How a Recession Will Impact Pension Funds?
The post-pandemic economic environment across the world has bearish undertones. During the pandemic, many countries had lowered their interest rates to unsustainable levels. As a result, they are now witnessing record inflation numbers. The central bankers across the world have started tightening the monetary policy. This means that the risk-free interest rates are likely to […]
Pension Funds and the Use of Derivatives
Pension funds across the world are meant to be low-risk financial instruments. They are allowed to take slightly more risks in some parts of the world as compared to others. However, for the most part, pension fund across the world is advised to stay away from risky instruments such as derivatives. Derivatives have been known […]
Hedge Funds and Leverage
Leverage is one of the defining features of any hedge fund. Therefore hedge funds have gained expertise in the creation and utilization of leverage. Not only do they use traditional means like equity and fixed income leverage but they also use create leverage with the help of futures, options and swaps. In this article, we […]
What is Strategic Budgeting?
The budgeting process is an integral part of any business. The budgeting process is ubiquitous and underlies almost every decision in the corporate world. In fact, critics of the budgeting process argue that the process takes too much of the management’s time. The management typically spends 25% to 30% of four months of their time […]
Functions of a Central Bank
The modern banking system is two tiered. This means that at the bottom there are commercial banks i.e. the banks that we interact with on a day to day basis. They are then managed by a central bank which forms the next level in the hierarchy. The modern banking system provides central banks with considerably […]
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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