Recession fears unleash panic in commodity markets

The energy sector fell 5.8 percent and materials stocks 5 percent. Beach Energy fell 8 percent to $1.61 and Woodside Energy 6.9 percent to $30.20. It was the sector’s worst one-day loss since May 2020.

However, the big four banks rallied on the prospect of improving lending profits as they passed the Reserve Bank of Australia’s half a percentage point hike to the official interest rate.

Selling stretched across Asian equity markets with Japan’s Nikkei 225 on track for a 1.1 percent loss, Hong Kong’s Hang Seng Index 2.3 percent and China’s CSI 300 Index 2 percent.

Sentiment was shaken by news that Shanghai had launched mass COVID-19 testing in nine districts after detecting cases over the past two days, reigniting concerns about a return to lockdown in China’s financial hub.

Citi warned a recession could lead to crude oil surging to $65 per barrel by year-end and falling further to $45 by the end of 2023, in the absence of intervention by OPEC+, and a decline in short-cycle oil investment.

“The drop in oil prices tells us a lot about demand-crushing concerns linked to deep concerns about not only the US recession, but the global one as well,” said Ray Attrill, head of global FX strategy at National Australia Bank.

“It was an environment where the Australian dollar never performed well; when global concerns are a concern.”

Instability in commodity markets dragged the Australian dollar to a two-year low of US67.62¢, before climbing higher to US67.79¢ on Wednesday afternoon. The safe haven US Dollar Index jumped 1.3 percent to 106.5, a fresh two-decade high.

The Commonwealth Bank warned that the Australian dollar could drop to US65¢ by the end of the year due to lower commodity prices amid a slowing global economy and rising interest rates.

Copper, widely seen as a determinant of the economy’s direction, fell 4.2 percent on Tuesday to its lowest level in 19 months. The metal fell as much as 4.9 percent on Wednesday to $7291.50 a tonne on the London Metal Exchange, before settling around $7440.

Other metals followed, such as aluminum down 2.9 percent and tin down 2.3 percent. Both declined further on Wednesday.

“The market appears to be fully focused on concerns about the economic slowdown and its impact on metal demand in the near to medium term,” said Warren Patterson, head of commodity strategy at ING.

“If testing reveals more cases, Shanghai may see curbs increasing, weighing on China’s economic growth and commodity demand,” said Vivek Dhar, mining and energy analyst at Commonwealth Bank.

“However, as long as China’s COVID zero policy is in place, it is unlikely that Chinese commodity demand will increase enough to offset weaker demand elsewhere in the world.”

Safe haven gold even caught up in the sell-off, slumping to a more than six-month low on the US dollar’s rally.

The bearish mood across markets finally overwhelmed all the positives sparked by reports on Tuesday that the Biden administration was considering reducing tariffs on Chinese consumer goods.

Wall Street was swept by the chaos in commodity markets, with the Nasdaq up 1.8 percent and the S&The P 500 rose 0.2 percent as technology stocks led the mid-session recovery and penalized cycle stocks. The Dow Jones was the only major benchmark to fall, down 0.4 percent.

Energy crisis

European equities bore the brunt of selling as the Euro Stoxx 50 fell 2.7 percent, and the FTSE 100 Index fell 2.9 percent.

This was attributed to European gas prices surging to a four-month high as oil workers in Norway went on strike over a dispute over wages. The strike was forcefully ended with government intervention.

“The look of the energy crisis could explain the more bearish tone seen in Europe,” said National Australia Bank analysts.

Worries about the European economy, combined with the strength of the US dollar, dragged the euro to a 20-year low against the greenback. The European currency is moving closer to parity with the US dollar, with 1 euro trading at around $US1,027.

“For oil, historical evidence suggests that oil demand has turned negative only in the worst global recessions. But oil prices have fallen in all recessions to near marginal cost,” said Francesco Martoccia, energy strategist at Citi.

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