According to reports appearing in the Wall Street Journal, commodity and stock markets dipped in both Europe and US on June 22, along with the growing concerns that economic recovery may still be too far and that the commodities and stock markets rally was not in line with the fundamentals.

During the last few months, investors' optimism regarding the state of the global economy and chances of an early economic recovery pushed up both the commodity and stock markets. According to international press reports, silver was up 59 per cent from December lows on future markets, copper was up 90 per cent, corn 45 per cent and crude oil 113 per cent. Similarly, the stock markets also rallied. Ukraine's stock market was up 125 per cent, Vietnam 116 per cent, Indonesia 76 per cent and India 87 per cent, from the lower level in December 2008.

However, the aforesaid increases in stock and commodity prices are not sustainable as per the analysts. Copper futures declined by 5 per cent on June 22 in New York. Oil futures nearly fell by 4 per cent. Aluminum maker Alcoa was off 8.9 per cent, while US steel fell 9 per cent. Similarly, the stock markets are showing a downward trend. The Dow Jones Industrial Average declined by 5 per cent in the past six trading sessions, while Nikkei again tumbled below the 10,000 mark, after crossing it last week. If the stock markets rally and the increase in commodity prices during the last three months were not based on fundamentals, then what else pushed them up?

According to analysts, a portion of the money earmarked by the governments for stimulus spending found its way into the stock and commodity markets. This seems to be possible, since both the local and the external demand were at a lower level during the period, due to which there was no point in boosting production.

The US government alone reportedly allocated $11.4 trillion for stimulus spending (both direct and indirect) during the last two years. Besides, China announced stimulus plans for $600 billion for direct stimulus spending, Russia $290 billion, Britain $147 billion and Japan $155 billion. The above-mentioned countries and others were reportedly spending trillions more indirectly to boost the economy.

However, after investing freely in the stock and commodity markets during the last three months – which pushed up these markets – the investors were now having second thoughts about future investment. This second thought inter-alia resulted from the latest World Bank report, which said that the global economy might shrink 2.9 per cent in 2009, instead of 1.7 per cent predicted earlier. The pause in investment resulted in the decline of stock and commodity prices, as explained in the preceding paragraphs.

Earlier, statistics released showed that in the first quarter of 2009 (January-March 2009), the US economy contracted by 5.5 per cent, while the EU and Japanese economy contracted by 14-15 per cent. Now, after seeing the WB report predicting 2.9 per cent contraction of the global economy in 2009, the investors feared that their hopes regarding early recovery of the global economy may not materialise and they were now anxiously waiting for the second quarter growth reports - expected to be announced sometime in July.

According to reports appearing in the international press, a growing number of investors have now decided to take some money off the table. According to analysts, the majority of investors would be reluctant to invest in the aforesaid situation, unless and until signs of economic growth become quite clear. Oil prices declined to less than $33 a barrel in December 2008. But, then, investments in the oil market pushed up the oil prices to over $70 a barrel. However, after release of the WB report saying that the global economy was likely to contract by 2.9 per cent in 2009, oil prices recently fell below $70 a barrel and it finding it difficult to move beyond $70 a barrel.

According to international press reports, investors are losing confidence in the prospects for a jump in the summer US oil demand. US petroleum data released in the 3rd week of June showed sharp increase in the inventory of motor fuel. This report put a restraint on the rising oil prices, which crossed the $70 a barrel mark. In the US – the world's largest oil consumer – demand for oil usually peaks in summer, with the start of the driving season. But, this year, poor economy curbed vacation plans, while rising unemployment reduced the number of commuters. Demand for oil in the US is much lower, at present, than it was at this time, last summer.

It looks almost certain now that oil and commodities prices are in no position to move towards their previous highs, at present. The industrialised world is still in the grip of recession. The global economy is expected to contract by 2.9 per cent in 2009, according to the latest WB report, while the US economy is likely to contract by 1.3 per cent in the 2nd quarter, as compared to the contraction of 5.5 per cent in the first quarter of 2009. This provides an opportunity to Pakistan to bring down its inflation rate, which is still running in double digits. Since the world oil and commodities prices are likely to remain restrained during the next few months due to lingering recession, the same would not be able to put any pressure on local prices in Pakistan. The government may, therefore, take effective measures to bring down inflation, taking advantage of the situation.