China Shutdown Impacts Commodities

After massive commodity producer Russia was exiled from the world economy, a new shock is emerging from China; the world’s biggest user of raw materials.

The big picture for commodities prices is that they turned tail and tumbled yesterday, as China imposed new COVID-related lockdown in response to soaring infection rates.

In numbers; the US benchmark crude oil dropped 5.8% to $103 a barrel. Benchmark Chinese iron ore contracts dropped nearly 7%. Copper prices, a key industrial metal, fell 2.4%. Even European natural gas prices — the epicenter of the Russian commodity shock — dove nearly 10%.

If sustained, the downturn in commodities prices suggests traders see the remarkable level of global uncertainty right now. War, inflation, COVID and globalization together constitute a set of factors potentially triggering an economic downturn.

UK’s FTSE 100 fell on Tuesday, dragged down by mining and oil stocks as commodity prices retreated on concerns about resurgent COVID-19 cases in China, while strong jobs data supported the case for a Bank of England interest rate hike later this week.

The commodity-heavy FTSE 100 fell 1.4%, while the mid-cap index (.FTMC) dropped 1.6%.

UK’s oil & gas index slid 2.6% as crude prices tumbled to two-week lows, while industrial miners dropped 4.0%. Most metal prices fell on concerns over the fallout from surging COVID-19 cases in top metals’ consumer China.

Meanwhile, official figures showed Britain’s unemployment rate dropped below its pre-pandemic rate in the three months to January while pay rose faster than expected. read more

The modest further acceleration in nominal wage growth seen in today’s report coupled with lead indicators showing further tightening ahead are likely to provide further justification for the MPC to continue to ‘front load’ policy tightening.

Among individual stocks, cigarette maker Imperial Brands slipped 0.4% after saying its exit from Russia would have a small impact on annual profit.