The Continuous Commodity Index slumped Wednesday to a fresh 21-month low as the raw commodity sector continues to wilt under the pressure of trader and investor trepidation mostly tied to the ongoing European Union sovereign debt crisis. The CCI is a basket of 17 major raw commodity futures prices combined into one composite index price.
The EU debt and financial crisis has been ratcheted up a notch or two in recent weeks, with the marketplace now wondering if Greece can remain in the European Union and with Spain's banking sector in fresh trouble. There are worries the EU crisis could boil over into a worldwide debt contagion, which would in turn do serious harm to already shaky major world economies and sap worldwide demand for major raw commodities.
Underscoring the serious nature of the EU debt crisis were news reports Thursday quoting St. Louis Federal Reserve president Bullard as saying in a speech in Japan that the EU debt crisis is "grave" and EU leaders must act to prevent a "major meltdown" of the world economies. Bullard also said he is worried about the economic slowdown in raw-commodity-consuming juggernaut China.
Importantly, the speculative traders and investors have backed away from the commodity markets in recent months due to the keener uncertainty that is mainly due to the EU debt crisis. Raw commodities are perceived by the marketplace as risk assets. The vast majority of speculators like to be bullish buyers, not bearish sellers. So, the generally downtrending commodity futures markets of the past few months have seen the speculative trading interest dry up, which has only added to the bearish nature of the raw commodity sector.
Another important element of the marketplace that shows just how risk-averse are traders and investors at present is that Treasury note yields hit a fresh all-time record low below 1.6% on Thursday. The move into safe-haven Treasuries not only is sucking money out of the commodity markets, but the resulting strengthening of the value of the U.S. dollar against the other major world currencies is also working to limit demand for many commodities. Most major world commodities are priced in U.S. dollars. That means when the value of the U.S. dollar rises it becomes more expensive to purchase those commodities with non-U.S. currency.
One early and important clue that the raw commodity sector has bottomed out and is ready to see some fresh price uptrends develop on the charts will be when U.S. Treasury note yields start to see a sustained rise.