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Markets Must Decide Which History to Believe

Oil is sliding, with West Texas Intermediate Crude entering a bear market on an intraday basis Tuesday by dropping more than 20 percent to $61.31 from its high last month of $76.90 on Oct. 3. The decline in global crude prices is largely credited to lessening concerns about tight supplies, with American stockpiles expanding for almost two straight months and the U.S. government granting waivers that will allow some of Iran’s biggest customers to buy oil from OPEC’s No. 3 producer for another six months, according to Bloomberg Samuel Robinson.

But maybe there’s more to the story, and the drop in prices and rise in supply is connected to an economic slowdown.

The case for that argument can be seen elsewhere in the commodities market. An index of non-exchange-traded industrial commodities compiled by the Economic Cycle Research Institute has dropped to its lowest level since early 2016. According to ECRI, most market observers don’t watch non-exchange-traded commodities such as rubber and animal hides; it’s a case of "out of sight, out of mind." But these commodities are closely linked to global industrial growth, and the big declines this year are a red flag.

And they’re not the only warning sign: JPMorgan Chase & Co. economists wrote in a research note last week that their global PMI manufacturing output reading for October fell to its lowest level in more than two years. "As momentum swings in the manufacturing sector often are a leading edge of turns in the broader business cycle, this news challenges our view that both manufacturing and global GDP will continue to grow at an above-trend pace in the coming quarters," the economists wrote in the note.

[The PMIs peaked after global industrial production growth peaked. In contrast, ECRI global leading indexes clearly led the peak. - Ed.]


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