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The impact of the sub-prime crisis continues to serve as a drag on the global economy into the 3rd quarter of 2010. As suggested in our last newsletter, the evidence of slowing in the US economy has become more prevalent throughout a wide range of statistics over the last month and that in turn has created a fresh drag on physical commodity prices.
We also suggested in prior publications that a number of physical commodities like soybeans, sugar, crude oil, RBOB, heating oil and natural gas are pretty flush with supply right now. Fears on the demand side are, therefore, something that should be expected to weigh on price structures.
Ordinarily we would have expected some response from the government to recent evidence of slowing but our Congress gets a full week off for the 4th of July, perhaps so they can take advantage of their superior health care benefits and be fully rested when they get back. Complicating the move toward additional stimulus measures are international concerns toward deficit spending and apparent fundamental differences within the government on what type of stimulus measures actually work.
While the jury is still out on whether extending unemployment benefits is a stimulus, those benefits were included in the original record stimulus package and it doesn’t seem as if the country is garnering a sustained benefit from that spending. However, given that the Democrats have a solid majority and also the White House, we suspect that a noted portion of any additional stimulus will be directed by the California and Nevada Congressional contingents toward unemployment benefits extensions.
We have to wonder if key members of the G20 won’t begin to complain that the US is using borrowed money for suspect programs. Therefore, the international response to an upcoming US stimulus push might serve to reduce the flight-to-quality status of the US Dollar and the US Treasury markets. While we aren’t expecting an all out discussion of a downgrade of the US debt rating, it is possible that money won’t be as aggressive in flowing toward US financial assets.
In the event that the President dares to dream big and Congress puts together another massive pork barrel package, it is possible that global market players might attempt to shape US policy by their investment flows. While China recently suggested that would not abandon US Treasuries, they reportedly held in excess of $900 billion at the end of April. Therefore, they do have the power to influence US policy decisions. We see the prospect of the Dollar weakening ahead but we doubt that factor alone will be capable of turning off a pattern of weakness in physical commodities.
