The Federal Reserve decided not to raise the federal funds rate during its September 17 meeting, shocking many market participants who expected a rate rise. The delay of the rate rise caused heavy volatility across the spectrum of global financial markets, with precious metals leading the winners, and lumber, corn and the U.S. dollar leading the losers.
Year to date, commodities across the board have been hammered by economic headwinds, potential federal funds rate increases and an increasingly strong dollar. Agricultural goods are down 15.83%, energy is down 21.30%, industrial metals are down 16.92%, precious metals are down 8.25% and softs are down 22.65% year to date.
But these commodities may be entering a short-term bullish period, with the Federal Reserve announcing that they will continue to keep conditions “accommodative” in the near term. Further, the Federal Reserve stated that they are focused on inflation and looking for the indicator to move more towards their 2% target before they increase rates.
Meats: Up +1.04% for the Day
The meat market was the most positively impacted commodity sector with lean hogs and milk leading the charge. Lean hogs have seen a 13% increase from their August lows of $62.00 on concerns about supply, while milk bounced up 1.61% off of its yearly low of $15.60 on speculation surrounding sustained increases due to continuing accommodative policies by the Federal Reserve.
Metals: +0.94% for the Day
In the metals space, silver and gold were the clear winners. Both gained on the devaluation of the U.S. dollar stemming from the Federal Reserve not raising rates.
Financials: Up +0.62% for the Day
Financials were a major gainer from the Federal Reserve decision not to raise rates; T-Bonds and T-Notes across the yield curve had prices boosted. These gains are directly related to the Federal Reserve not raising rates, causing prices to increase as yields decline.
Currencies: Up +0.46% for the Day
Non-U.S. currencies saw their values increase against the U.S. dollar when the Federal Reserve delayed the rate raise. The U.S. dollar has seen significant value increase over the past 12 months due to the deterioration and increased quantitative easing of Europe and Asian economies. The Federal Reserve not raising rates blows off some of the speculative steam in the U.S. dollar, and their statement regarding increased accommodation means that quantitative measures in these economies will be less effective than previously thought.
Softs: Down -0.76% for the Day
Softs were mixed, with cocoa and coffee gaining slightly, while lumber suffered a large decline. After the Federal Reserve’s announcement, lumber resumed its downwards trend. Lumber has declined approximately 21% over the past three months on concerns of a global economic slowdown. The Federal Reserve cited deteriorating global economic conditions, which could be a major concern in the lumber market.
Grains: Down -0.69% for the Day
Grains were a major loser after the Federal Reserve rate decision, with corn hit the hardest. Corn has declined 15% from its July 2015 high of $450.00. Wheat has also fallen 22% from its July 2015 high. These markets resumed their downward trends, spurred by global economic concerns.
Energies: Down -0.27% for the Day
Energies have been hammered in 2015. Crude has fallen 27% from its $65.00 high in May 2015. Crude and its derivative products have trended downward after OPEC increased supply earlier this year in an attempt to squeeze out U.S. oil producers. Natural gas has also fallen 16% from its May 2015 highs on concerns of oversupply in the U.S. All assets in the energy sector have sagged due to global slowdown concerns.
The Bottom Line
In general commodities have continued their previous trends that were in place earlier in the year. The Federal Reserve choosing not to raise rates keeps these previous paradigms intact. With China and Japan taking drastic quantitative easing measures, and with Europe considering expanding quantitative easing, it is possible that commodities will break their downward trend. Until these central bank moves hit the market, or the U.S. decides to raise rates, expect these trends to continue
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