Commodity prices, especially crude oil, began last week with a bang as Beijing announced a $568 billion government-spending stimulus package to rev up its failing economy.
Just as the recent plunge in demand for commodities from Europe and the U.S. was being further threatened by the cooling of China's huge economy, China's surprise move boosted prices for crude on Monday more than $5 up to $65.50 per barrel.
Massive economic problems quickly returned to dampen enthusiasm by Tuesday as unemployment, bankruptcies, falling U.S. real estate values and the disappearance of credit dominated investors' concerns on Wall Street and in Washington.
Tumbling prices for stocks and commodities accelerated midweek despite the administration's reversal (announced by Treasury Secretary Paulson) regarding the $700 billion bailout of the U.S. economy. Paulson stated the government would abandon the original rescue effort for the financial system slated to use the money to buy toxic bank assets.
Instead, he now proposes purchasing bank stocks to bolster their balance sheets and, hopefully, resume lending. The tight credit markets have been hurting commodity demand by preventing the build-up of inventories, especially for crude oil, which fell to $54.20 per barrel (a low for the year) on Thursday morning.
Then Thursday midday, a boom in crude oil and the stock market abruptly turned virtually all markets sharply higher.
Often when stocks sell off, investors turn to gold as a safe haven. But recently the crash in stocks has been seen as a sign of deflation. When the stock market took off this time, crude and gold moved in tandem as if the three markets were married to one another.
Little reason, except "drastically oversold conditions" emerged to explain why this explosion occurred, though some analysts cited upbeat anticipation of the G-20 Economic Conference in Washington.
Friday morning showed a strain on the crude-gold-stocks marriage, as stocks and crude fell downward while gold rallied more than $40 per ounce, possibly hinting that inflation may heat up.
Opinions expressed solely are those of the writer. Walt Breitinger is vice president of commodities at Wachovia Securities. He can be reached at (219) 738-6460.
