Commodities On The Brink
Risk Watchdog has been observing the recent correction in commodity prices with interest. A wave of risk aversion has seen commodities dragged down by weaker equities and a stronger US dollar. Of key concern is the CRB index, which has broken below multi-month support.
The CRB index has suffered several short-term corrections in recent months, only to bounce back once risk appetite has resurfaced. However, prevailing equity market uncertainty and the broader macroeconomic outlook have made my colleagues at BMI particularly wary of a major correction this time around. Here are our key thoughts:
o On a short-term basis, Risk Watchdog sees some room for a bounce. Like equities, many commodities are ‘oversold’. In particular, the daily ‘relative strength index’ for Brent Crude is currently at its lowest since December 2008, when the oil market bottomed.
o Beyond the short-term, things do not look good. A glance at weekly charts confirms this. With only a few days left of trading this month, the monthly charts should also make some interesting reading.
o Should equity markets continue to sell off in the coming days, commodities should follow suit.
o Signs that Chinese authorities are beginning to tighten monetary policy pose a further risk to commodity prices. Rampant Chinese demand (and imports) has been the key driver of commodity prices over the last 12 months. Lower bank lending could curtail this hitherto insatiable source of demand.
On the whole, my colleagues and I hold a cautious view that can be best summed up as follows:
o Given the rapid pace of recent losses, a short-term bounce is on the cards.
o However, we are increasingly concerned about a possible ‘trend change’ for commodities. A continued sell-off in global equity markets would undoubtedly see commodity prices head lower.