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Oil and copper prices are weakening despite China's reopening. It's a sign a global recession is coming but liquidity issues may also be at play, economists warn.

Copper
A worker ties copper wire rods before loading them onto a truck at the workshop of a company on January 29, 2023 in Huai'an, Jiangsu Province of China.(Photo by Yin Chao/VCG via Getty Images)
  • Oil and copper prices have remained weak of late despite China's reopening from COVID-19 restrictions.

  • It's a signal that a global recession is on the horizon, according to one economist.

  • But liquidity issues triggered by rising interest rates may also be weighing on commodities, another economist told Insider.

Oil and copper prices are staying weak even as China's economy rebounds from a coronavirus-fueled slowdown, and that suggests a global recession is underway, according to economists.

Since mid-January, the two commodities have dropped about 6% and 5%, respectively. That's in spite of China, the world's largest buyer of crude and the red metal, making a full U-turn on its strict zero-COVID restrictions.

"Whatever is going on in China, there's no sign that the end of zero-COVID is boosting global growth, based on commodity prices. Oil prices never went up and copper prices are falling after the initial China reopening excitement fades. Global recession is coming," Robin Brooks, chief economist at the Institute of International Finance, said in a tweet.

 

 

Declines in oil and copper prices despite the economic reopening of China, one of the world's biggest buyers of raw materials, suggests lingering investor anxiety about economic risks, according to Craig Erlam, market analyst at OANDA.

"Lower commodity prices in the face of a strong Chinese recovery would certainly suggest to me that markets are factoring in slower growth elsewhere," Erlam told Insider.

Not everyone sees it that way. The weakness in key commodity markets may be more of a reflection of reduced financial-market liquidity amid rising global interest rates, according to Marc Ostwald, chief economist and global strategist at ADM Investor Services.

"No shadow of a doubt, there is no depth to markets (bid offer spreads widening, and depth and number/size of market bids/offers below current prices)," Ostwald said.

In an illiquid market, traders cannot agree on asset prices, increasing uncertainty about demand and supply prospects. Higher interest rates tend to crimp a country's money supply as they raise funding costs for investors, leading to liquidity issues.

Ostwald referred to the sharp change in oil prices last Friday to fortify his point. "As witnessed in oil prices round trip on Friday, if there was liquidity, the market does not do round trips like that - the same thing applies to copper and Treasuries," he said.

"If you were to speak to physical oil traders (crude or product), they will probably tell you that nothing much has changed over the past week, so this is about  'paper' markets underlying liquidity, i.e. it's a financial problem, not supply," Ostwald added.

Read the original article on Business Insider