession is approaching,” said Robin Brooks, chief economist at the Institute of International Finance, in a Tweeter.
Falling oil and copper prices despite the economic reopening of China, one of the world’s biggest buyers of commodities, suggests lingering investor concern over economic risks, according to Craig Erlam, market analyst at OANDA.
“Falling commodity prices in the face of a strong Chinese recovery would certainly suggest to me that markets are pricing in slower growth elsewhere,” Erlam told Insider.
Not everyone sees it that way. According to Marc Ostwald, chief economist and global strategist at ADM Investor Services, the weakness in major commodity markets could be more a reflection of reduced liquidity in financial markets amid rising global interest rates.
“There is no doubt, there is no depth in the markets (bid spreads are widening, and the depth and number/size of bids/offers in the market are lower than current prices),” Ostwald said.
In an illiquid market, traders cannot agree on asset prices, which increases uncertainty about the outlook for demand and supply. Higher interest rates tend to pinch a country’s money supply as they increase funding costs for investors, leading to liquidity issues.
Ostwald pointed to the sharp swing in oil prices last Friday to back up his point. “As evidenced by the back and forth in oil prices on Friday, if there was liquidity, the market doesn’t go back and forth like that – the same applies to copper and Treasuries” , did he declare.
“If you were to speak to physical traders in oil (crude or product), they would probably tell you that nothing much has changed over the past week, so it’s all about the underlying liquidity of the markets” paper “meaning it’s a financial issue, not a supply issue,” Ostwald added.
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