Rate rise fears temper firm commodity fundamentals
ETF Securities Commodity Monthly Monitor – Rate rise fears temper firm commodity fundamentals
Your reference guide to commodity markets. Includes the latest outlook for each commodity sector and major developments for individual commodities.
- Despite the lower probability of a La Nina weather pattern developing this year, the overhang of record stock levels and higher production forecasts are weighing on prices.
- Fundamentals to sustain a recovery in industrial metals in Q4 or Q1 2017.
- Oil continues to remain volatile, but will trade within a range of US$40/bbl to US$55/bbl.
- Precious Metals likely to remain volatile amid key central bank meetings.
The base effects from the commodity rout in late 2015 only begins rolling out of the headline inflation data in late 2016 but should leave US inflation close to 1.7% by year end, up from 0.8% now. This coupled with rising wages is likely to pressure the US Federal Reserve to raise interest rates in December, with a rhetoric prior to that of increasing hawkishness. Following a strong run in commodities (since the February trough) of 22%, weaker growth expectations from China and forecasts for policy tightening in the US have driven a selloff, with commodities declining 6% since late June. We have continued to see inflows into safe-haven assets, particularly gold, reflecting a wide range of concerns that can be categorised into five main categories:
- uncertainty from the Fed and
- the ECB over policy action,
- Middle-East instability,
- negative interest rates surpassing that of gold’s cost of carry and
- the broad rise of political populism in the developed world.
We believe that the rise of populist parties, elected or not, is a powerful catalyst for reform, with incumbent parties scrambling to counter the populist wave by implementing similar policies. We expect economic stimulus to shift solely from monetary policy to include fiscal policy with the end result being a rise in infrastructure spend and social initiatives to combat inequality, prompting wider government deficits and higher inflation. Despite the broad set of fears pervading the market at present we are continuing to see improving growth figures from the developing markets where delivered economic data is broadly beating expectations. We believe the emerging markets are much better positioned to weather the prospects of a stronger USD now than they were 3 years ago.
- Despite the lower probability of a La Nina weather pattern developing this year, the overhang of record stock levels and higher production forecasts are weighing on agricultural commodity prices. Coffee, sugar, corn and soybean oil were the only commodities to post positive returns among the agriculture commodity complex.
- Fundamentals to sustain a recovery in industrial metals in Q4 or Q1 2017. Declining production combined with rising consumption resulted in a global supply deficit in each industrial metal in Q2. The commodity sector may end 2016 in a deficit for the second time since 2005. We believe copper is the best positioned to benefit from the recovery.
- Oil continues to remain volatile, but will trade within a range of US$40/bbl to US$55/bbl. Speculation as to whether OPEC will freeze production after its informal meeting later this month has been a source of that volatility. However, we believe that focus on an OPEC freeze is misplaced and cuts to non-OPEC production will push the market into balance.
- Precious metals declined 2.1% last month as expectations of a US rate hike this year increased and the ECB failed to signal any further loosening of policy. We believe demand for gold and silver is likely remain volatile in the second half of the year amid a number of decisive central bank meetings and the US presidential election.
For those of you following the contrarian model we have the following signals;
Copper COPA LN
PCOP LN (GBP hedged)
00XL GY (EUR hedged)
LCOP LN (2x Leverage)
3CUL LN (3x Leverage)
Live Cattle AIGL LN
FLIV LN (Longer dated)
LLCT LN (2x Leverage)
LGAS (2x Leverage)
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