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What's going on?
The oil price hit a five-month low last week (tweet this) and prices of other commodities such as iron ore also fell sharply but, with US stocks nearing a new all-time high on Friday, most investors dont seem to care!
What does this mean?
The oil price fell sharply on Thursday before recovering modestly on Friday. Market participants cited concerns over rising US production and the possibility that OPEC, a group of oil-producing countries, may not extend its deal to limit its output (click here for more background). Remember, more supply is typically bad for prices.
There are also signs that demand for oil from China is stagnating, possibly as Chinas government pares back its efforts to boost the Chinese economy. Relatedly, industrial metals such as iron ore and copper also had a rough week amid concerns that demand in China was weakening. All in all, a Bloomberg measure of overall commodity prices is near its lowest level in a year!
Why should I care?
For markets: Lots of types of investments typically perform poorly when commodity prices go down.
Currencies of countries that produce commodities, like Canada and Australia, have suffered as commodity prices have fallen. Similarly, stock prices of mining companies and oil producers have also dropped. If the lower commodity prices are due to weakening demand for commodities, its likely that demand is also weakening for things like equipment and other industrial goods which would be bad for manufacturers. Despite the weakness in commodities, many major stock markets are at or near all-time highs. But if lower commodity prices are signaling that demand is weakening in general, then that would be a bad sign for the economy and stocks overall.
The bigger picture: Lower commodity prices should lead to lower inflation.
Commodities are, of course, important inputs for many products. So, if commodity prices go down, it becomes less expensive to make things. That should put downward pressure on inflation, which should affect certain investments like bonds (see how here).
Originally posted as part of the Finimize daily email.
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