Market Strategy - Global Commodities Strategy - Monthly Roundup - FEB 2017

We remain positive towards commodity prices over 2017, as the combination of improving supply and demand fundamentals and rising global inflation expectations will support prices. Commodities look particularly attractive relative to bonds and equities - especially US stocks - and we maintain our long-held view that real assets will outperform ( see ' Weekly Market Views: Real Asset Revival In Play ' , January 23). Extreme valuations in bonds and equities, at a time when commodity prices are still low despite the rally recorded in 2016 - hovering around their 2015 levels -, will support this view.

Commodities Outperformance To Gain Momentum In 2017

Bloomberg Commodities Index, weekly and versus the S&P 500 Index.

Note: An increase in the ratio represents S&P 500 outperformance. Source: Bloomberg, BMI

Oil and grains, along with precious metals, remain our favourite picks in terms of outperformers in 2017. Improving supply and demand fundamentals (oil and grains) and currently extreme bearish speculative sentiment (grains and precious metals , see chart below) will support prices this year. Gold prices have picked up in January after weakening sharply in Q416 and we expect this trend to continue in 2017, driven by disappointing US economic growth and rising inflation, which will keep a lid on real US yields and keep gold attractive. We hold above consensus price forecasts for these three commodities sub-segments.

Reversal In Sentiment Will Buoy Grains And Precious Metals

Select Commodities - Ratio of Long To Short Speculative Positions

Note: simple average of individual commodities : precious metals = silver and gold; oil = Brent, WTI; grains = wheat, corn, soybean; softs - sugar, coffee, cotton, cocoa. Source: Bloomberg, CFTC, BMI

We have turned more cautious towards industrial metals, and expect prices to undershoot market expectations this year. Prices will remain supported in H117, especially in the case of ferrous metals, copper and aluminium, but the outlook for the rest of the year is less rosy, amidst growing risks to Chinese economic activity ( see our Country Risk coverage on China ' Weekly Recap: Steady GDP Growth Worsens Structural Weaknesses ' , January 25). We believe most of the positive developments on the demand side - namely, China's ongoing aggressive fiscal spending - have already been priced in. Policies in China in 2017 will be aimed at 'supporting' growth rather than replicating the significant growth boost of 2016, and we believe GDP growth will be constrained by an eventual downturn in the housing market and pressure on exports from a more protectionist US. As a result of these factors, we expect all metals to average lower than currently elevated spot prices in 2017. Meanwhile, we are bearish on coal and LNG prices over 2017 as stronger Chinese coal supply and robust global LNG production loosed these markets.