Aug 24, 2015

Commodity Price Dive and the Impact on Global Economies

It’s no secret that Global commodity prices have seen a sharp decline this summer – but what is this signaling in terms of the world economy and broader recessionary trends? In his recent article "Global commodity prices in sharp decline" Nick Beams brings this topic to light focusing on a range of important issues impacting that state of the global markets.  Udi Sela, Vice president of Product Solutions weighs in explaining what's driving the commodity slowdown and the impact its having on various global economies and emerging markets. Udi provides reaction to many of the issues and questions raised in this timely article.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Video Transcript:

Emily Ahearn (Host): Welcome to the Numerix video blog, your expert source for derivatives trends and topics, I’m Emily Ahearn. As the dog days of summer continue to heat up there’s one market that continues to cool. It’s no secret that the global commodity prices have seen a sharp decline this summer, but what is signaling in terms of the world economy in broader recessionary trends? Here to discuss this is our friend Udi Sela Vice President of solutions and our resident trading strategist and FX expert, Udi thank you so much for joining us and welcome.

Udi Sela (Guest): Good morning Emily my pleasure.

Emily Ahearn (Host): So Udi, as commodity prices fall, I expect this can have a major impact on raw material exporting especially in countries which have been heavily dependent on rising demand from China. In particular I’m thinking oil, iron ore, coal and other industrial metals so maybe you could take me through how the economic slowdown in China has impacted the commodities markets and maybe it would be interesting to touch on Australia and Canada.

Udi Sela (Guest): Ok Emily that’s a pretty vast question so I’ll try to address it in a few ways. So we have all kinds of commodities or commodity types weakening at this point in time. So if we start with oil. Obviously some of the weakening in oil is related to the slowdown in China the last GDP growth numbers were 7% and probably are said to weaken and we have seen also the collapse of equity markets in China and the impacts on the world and this probably means weakened demand from China so again less demand for commodities etcetera. Interestingly there was the agreement was signed with Iran, which basically means more oil supply will come to the market and hence lower prices and indeed since this agreement was signed the oil has further weakened down to below 47 dollars a barrel rather than around 52 and so forth. And then of course shale oil which keeps the production in the US still high. This relates to all prices. Then if you look we spoke of the slowdown in China this typically has an impact you know on construction, raw materials and so forth and then if we look at gold for an instance you can see since the disposable income in emerging economies which tends to consume gold more than the proportion, if you look India is the number one demander for gold /the biggest demand for gold comes from India. Since the slowdown in India, since the local currency is weak and etcetera the demand for gold is weakened as well. This also takes us to inflation fears. Since inflationary fears have weakened, expectations for inflation; it’s hard to find a country with a stable economy where inflation expectations are above 2%. Therefore the demand for gold has weakened as well. And with strength of the US dollar the commodity price has weakened, so that’s honestly most of the, biggest drivers behind these weakening commodities.

Emily Ahearn (Host): Sure, so Udi lets kind of stick with those emerging economies, and the BRIC nations. The commodities dive has also lead to, as you mentioned, increased unemployment and a large chunk of other emerging economies so what has been the specific impact on countries like Brazil and Russia and do you see the recession kind of deepening in these countries?

Udi Sela (Guest): In short yes so we definitely see currencies/ local currencies at levels never seen before. You know South Africa, which is of course, a commodity related economy. If it is Brazil we are operating in the Real is trading at something like 3, 4, 5 etcetera or in Russia where the ruble is again at 60. We know the recent/ actually this is related to commodities, take a look at Brazil. For an instance Brazil has a huge US dollar denominated debt and since the local currency has devalued so much they are trying to dump commodities like sugar in order to have sufficient foreign funds and again the fact that they are dumping those prices makes the receivables lower and then it has an impact on unemployment in Brazil. Specifically also it takes inflation higher. It can also mention an economy like New Zealand which is very sensitive to milk prices and milk futures have weakened the lot and again the local currency the New Zealand dollar, the kiwi, has weakened a lot as well.

Emily Ahearn (Host): So Udi looking forward you know it’s worth noting the widening gap and the underlying you know real economies. This can’t last forever so perhaps you can help us a little bit about what the result may be and how this gap might continue to widen.

Udi Sela (Guest): So if we look at the main driver for the exchanges to go higher over the last two or three years it was really the cheap money or the other way to look at it is that you know investors didn’t have many alternatives. The two alternatives were really real estate markets and stock markets and obviously the main diver was the US, given the scale and the fact that the quantitative easing in the US has stopped and supposedly the rates would go higher a few months from now either September or December probably this is taking some … then you have all the commodity related companies in the US like in Texas, etcetera and again we see a stark softening of the sector. We see that the bonds are getting lower and even the investment grades bonds are getting hit because these companies have no big companies have prices operating around 50 dollars so I actually think you know the golden cycle is getting towards its end.

Emily Ahearn (Host): Well it certainly has not been a quiet summer, it’s not the quiet summer that we usually expect Udi with interest rates you know expected to rise in certain countries. We still have a low rate environment in Europe, the commodities are diving, Chinas economic downturn so thank you so much for joining us and you know as these events continue to unfold we’re definitely going to be checking in with you again, we so much appreciate you joining us. On the Numerix video blog it’s our goal to examine topics that you want to talk about. Keep the conversation going on LinkedIn and on Twitter @nxanalytics. Thanks for joining and thanks a lot Udi for speaking with us today!

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