About China's massive food hoarding and further rising energy prices will result in even higher food prices in the near term.
The benchmark, CRB Commodity Index, ended the week 4,6% higher and therefore made new highs.
Oil-related futures ended their correction and surged higher. Natgas is still the most bullish play in town, as we warned you in The Kuemmerle Report over three weeks ago, with a long natgas setup.
The commodity bull market is still intact and buying opportunities look in most markets much more lucrative than selling signals.
Here is my latest playbook:
If energy prices keep rising at that pace - inflation will become even worse
Last week we saw crude oil up 8% and natural gas up over 16%. In a single week! Natgas also surpassed the 7$ mark and is now at hemispheres we haven’t seen in decades. Therefore it’s always important to keep in mind the following domino reaction:
- higher natural gas prices lead to
- higher nitrogen-based fertilizer prices lead to
- higher grain prices lead to
- higher food prices lead to
- plenty of social unrest, especially in lower-income countries
China isn’t THE driving commodity price force anymore
China’s Credit Impulse Index was one of the most important macro instruments over the last five years. More liquidity always led to higher commodity prices and vice versa. But it seems like the correlation to commodity prices is just another correlation that is broken. (like the USD/commodity price correlation)
While China on Saturday again cut reserve requirements for banks as the economy slows and nationwide lockdowns force workers and companies to limit output, China doesn’t seem to be the driving force of commodity prices anymore. Times have changed.
Nevertheless, it seems like China has on the one hand trouble with feeding their own population, especially in the strict lockdown areas, on the other hand, they have the highest commodity reserves in the world (by far) and are less dependent on imports at the current stage.
This is the result of massive food hoarding since 2019. Here are a few numbers, which IMO show that China actually can’t be THE driving force of demand in key commodities.
While those who have the least may ask why China alone is hoarding so much food, it actually gives China an edge when it comes to geopolitics and food supply in general.
Elsewhere In The Macro World
The USD Index is back above the 100 level
While the US Dollar Index is looking strong from a technical perspective we have to keep in mind that the DX is composed of 57% EUR, 13% JPY and 12% GBP.
So what the DX currently isn’t reflecting is the relative weakness of commodity-sensitive currencies like the Brazilian Real, the South African Rand, or even the Russian Rouble.
Compared to those the USD’s performance is actually pretty weak over the last three months. Basically, everything is a question of perspective, right?
This week look out for:
- Chinese GDP data on Monday
- Existing Home Sales data on Wednesday
- Flash PMIs on Friday
- FED chair Powell speaking on Thursday
BTW If you would like to see more commodity and macro content like this - consider following me on Twitter @lukaskuemmerle
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