A Barclays note on commodities says a lot about how scared markets still are:
- The signals that commodity prices are moving ever further below long-term equilibrium levels continue to proliferate. However, despite the growing lists of producers cutting output and projects being cancelled or deferred, commodity prices show little sign yet of bottoming out. In fact in most energy and industrial metals markets, the price decline has accelerated again over the past week.
- Current price levels are likely to encourage demand to grow much faster than supply over the medium term, but with financial markets showing few signs of stabilising and while economists continue to play leapfrog in their downgrading of 2009 growth forecasts, it is unlikely that downward price trends will be interrupted just yet.
- For investors the key theme is still one of risk aversion as market participants continue to reduce both counterparty and market risk. Consequently, hedge funds, institutions and retail investors are still liquidating their long positions in commodities and the downward price momentum that this is causing is feeding aggressive shorting of a number of markets by technical traders.
The point: The fundamentals of supply and demand are still a secondary concern in all sorts of markets, and it's not industry patterns that are driving selling across the commodity spectrum. Instead, it's fear -- of credit problems, of unknowns at hedge fund -- and confusion over just how bad the global slowdown will get that are creating a wild trading environment everywhere. On a day where stocks tested their lows for the year before posting a big rally in the afternoon without much in the way of credible explanation for either, investors shouldn't expect trading to calm down soon.