Sharp drop in prices: New alarm sounded in economies!

With the tightening measures against inflation, which began with protectionism in foreign trade and continued to rise with the pandemic and the Russia-Ukraine war, accelerated by rising interest rates, the bells of recession are ringing in the global economy. Many financial institutions, especially CitiGroup and Fitch Ratings, say that the likelihood of the world entering a recession is increasing.

Stagnation in the country’s economies, coupled with inflation, tightening and pandemic cases, have drastically dropped the prices of commodities, especially oil, steel, copper, zinc, tin and aluminum. Global markets have entered recession mode.

West Texas crude (WTI) was at 103, Brent crude was below $108. Steel and copper prices have seen the biggest drop in recent years.

Recession pressure on oil prices

Fed Chair Powell's Recession and Oil StatementFed Chair Powell’s Recession and Oil Statement

Economists, on the other hand, report that the global macroeconomic outlook has worsened since the beginning of the year due to tightening financial conditions, war and weakening growth, while inflation, rising interest rates and stagflation weaken sectors.

While it is reported that inflation will rise further in the recession and that the disinflation process could impose huge costs on economies, economists, who have said that the global economy will grow below 3 percent this year, comment that a new wave of unemployment could begin. with the decrease in production.

What is a recession?  A recession is a situation in which real gross domestic product, traditionally in macroeconomics, shows negative growth for two or more consecutive quarters.  It can also be called a recession in the economy.

HARD FALL IN OIL, STEEL AND COPPER

The first reaction came from the energy and metal markets with concerns of the global recession. Brent crude fell 6% to $107, while West Texas crude (WTI) dropped to $102. Analysts commented that Brent crude entered a downtrend after falling below $110 and $90 values ​​will be seen in a short time.

Expectations of contraction in global supply and fears of recession have also led to declines in steel and copper prices. Steel prices in China were at a 16-week low. Iron ore for September 2022 delivery on the Dalian Commodity Exchange has been trading at $107 since March 1, down 5%.

The July 2022 contract on the Singapore Stock Exchange dropped 4.7% to $109.50/t. Iron ore, Completely eliminated 2022 Singapore earnings. Rebar fell 1.3 percent and hot rolled coil 1.1 percent on the Shanghai Futures Exchange.

Analysts noted that markets are particularly concerned that demand growth may not occur while China’s zero Kovid policy is in place, as well as pointing to the current oversupply in the Chinese steel industry.

Copper also suffered from recession fears. Copper prices in London fell more than 1% to hit a 14-month low as the stronger dollar and growing supply concerns put pressure on demand for the metal. Three-month copper on the London Metal Exchange dropped 1.2 percent to $8,885/t. In Shanghai, copper for July 2022 delivery fell 0.4% to $10,121.

METALLIC MARKET FOR DUBAI

While prices have dropped sharply in the commodities market, Swiss commodity sellers and Russian manufacturers have shifted their business transactions to Dubai due to the economic embargo imposed by the European Union on Russia. From now on, investors doing business in Russian commodities will conduct their business from Dubai. It is worth mentioning that investors moved their business to other international centers besides Dubai due to the sanctions imposed on Russia.

Investors, who said commodity trading cannot be stopped, said the Middle East and Asia regions will stand out more than the commodity hubs of Europe and gain importance from now on.

On the other hand, financial institutions reporting concerns about the global recession are on the rise. While US President Joe Biden and Treasury Secretary Janet Yellen both comment that there will be no recession in their country and the world, Wall Street financial institutions are raising their expectations of a recession.

One of the institutions that shared the expectation of recession was CitiGroup, based in the United States. Bank economists, who expect the global economy to grow below 3% this year, have brought the problem of unemployment to the agenda, as well as the recession warning. Economists, especially the decline in commodity prices; They attributed the continuation of the trend for monetary tightening, that is, the cycle of interest rate hikes, to accelerate and expectations of recession to spread.

MACRO ECONOMIES ARE WORSE

The international rating agency Fitch Ratings also explains that the global macroeconomic outlook has seriously deteriorated since the beginning of the year due to the tightening policies against inflation implemented. In the report released by Fitch analysts, it was stated that inflation, rising interest rates and stagflation weakened the sector’s prospects. In the Fitch report, it is stated that tightening financial conditions, weakening growth, Russia-Ukraine war and ongoing supply chain disruptions affect various industries.

In the Fitch report, it is noted that the economic fragility caused by the rapid rise in interest rates has dragged down GDP growth, and that this situation will be less than 3% in the global economy.

Bringing the European Central Bank’s (ECB) monetary policy to the report’s agenda, Fitch Ratings says that the new tool the bank will develop to help highly indebted eurozone members can reduce financial risks, and that policy are still important.

Fitch also noted that the support will support the creditworthiness of these countries, but asserts that progress on debt stabilization and reduction will continue to be important to countries’ credit ratings.

On the other hand, according to ECB analysts, experts working on the European economy do not expect stagflation similar to that of the 1970s in Europe. In the ECB report, it is noted that inflation expectations have increased due to the Russia-Ukraine war, while it is highlighted that economic activity will increase next year and that inflation will fall below 2% in the second half of 2023.

CONTINUOUS INFLATION THREAT

On the other hand, as the global economy enters recession, inflation in countries is pushing the peaks of recent years. UK inflation in May hit its highest level in 40 years at 9.1% a year. The monthly increase in the CPI, registered at 2.5% in April, was 0.7% in May. Both inflation data came in line with economists’ expectations.

While the Bank of England (BOE) forecasts that inflation will rise above 11% in October, many financial institutions report that inflation increases will continue in parallel with the BOE. According to economists, although monthly inflation was lower than in previous months, the figures still reveal the inflationary problem facing the United Kingdom.

Thomas Barkin, chairman of the US Federal Reserve (FED) Richmond, argues that inflation must raise interest rates quickly before it does more damage to the economy. Barkin argues that inflation is high, widespread and persistent, while interest rates are below the normal level. Barkin warns that unless rapid rate increases are made, the Fed may have to move the current situation into a tight zone.


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