Current base metals prices suggest that U.S. and Europe problems will spread globally, but that may not be the case.
This past week was a brutal one for commodities in general, but the base metals sector got hit particularly hard. Traders now seem to be speculating that the economic worries that centered on the U.S. and Europe will spread to the rest of the world, including emerging markets.
Leading the charge lower is copper, which is down a whopping 11.3 percent just this week. Prices are now at the lowest levels in a year.
Aluminum has been the most resilient of the metals, falling only 2.3 percent this week and remaining close to its highs of the year.
Zinc, lead, nickel and tin fell by 4.83 percent, 8.03 percent, 7.38 percent and 11.02 percent, respectively.
Though we have yet to see evidence of it, markets are pricing in the possibility that emerging market growth will be derailed by the bearish fundamentals of the developed world. The next batch of Chinese economic data comes out over the next few weeks, but traders clearly aren’t waiting around for those figures. Many are content to sell now and ask questions later.
In a panicked environment like this, there is no telling where prices will bottom. An investor must decide whether to subscribe to the bearish thesis in which the global economy experiences a marked slowdown akin to 2008/2009, or the bullish thesis that the global economy avoids such a dire outcome and continues to expand.
In 2008/2009, the downturn was fueled by a credit crisis following the collapse of a housing bubble. This time around, the crisis surrounds European sovereign debt, with a potential default by Greece, or worse, Italy — especially concerning.