Commodities have lost 20% since June’s peak amid recession fears

Commodities had been advancing since the early days of the worldwide pandemic as massive government spending and ultra-low interest rates bolstered demand while production was curbed. Russia’s war in Ukraine exacerbated supply disruptions.

But sentiment has shifted as fears grow that the Federal Reserve won’t be able to tame the highest inflation in four decades without throwing the economy into a recession. A surge in the U.S. dollar — which makes it more expensive to buy raw materials priced in the greenback — has also weighed on U.S.-traded commodities. Hedge-fund managers recently slashed bets on higher commodity prices to the lowest in almost two years.

Still, recession is a “highly anticipatory concern”, and markets have “clearly overreacted” by bringing prices for commodities back to pre-war levels even as supplies of raw materials such as oil remain tight and vulnerable to disruptions, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co.

While the recent surge in energy and food costs worked as a “very big tax” weighing on consumption, demand should re-accelerate in the next months and keep markets tight as China’s economy rebounds, Sharenow said in an interview.

(By Gerson Freitas Jr.)