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Commodity prices, as measured by our Materials Price Index
(MPI), dropped 2.3% last week in a broad-based retreat that saw
eight of the index's components fall. The MPI's decline ran counter
to equity markets, which had their best post-election week since
1932, on optimism that at least one unknown has been removed from
the outlook with the possibility that some sort of second stimulus
package will be forthcoming before year-end.
Rubber dominated moves in the MPI, reversing also all of the
previous week's 18.0% gain by falling 17.5% as traders took
profits. Tight underlying fundamentals should keep rubber prices
supported in the short-term, however. Bulk freight rates fell 11.5%
on the better availability of Capesize vessels and sharply slower
exports from Brazil last week. Steel raw materials also fell 2.3%
on slower Chinese imports as well as higher iron ore port stocks in
mainland China, which reached 128 MMt, up from a 2020 low of 107
MMt. Energy fell 1.6% as natural gas dropped 6.0% following its
recent surge. Oil also dipped 0.6% due to OPEC prices falling on
concerns that a Biden presidency might ease sanctions on Iranian
crude exports. Counterintuitively, Brent and WTI both rose on
improving risk asset demand following the Biden win. Lumber prices
appear to have found a floor, rising 8.5% last week after falling
45% from a record-high in early September. Non-ferrous metals
prices rallied 2.0%, chiefly on aluminium price increases, which
rose by more than 3.0% last week. Aluminium has felt a pull from
China, where good consumption growth is drawing metal from the rest
of the world.
The US presidential election dominated markets last week. Stock
prices rose as the week progressed and it became clearer that the
Democrat, Joe Biden, would be elected president. Incomplete
down-ballot election results, however, suggest Republicans might
retain a narrow majority in the US Senate, implying a divided
government. While this clouds the outlook for additional fiscal
support in the next two years, Senate majority leader McConnell
(Republican) expressed interest in working on a narrow fiscal
package during the lame-duck session of Congress. A definitive
result in the presential election with the prospect for some sort
of fiscal stimulus was enough for equity markets (and commodity
markets at the very end of the week) to take a glass half full view
of the near future. The question is whether rapidly rising COVID-19
case counts in Europe and North America will now blunt this
optimism.
Posted 11 November 2020 by Mr. William May, Senior Economist Pricing and Purchasing
