[The Age of Bubbles] World Central Banks Helpless Except for 'Warnings'... Emerging Countries Just Watching

Iron Ore and Corn Prices Surge Over 40%

Following Stocks, Real Estate, and Cryptocurrency,

Speculative Funds Flow into Commodities

Unstable Employment Indicators, COVID-19 Uncertainties

Central Banks Worldwide Maintain Near-Zero Interest Rates

Risk Burden Left to Investors

[Asia Economy Reporters Byunghee Park, Eunbyeol Kim] ‘Stocks, Real Estate, Cryptocurrency, Copper, Iron Ore, Lumber...’

The soaring asset prices across both physical and virtual markets have been largely influenced by over a year of near-zero interest rates following the outbreak of the COVID-19 pandemic. Excess liquidity has not only flowed into commodities but speculative funds have also surged, further driving price increases amid economic recovery and rising demand.

The problem is that despite clear signs of a bubble, there is little that can be done beyond issuing warnings to investors. Central banks worldwide, including the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BOE), have only issued cautions about the rapid rise in asset markets while maintaining near-zero interest rates. Given weak employment data and significant COVID-19 uncertainties, it is not yet time to raise rates. Naturally, Asian countries, including South Korea, must follow the U.S. lead. Moreover, Asia’s vaccination rates remain lower compared to developed countries. Ultimately, for various reasons, central banks are ‘knowingly allowing the bubble to grow.’ During this bubble expansion, the risk burden falls on individual investors.

Guri Photo by Reuters Yonhap News

Iron Ore and Corn Prices Surge Over 40%

According to Bloomberg and others on the 11th, iron ore futures prices on China’s Dalian Commodity Exchange have risen 43% since the beginning of the year. As China’s economy recovers, demand for iron ore has increased, but tensions with Australia, a major iron ore supplier, have escalated, causing supply instability and price hikes. Brazil, the world’s second-largest iron ore producer, is also facing production disruptions due to COVID-19 and heavy rains. Iron ore prices hit record highs last week and surged by the maximum 10% limit immediately after trading opened on the 10th at exchanges in China and Singapore.

However, the recent short-term surge is difficult to explain by demand recovery alone. Analysts suggest speculative forces are fueling the bubble. Analyst Wu Shiping from Wuhan Tenfeng Futures in China stated, "Most of the iron ore price increase is due to speculative trading." Attila Winell, director at Navigate Commodities in Singapore, also noted, "Market participants are currently trading iron ore futures like cryptocurrencies, buying based on momentum rather than fundamentals."

Copper futures prices recently surpassed $10,000, reaching the highest level since February 2011 ($10,190). On the 10th (local time), copper futures on the London Metal Exchange (LME) slightly declined to $10,382 but still represent a 33.7% increase compared to the end of last year ($7,766). Copper, known as ‘Doctor Copper,’ is a useful leading economic indicator. The recent price surge is partly driven by speculative demand fueled by expectations of increased copper use in electric vehicles and wind power, key sectors in the green economy. Grain prices are also soaring. Corn futures reached $7.73 per bushel on the 10th, up over 50% this year, leading the rise in grain prices. Lumber prices have also increased as home improvement demand rose with more people staying at home due to COVID-19. On the 10th, U.S. lumber futures hit $1,575.60 per thousand board feet (1TBF), four times higher than a year ago.

Fed Issues Warning: "Some Asset Prices Exceed Fundamentals"

Although asset and commodity prices are rising simultaneously, central banks can only issue warnings. The ongoing COVID-19 situation, concerns over the spread of variants originating in India, and uneven vaccine supply contribute to significant uncertainties.

In its Financial Stability Report released on the 6th (local time), the Fed stated, "The values of stocks and other risky assets have risen since November last year, with some reaching all-time highs," adding, "Even considering low Treasury yields, some asset prices are higher than historical standards." It further warned, "If this risk appetite fades, asset prices could fall significantly, causing damage."

However, U.S. interest rate hikes remain distant. According to a survey conducted by the Bank of Korea’s New York office targeting investment banks (IBs), as of the 5th, five out of 13 IBs expect rate hikes only in the second half of 2023. The earliest predicted rate hike among the 13 IBs was the second half of 2022. Although early rate hike speculation arose due to rising inflation, the market still bets that central banks will not raise rates soon.

Nonetheless, there is strong consensus that caution is necessary. The Wall Street Journal (WSJ) noted, "Unlike the dot-com bubble, price increases across all sectors can be interpreted as a sign of economic recovery," but warned, "Unprecedented monetary and fiscal stimulus driving rapid inflation and asset price surges could come at a significant cost."