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Technical analysis shows commodities have been in a downtrend since last June.

Brian Splitt, Technical analyst

February 3, 2023

4 Min Read
commodity downtrend
IIIerlok_Xolms/Getty Images Plus

Goldman Sachs research at the beginning of 2023 suggests commodities will outperform other assets, and that China’s reopening will be the variable that underpins support among a plethora of commodities that have a tight supply story. But looking back, it appears that late winter through early summer of 2022 marked an apex of commodity bullish enthusiasm after the invasion of Ukraine.

The truth is that commodities, in general, are in a downtrend -- and have been since June.

Below is a chart of the Bloomberg Commodity Index. Since breaking above the 200-day moving average in mid-2020, this index has respected the moving average as support until September 2022, and the last push of commodity buying into the end of December failed at that moving average.

What’s important to note is that the uptrend established in this broad-based index of commodity values, that began when markets made “COVID lows” in early 2020, has been breached. It is also important to note that the lows made in July and September on the index have been breached. In technical analysis, this pattern would be called a descending triangle and it is a bearish pattern.

It is very easy to get caught up in the excitement of Argentina’s dry weather and what it has done to the soymeal market. Often individual commodities can ignore what’s going on in the bigger picture if they have their own story to trade. But when one considers the change in monetary policy and its effect on inflation, a certain level of concern is warranted.

As of November 2022, the growth rate of M2 Money Supply has gone negative. The surge in M2 Money Supply in early 2020 into late 2021, combined with supply constraints caused by COVID, has pushed the growth in inflation to the most rapid rise since the late 1970’s. Yet, here we are with the first negative growth rate in M2 Money Supply since 1958, when inflation was only 1.76%.

With the S&P 500 stock market index trading this week a mere 12.5% off all-time highs, 517,000 jobs created in January, and unemployment at 3.4% (lowest in 53 years) the case for an imminent Fed pivot does not carry much strength.

China’s impact

On top of monetary policy, recent developments with China bring flashbacks of our trade war. Another standoff could impact China’s appetite for U.S. agricultural products as we approach the time of year when a fresh Brazilian crop will be made available to world buyers. Much of the tightness on the domestic balance sheets for corn and soybeans comes from demand assumptions that Chinese buying will materialize.

A couple of recent developments could sour relations with China and are worth keeping an eye on. Plans for a Chinese-owned corn milling plant in North Dakota are in jeopardy as the U.S. Air Force has declared the project a threat to national security. The plant in question would be 12 miles from an Air Force base that is a hub for both air and space operations. North Dakota Senators John Hoeven and Kevin Cramer, along with the mayor of Grand Forks, appear to all be pointed in the same direction on the issue, which is to find a U.S. -based company to do the project instead.

Although the Chinese company involved is not state-owned, geopolitical tensions are on the rise as a Chinese balloon has sailed unopposed over several states in the last few days. President Biden was first notified of the balloon’s presence on Tuesday of this week, while Thursday the Pentagon relayed that the balloon was spotted over Montana, home to one of America’s three nuclear missile silo fields at yet another Air Force base. Although China maintains the balloon is simply a “weather research airship” that has limited navigational abilities and has simply drifted off course, the environment is tense enough that Secretary of State Antony Blinken has abruptly cancelled his trip to Beijing, which was supposed to be the highest-level meeting between the U.S. and China since the onset of COVID.

Hearing China, Air force, and “national security risk” in two separate conversations in the same week is disconcerting. Row crops will continue to deal with potential weather stories, acreage conversations, and demand fluctuations over the next several months. But could the broader based moves in commodities be painting a not so friendly picture? Could U.S./China relations go backwards, causing strife in agricultural trade? Could Goldman Sachs be wrong about their bullish commodity thesis?

A tweet I read today from the U.S. Naval Institute was humorous and appropriate: “In 1945, the crew of USS New York spotted a sphere that they thought might be a Japanese balloon weapon. The captain ordered it shot down but none of the guns could score a hit. Finally, a navigator realized they were attacking Venus.”

Contact Brian Splitt directly at 815-665-0463 or anyone on the AgMarket.Net team at 844-4AGMRKT for assistance.

About the Author(s)

Brian Splitt

Technical analyst, AgMarket.Net

Brian began his career in the financial services industry with expertise in insurance products, stocks, bonds, mutual funds and annuities. Brian studied technical analysis and migrated to commodities where he has built a successful career. As a technical analyst with AgMarket.Net, he utilizes prior price or volume action or trends to predict future price moves and break down agricultural balance sheets. Brian is a decorated combat veteran of Operation Iraqi Freedom as well as a member of a Gold Star Family.

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