Commodity prices are a good indicator of global economic growth and monetary policy. Neither looks investor-friendly right now. Equity markets haven't got the message. Prices are falling for a wide variety of raw materials, from oil and cotton to corn and sugar. The S&P GSCI Enhanced Commodity Index has declined 11 percent since end-May. A strengthening dollar may have magnified the fall. But energy, metals and food have become cheaper in euros, yen and pounds, too.
The economy provides the best explanation for the simultaneous drop. Commodities tend to move in lockstep with near-term output growth, and analysts' average forecast of global GDP expansion in 2014 has fallen to 2.8 per cent, from 3.1 per cent at the start of the year. The 0.3 percentage point downgrade translates into $170 billion of lost output.
As long as China avoids a crash landing, commodities shouldn't collapse as they did in 2009. Then real global output shrank by $1 trillion. But commodity buyers have another reason for to be wary: a less stimulative monetary policy.
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In more ebullient times, fears about elevated geopolitical tensions would sustain commodity prices. Right now, though, the reality of insufficient demand is more powerful. The International Energy Agency last week reduced its estimate of 2014 global oil demand for the third straight month, terming the slowdown as "nothing short of remarkable." The sub-$100 barrel of oil could easily become a sub-$90 barrel.
Stock markets aren't trembling. The MSCI World index is just two per cent below its early July high. But commodity currencies could be a more accurate indicator. The exchange rates of key exporters - Australia, New Zealand, South Africa, Chile and Canada - are all falling. That suggests more price declines to come, and slower GDP growth. Shares cannot resist the demand chill forever.
