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Wrap of the week: Supersized rate hike shocks global markets

Equity markets around the globe have bled after yet another supersized 75bps rate hike by the Fed, bringing the current US federal funds rate target up to 3%-3.25%, the highest since 2008, and blowing out 2023 projections to 4.6%.
Equity markets around the globe have bled after yet another supersized 75bps rate hike by the Fed, bringing the current US federal funds rate target up to 3%-3.25%, the highest since 2008, and blowing out 2023 projections to 4.6%. The S&P 500 closed out Monday night’s trading session -6.28% lower than the previous Monday and -24.15% lower than its January all-time high. All eyes are on the June low for 2022, with the index just another 0.5% away from breaking it. The S&P/ASX 200 finished Tuesday’s trading session -4.56% lower than the previous Tuesday, and is -14.89% lower than its all-time high in August 2021. Resources account for over 70% of Australian exports, and mining represents 11.5% of GDP. It is a stark reminder that it took 11.5 years for the S&P/ASX 200 to recover and reach its resources driven pre-GFC peak, but it took the S&P 500 just five years. Just a few months ago, a decade-long underinvestment in supply was driving a commodity supercycle. Now, the Bloomberg Commodity Spot Index, which tracks futures contracts of all major commodities from copper to oil and wheat, is down over 22% from its June peak on recession fears. Usually considered an economic bellwether, copper demand has been driven out of China, which accounts for over 50% of demand. The energy crisis in Europe, which accounts for 15%-20% of demand, threatens to reduce demand to the extent of a price crushing inventory surplus. Citi analyst Max Layton, who in February this year was forecasting a $US9,500/t copper price for Q1CY23, is now forecasting $US6,600/t for the same period because of the gas crunch. Macquarie has put forward a 691kt surplus for 2023, up from a 162kt deficit in 2022.  Global all-in sustaining costs of copper production rose 16.2% year-on-year in 2021 to $US2.12/lb, before the war in Ukraine and oil and gas fundamental undersupply really started to reveal themselves. With copper hovering around $US3.30/lb, and natural gas still trading 83.85% higher than it was at the start of the year, there is not much room to move. Signs of energy-induced commodity market dysfunction are popping up in other resources, with the energy cost of producing one ton of aluminum in France estimated at $US8,000, but all the aluminum spot and futures contracts on the LME trading at less than $US2,500. Past performance is not a reliable indicator of future performance.
Sources:  

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