Impact of Commodity Market News on Sentiment
In the constant search for value, traders and investors would do well to stay updated on macroeconomic news from the commodities sector. Much has been written about the performance of commodities in the world press and it’s worth exploring how news reports can move the markets and influence sentiment.
Starting right from the beginning, is there really a direct link between commodity prices and news? What proof is there that market participants react to news by buying and selling assets? Maybe it’s not enough to make intuitive observations or go by experience. After all, the senses can make the wrong connections sometimes and even the most experienced investor might make an unproven assumption.
Causal link between news and commodity prices
The answer is yes, there’s a causal link between news and a major commodity’s prices - gold - according to quantitative researchers Ankur Sinha and Tanmay Khandait. Their study was published in 2020 and examined over 1000 gold news headlines from well-established and solid sources.
“...we performed a causality analysis, which reveals that the price related news on gold significantly impacts the prices of gold.” Ankur Sinha and Tanmay Khandait. Study: ‘Impact of News on the Commodity Market: Dataset and Results’.
The news headlines were mainly categorized into ‘price up’, ‘price stable’, ‘price down’, ‘future price news’, ‘general news’ and ‘asset comparison’, amongst others. The research concluded that the headlines influenced gold investors’ buying and selling behaviour even 24 hours later.
The fact that commodity prices like gold are affected by news reports can be observed in market trends. In one extreme example, on June 23, 2016, spot gold prices rocketed up, indicating significant uncertainty in the financial markets. This was the day of the Brexit referendum when traders and investors reacted to the uncertainty by moving resources into gold-linked assets.
These trends represent buyers and sellers accepting or rejecting asset prices and we can see patterns across other commodities that can often be traced back to influential reports. For example, Australia’s New South Wales Weekly Commodity Report, which summarizes price directions for wheat, barley, sorghum, sugar, cotton, oilseeds and chickpeas, to name a few. The report is compiled from sources like the USDA and Grain Central. In addition to an overview of prices, the report includes a snapshot of the weather because it directly affects agricultural production.
Coffee and other commodities
The US Department of Agriculture (USDA) publishes reports on a broad range of commodities, from cotton and coffee to meat and potatoes. The surveys give insights into international supply and demand as well as price projections in these important commodity markets.
The USDA’s report on coffee covers production in Brazil, Vietnam, Colombia, Indonesia and other world producers. There are fascinating facts about coffee in the report, did you know that the European Union accounts for 40 percent of world coffee imports, mainly from Brazil? Brazil is also one of the main suppliers to the second largest importer of coffee - the USA. From there, it’s not a far stretch that the information included in the coffee report would have a ripple effect on share prices in the coffee retail and leisure sector if something unusual happened.
Following the International Monetary Fund’s (IMF) commodity news sources can help commodity traders and investors to track price movements for international commodity prices and import/export levels from timber to tea. The IMF’s Commodity Data Portal tracks 68 commodity prices from four commodity classes: energy, agriculture, fertilizers and metals.
Perhaps the most useful information in the benchmarks is understanding the usual range of prices for each commodity. In this way, when a price spikes or falls, you’ll know it’s an unexpected movement and look for the reason behind it. Just as we instinctively know when we’re paying too much for a cup of coffee, the instinct will be to do some research and dig into the causes of the price’s movements.
In the example of gold spot prices, market sentiment follows trends and - as traders and investors grow increasingly informed and sophisticated - these trends are likely to become more and more based on the fundamentals of supply and demand.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.