Can the commodities sector overcome recession fears?

THE commodities sector has rallied this year, outperforming other sectors of the market. In terms of sectors within the S&P 500, energy delivered the highest positive returns year to date. But despite being a big winner so far in 2022, fears of a global recession have raised caution over the commodities sector.

In view of the current high inflationary environment, central banks around the world have embarked on an aggressive rate hike cycle. The US Federal Reserve, for instance, hiked interest rates by 75 basis points for the second straight month in July in an effort to bring rampant inflation under control. More recently, Fed Chair Jerome Powell reiterated the overarching aim of bringing inflation back down to the 2 per cent goal in his annual address at the Jackson Hole Economic Symposium.

But with aggressive rate hikes underway, the economy is increasingly at risk of a recession. Beyond this, weak economic data coming out of China has also contributed to global recession fears, as China’s factory activity extended declines in August due to new Covid infections. Recession expectations have in turn dampened the near-term outlook for commodities.