Even commodity futures are not safe from the inflation fears gripping global markets. Crude oil was down 7%, coffee had its largest loss in two months, while corn and copper also tumbled.
New concerns that the Federal Reserve will let inflation accelerate sparked a sell-off in most risky assets on Thursday. US equities have fallen and government bond yields have risen. Those movements spilled over into commodities, with physical demand strongly linked to global growth expectations.
Still, it was a bit of a raw material paradox. The markets can sometimes benefit from an inflationary environment as investors view commodities as a good place to find yield. But the inflation equation has to add up – too much, especially when accompanied by concerns about economic growth and a higher dollar, and the inflation boost quickly turns into a drag amid deflated demand expectations.
Commodities had one supercharged start of the year that saw crude oil up more than 30% through Wednesday. Corn, soybeans and copper multi-annual heights and timber prices soared. Bulls took such a command that some traders geared up for another super cycle of long-lasting profits.
The reason why commodities keep on rising? They are a home for yield
That enthusiasm has stalled this week as the slow rollout of vaccines sparked concerns about how long it will take for energy, metals and grains consumption to return to pre-pandemic levels. This was exacerbated by dollar gains, making commodities priced on the dollar less attractive as a store of value.
“Treasury and dollar yields are responding to the Fed, and that is currently having a negative impact on commodities,” Arlan Suderman, chief commodities economist at StoneX, said in an email.
The Bloomberg Commodity Spot Index fell 2.4%, the largest drop since mid-September.
West Texas Intermediate crude oil futures fell for a fifth session, the longest period of daily losses in more than a year. Global oil Demand will not return to pre-pandemic levels until 2023, and growth will be dampened thereafter amid new work habits and a shift away from fossil fuels, the International Energy Agency said this week.
Grain prices also fell. For some crop producers, there are signs that growing conditions are improving. Favorable rains for soybeans in Argentina weighed on the market, while favorable weather in the US, Russia and Ukraine put wheat prices under pressure.
Meanwhile, gains on government bonds weighed on demand for alternative assets such as gold and silver, which yield no interest.