Bearish Factors Aligning For Commodities
Commodity markets have been edging higher in recent days as risk appetite has tentatively re-emerged. With several key markets now testing resistance, how much further can commodities bounce? With this question in mind, I would highlight the following:
- In the event of a continued improvement in risk appetite over the coming days, Brent Crude and Base Metals are best placed to head higher.
- However, with regard to the medium-term picture, commodity markets are being pulled in opposite directions by countervailing forces. On the one hand, a strong rebound in consumption figures for industrial commodities points to a robust cyclical recovery. On the other hand, capital markets suggest a far bleaker outlook.
- With several bearish factors aligning in recent weeks, I see a significant risk of a bearish trend change in commodity markets.
Reuters-Jefferies CRB Index
First, while the short-term picture shows some promise, weekly and monthly charts for commodity markets urge caution. Equity markets looks similarly precarious. Second, fixed income markets in a number of developed states (Australia, Germany, US) are increasingly pricing in an extended low-interest rate, low-growth environment. Third, some commodity currencies such as the Aussie dollar look toppy. Most importantly, should Business Monitor’s key macroeconomic convictions play out in the coming months, the cyclical rebound could be derailed. BMI calls for a slowdown in US economic activity as we move into 2011, and significant macroeconomic headwinds in China. Taking these factors into account, despite potential for a continued bounce in the coming days, I am increasingly cautious commodities in the medium term.