What the headlines are telling us about sentiment in commodity markets

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Digesting the financial media’s latest headlines at the wrong time of day can be bad for your personal and financial health. Headlines can, when you can think about them rationally offer important clues into the state of financial markets, opening up opportunities for investors. According to Peter Atwater, President at Financial Insyghts:

“The morning headlines in the Wall Street Journal, the Financial Times the New York Times, the Washington Post… are huge mirrors. They are telling us how we feel and what we believe to be true.”

The front page of a newspaper or the opening items on the TV news broadcast are only ever things that confirm what we already believe to be true. After all, the media are trying to move us onto page 2 and so on, and to stick around for the next item on the TV news bulletin. According to Atwater trends are “over-believed” by investors, those that can be easily extrapolated long into the future are the most dangerous for investors:

“When everyone believes something is going higher, like interest rates last fall, the opposite is likely. As I write often, extrapolation kills.  And the bigger the trend-extrapolating headline and the more prominent the headline’s position, the more likely a reversal is. Typically, when something makes it to front page coverage, the end is near.”

With that in mind what do recent headlines say about the state of commodity markets?

“The migration problem is a coffee problem” – Washington Post

People don’t abandon their livelihoods, homes and ancestral homelands unless they can’t see the situation getting any better. For farmers in Guatemala that point appears to have been reached over the past year. The country is the largest single source of migrants to the US with numbers doubling over the past year to over 200,000. For coffee farmers there and elsewhere in South America the decline in coffee prices has been relentless and crushing; from a high of around 300 cents per lb in 2011 coffee futures fell to below 100 cents per lb in 2019. Coffee prices are under pressure due to an increase in mechanized production in Brazil (the largest producer), and higher output from Honduras, Vietnam and Colombia. The negative roll yield has been a boon for those short selling the futures contract.

Related article: Coffee prices: The top 10 most important drivers

‘The future is nickel’: Cobalt 27 sells off its namesake metal after tough year – Financial Post

Toronto based Cobalt 27 stockpiled cobalt and streamed mining rights in a bid to ride the wave of growth from the metals use in electric vehicle batteries. Over the past year the price of cobalt and the share price of Cobalt 27 has fallen by around two-thirds. Higher than expected output from the DRC and a slowdown in demand from China as auto sales ground to a halt were behind the fall. Yet like rhodium a decade ago, arguably sentiment towards cobalt was too high in the first place. Buying high and selling low doesn’t inspire confidence. Sentiment is so low that the company is selling off its cobalt holdings to focus on nickel instead.

Related article: What lessons does rhodium have for commodity investors?

‘It can’t get any worse’: Iowa farmers suffer as U.S. trade war with China escalates – Des Moines Register

Farmers have perhaps had it too good for too long. Strong growing conditions for several years and strong demand from China and emerging economies helped support US agriculture. Slumping agricultural commodity prices, trade wars and poor weather have battered US farmers. As with all the examples in this article sentiment could get worse before it gets better. But when the media start reporting that things can’t get any better, that there is no end in sight to the suffering that often sets the scene for a rebound in sentiment.

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