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


The outlook for commodity prices over the rest of 2017 remains neutral, with the exception of oil and grains, towards which we are more positive. Over a two-year horizon, we remain broadly constructive on commodities and expect prices to grind higher, driven by oil, non-ferrous metals, gold and agricultural commodities. We expect commodities to eventually resume outperforming US equities, but this could be more a case of equities correcting than of commodities rallying significantly from current levels.

The outlook for the US dollar has weakened over recent months, which is a net positive for commodity prices. Although we believe the dollar will continue on a modestly depreciating trend, driven by the narrowing of real yield spreads between the US and the rest of developed markets, it will only provide modest support to commodity prices and will not outweigh other factors that are currently keeping a lid on the complex. Indeed, we continue to expect prices will be anchored in the coming months by signs of slowing economic growth in China and waning optimism surrounding robust US fiscal stimulus. In particular, these factors will remain a drag for industrial metals, especially ferrous metals over the rest of 2017. As Chinese authorities simultaneously ease fiscal support and tighten credit conditions in 2017, China's demand growth for industrial metals will slow in the coming quarters following the revival seen in 2016. Long-term infrastructure projects initiated in 2016 and Q117 will prevent any sharp drop in consumption and prices this year, warranting our neutral view on industrial metals over the next three-to-six months.

In terms of relative performance, we believe oil and grain prices will be the strongest performing commodities over the remainder of 2017. Industrial metals will underperform due to the factors mentioned above. Meanwhile, precious metals will continue to grind higher in unspectacular fashion. Regarding oil, we believe prices will rebound after a weak performance year-to-date. Global demand will outstrip supply over the remainder of Q217 and into Q317, which in turn will draw down global oil inventories. This view is premised on the highly anticipated extension of the OPEC/non-OPEC agreement to restrict supply, which we expect will be confirmed at the OPEC meeting that commences May 25.

Commodities To Outperform
S&P 500 Equity Index & Bloomberg Commodity Index (LHC) & Ratio (RHC)
Source: Bloomberg, BMI

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