The world is watching the news and waiting to see what the global economic effect of the attack on Saudi oil fields this past week. Oil commodities are predicted to be a little shaky as we wait to see how much damage has been done and what kind of response will come from this event.
Investors trade in stocks and commodities which offers them a variety of options to turn a profit. Stocks are financial products represented the financial trade sector while stocks and commodities are representative of the raw products sector.
We know that prices in the market are controlled by supply and demand. For example, developing countries such as China and India require heavy investment in commodities such as steel and oil to build their infrastructures; cotton and metals to manufacture products, and food-related commodities to feed their increasing population. This has put commodities under stress and the price moves upwards. High demand has also attracted investors, who formerly invested in only stocks and bonds, to take advantage of commodity market strength and its normal inverse correlation to the movement of the stock market. When manufacturers purchase commodities at a low price, they turn higher profits and their stock price rises. This makes it lucrative for investors to invest in stocks. High commodity prices tend to choke an expanding economy because they make the price of goods too high for continued strong consumer buying. When consumers stop buying manufactured goods, manufacturers’ earnings drop and their stock prices also drop.
High commodity prices are offset by cheap manufacturing costs and high consumer demand. Increase in consumer demand pushes stock prices upwards.
Impact of Recession
When the global economy is on a decline, central banks from different countries often try to boost their economies by keeping interest rates low. Low-interest rates reduce the cost of manufacturing because companies can borrow money cheaply to fund operations. Low rates also reduce the cost of producing commodities for the same reason. This means continued high demand for commodities and continued high earnings for manufacturers. Both stocks and commodities tend to rally when central banks stimulate the economy through lower rates.
The Week Ahead for Commodities
8 There is a big risk facing the economy – Oil’s geopolitical premium after the attack on key Saudi oil facilities is a big risk facing the market however there is an even bigger risk in the form of Saudi’s retaliation against Iran. A global recession would hit demand for crude, offsetting any oil rally. Notwithstanding the affront to their dignity from the attacks, Saudi’s Aramco is planning a 5% sale of its shares and a valuation of up to $2 Trillion of its energy business. The conflict could narrow the valuation gap.
Away from oil, gold was up more than 1% in Asian trading, riding the waves of the crude rally. The interest rate-cut is still a big deal for the gold market. There are huge risks in both stocks and commodities in times like these and it is prudent to stand on the sidelines and watch the week’s geopolitical events unfold before making big moves.
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