Principles of Strategic Financial Management
The field of strategy is not an exact science. This is because strategies are made based on the assumptions that an individual or a group of people have about the future. It is for this reason that if different people undertake the activity of strategic financial management, they are likely to come up with different […]
Mining Pools in Cryptocurrency
In the previous article, we have already learned about the “Proof of Work” mechanism which underpins Bitcoin and many other major cryptocurrencies across the world. In any proof of work-based cryptocurrency, every transaction is validated by a miner. The transaction gets added to the blockchain only after such a validation takes place. However, we also […]
What is Accounting? – Meaning and Important Concepts
Accounting has been hailed by many as the “language of business”. There are many quotations like “A pen is mightier than the sword but no match for the accountant” by Jonathan Glancey which tell us about the power and importance of accounting. The text book definition of accounting states that it includes recording, summarizing, reporting […]
Introduction to Cash Flow Ratios
Once upon a time, investors and analysts used to believe in ratios that have been calculated based on the earnings that the company has stated in the Income Statement. Alas! That was once upon a time. Of late, there have been a huge number of frauds and malpractices that have come to the fore. All […]
Inverted Yield Curve
Most investors across the world are aware of the fact that yield curves are generally upward sloping. This is because, under normal circumstances, yields for bonds with longer maturities tend to be higher. However, it is possible for the opposite scenario to play out. This means that it is possible for bonds with lower maturities […]
All kinds of investing is driven by market sentiment. These sentiments in turn are driven by certain market indicators. Investors and traders are often glued to these indicators. The markets get particularly volatile when information pertaining to these market indicators is released. Every type of market has its own set of indicators. Some indicators overlap between markets. In this article, we will have a look at some of these indicators in more detail.
GDP is the most important economic indicator in the world. Although this indicator is riddled with flaws, it still provides more information than anything else. It is for this reason that commodities markets also pay a lot of attention to this number. The link between GDP and commodities is fairly simple.
A higher GDP creates anticipation for an even higher GDP. In countries like India and China, the GDP is completely driven by growth projects. Such infrastructure projects require huge amounts of commodities such as iron and steel.
Therefore, the prediction of a higher GDP automatically translates into higher demand for commodities. The opposite of this is also true. Consider the case of the recent fall in commodity prices that was caused by the fall in China’s GDP.
China is a huge importer of commodities and when the Chinese economy witnessed a downfall, so did the commodity markets.
The Energy Information Administration (EIA) reports are released by the Department of Energy in the United States. The United States is the largest consumer of energy in the world, hence these reports have a huge impact on energy prices worldwide even though these numbers may not be publicized as much in the media.
The EIA reports present an estimate of the forthcoming week’s energy supply i.e. crude oil production, refinery utilization and transportation of energy. Studying these numbers allows traders to predict the abundance or shortfall of energy in individual states, counties, cities and towns.
The world’s energy markets also follow the trends set by the United States. In most cases, the trend is followed. In some rare cases, the world market may be bullish when the US is bearish and vice versa.
The EIA report is probably the most important for investors and traders who are invested in the energy market.
Western Texas Intermediate refers to a type of crude oil. This type of oil is traded on the Chicago Mercantile Exchange. It is commonly referred to as the NYMEX. There is another major indicator of oil in the European region. This is called the Brent.
These two indices are what are commonly quoted across the world as far as crude oil is concerned.
Commodities investors have no option but to closely track the movements in these indices since they cause movements in their underlying positions.
Almost all commodities in the world are priced in United States dollars. The world exchanges oil and gold only in return for United States dollars. This is because dollars are the reserve currency of the world and the countries obtaining dollars can later redeem it for other goods and services.
Since the value of everything else is measured relative to the dollar, the value of the dollar becomes exceedingly crucial. A drop in the value of the dollar would lead to a bull run in all the commodities. This is what has happened each time quantitative easing has been announced.
The value of the dollar has dropped because of the debasement. At the same time, all commodities such as oil, natural gas, metals and even agricultural commodities were rallying at all time highs! Now, when the United States government is signaling that they intend to raise interest rates, the commodities markets seem to be collapsing.
Any commodities investor has no option but to closely track the changes in the United States dollar. Any movement in the US dollar almost certainly results in a movement in the commodities markets.
The fed funds rate is the basic rate at which banks are willing to lend to each other. This is the benchmark for other interest rates in the country. A higher interest rate means less liquidity and therefore less money flows into commodities and vice versa. The Fed Funds Rate moves almost every market in the world and commodities are no exception!
Jefferies is the oldest and the most quoted commodity index in the world. There are many other indices which consider Jefferies to be the benchmark and therefore mimic it.
This index is also known for its famous flaws. One of the flaws is that it only tracks commodities for which futures are being traded on the exchange. Therefore if a commodity is strategic but not traded on the exchange, Jefferies will not track it! This is the case with steel which is quite literally the most important metal.
Despite its shortcomings, the Jefferies index does indeed provide the most accurate overview of the commodities market making it an absolute essential for any person invested in commodities.
The number of indices that an investor has to track is greater in case of commodities. This is because the diverse nature of the commodities does not allow for single index.
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