Commodity prices seen as greatest threat to recovery: poll

Rising commodity prices pose the biggest risk to recovery after the 2008 global financial crisis, according to a risk.net poll

Rising commodity prices and the ensuing risk of inflation are seen as the biggest threats to the continued recovery of the global financial services industry from the 2008 crisis, according to a risk.net poll. A total of 40% of 355 respondents to the poll deemed this to be the biggest risk.

An escalation of the eurozone debt crisis is seen as the next biggest risk, garnering 32% of the votes. Some 12% of respondents saw regulatory risk from the current reforms as the greatest threat to financial services recovery, with unrest in the Middle East receiving 9% of votes and only 5% believing the broader impact of Japan's earthquake/tsunami crisis to be the biggest threat.    

Soaring commodity prices have certainly hit headlines so far this year. The price of gold continued its upward march to hit a record high of $1,530 per troy ounce last week, while crude oil prices have also pushed higher this year, with both Brent and West Texas Intermediate (WTI) breaking $100 per barrel in February for the first time since September 2008.

However, rising agricultural prices are what people should really be paying attention to, believes Philip Verleger, economist and professor of management at the University of Calgary's Haskayne School of Business. He believes the impact of higher energy prices on the economy is often overestimated. “As long as higher energy prices don’t lead to wage increases and so on, the impact is going to be moderate,” he says. “The impact actually occurs when central banks respond to rising prices.”

Verleger does see food price rises as a big risk, however, especially if wages and therefore the core inflation rate are affected. He adds that growing inflation in China is already evident in higher food prices. “If I was going to pick the thing that worries me most right now, it would be the weather in the mid-west of the US,” he continues. “The devastation by flooding in Australia in December and January affected the wheat crop there, and Argentina’s has also been lower. The US could lose more of its corn crop from current wet weather and that would set in motion much higher food prices, which is a much greater risk [to the recovery].”

Figures from the Foreign Agriculture Service of the US Department of Agriculture show US corn and wheat exports slowed during the week of April 15–21. Corn exports of 907,800 metric tons (MT) were down 3% from the previous week and 11% on the prior four-week average. Wheat exports of 826,200MT fell 4% from the previous week but were up 3% from the prior four-week average.

According to the latest forecast from Commodity Weather Group, showers will continue to affect the Midwest over the next 15 days, with some areas affected throughout May as well.

In addition to rising commodity prices, 32% of voters in the risk.net poll said the eurozone debt crisis escalating posed a risk to recovery.

“These risk factors are the inescapable accompaniments to a market correction,” says Walter Zimmerman, senior technical analyst at United-Icap. “As a technical analyst, I try to listen to what the market is saying. Is the market saying this is a sustainable recovery or only a correction of the previous decline? When you look at the market technically, the answer we get is that there is a very compelling case from price action that the so-called recovery is only the bear market correction of the decline from 2007 in equities and 2008 in commodities. There are credit risks arising from deflation – too much debt, not enough revenue to service that debt.”