China’s slowdown weighs on cyclical commodities, with uncertainty keeping investors defensive.
Uncertainty over the outlook of the global recovery has been compounded by the US Federal Reserve’s decision to delay its rate tightening cycle. The Fed’s emphasis on subdued inflation and the spillover effects of a slowdown in the Chinese economy drove cyclical markets lower. Simultaneously, defensive commodities have benefited, as central banks continue to support the global recovery with excess liquidity and record low rates. We expect that central bank stimulus and the overly pessimistic view of the Chinese economy by investors will change and other major global economies will help lift fragile demand in the months ahead. Although seasonal demand is expected to keep the energy sector under pressure in the near term, unexpected drawdowns in US inventories have seen WTI outperform and we feel that supply side issues will gradually improve towards the end of 2015.
- Intensifying El Niño threatens global crop harvests. The potential for the current El Niño to develop into the most extreme on record has seen support for a broad range of agricultural commodities. With prices remaining at relatively attractive levels from a historical standpoint, the balance of risks appears to be to the upside in the near-term.
- Gold and silver benefit from Fed rate hike delay as physical demand remains solid. As long as the Federal Reserve keeps interest rates unchanged due to the lingering global economic uncertainty, defensive commodities like gold and silver stand to benefit. Simultaneously, physical demand from emerging markets and the official sector should provide baseline price support.
- Industrial metals prospects diverge despite uncertainty surrounding Chinese outlook. Negative investor sentiment continues to pervade the industrial metals sector. Moreover, signs of plentiful supply in zinc, copper and aluminium markets suggest a price improvement will depend on a reversal of recent weakness in Chinese data.
- Seasonally weak demand keeps downward pressure on energy sector prices. An oil glut and weaker seasonal demand, as the northern hemisphere summer (and the US driving season) draws to a close is likely to keep distillates and natural gas prices under pressure. Winter conditions, and the impact of El Niño on temperatures will be the main focus for investors going into Q4 2015.
Martin Arnold – Director, Global FX & Commodity Strategist – ETF Securities