Commodities rebounded on Monday after a beating last week triggered by an increasingly cautious Federal Reserve in the face of inflation. History and fundamentals show that the one-day rally could be turned into an honest winning streak, strategists say.
Copper gained 0.7% on Monday after falling 8.3% last week, while gold rose 0.8% after falling 5.8%. And the Bloomberg Commodity Index rose 0.6% after falling 2.9% last week. The index has 23 commodity futures contracts across six sectors: energy, grains, livestock, precious metals, food and fiber, and industrial metals.
Commodities were on a good run ahead of the release of the Fed’s monetary policy statement. The Fed, however, signaled two possible rate hikes in 2023 and acknowledged that members have started discussing reducing – or shrinking – the size of its bond buying program. This caused bond yields to fall and the US dollar to rise, both negative for commodities, which are priced in greenbacks.
But the tapering might not be too damaging to the raw materials complex. During the 2013 âTaper Tantrumâ, triggered by the Fed’s brutal decision to reduce its bond purchases, the Bloomberg Commodity Index fell a little over 2% in three months, from the end of May to the end of August. , according to Gavekal Research. . It was the second best performance, behind the
âOn 12 assets that Gavekal followed for this period.
This outperformance suggests that the strength of the economy may play a more important role for commodity prices than monetary policy, Sikand writes. “This apparently counterintuitive outperformance of the ultimate pro-cyclical asset [commodities] During a period of strong risk aversion, fundamentals of supply and demand are more important for commodities than financing conditions, âwrites Sikand.
And the current dynamic of supply and demand favors rising commodity prices right now. Gavekal data shows that inventories of several metals, including copper, have trended downward in 2021. In contrast, demand is expected to be strong as the world strongly recovers from the Covid-19 pandemic.
“Therefore, the outlook for commodity prices remains on the upside,” writes Sikand.
Bottom Line for Investors: A break can be just that, and nothing more. Commodities can have history and economic fundamentals on their side.
Write to Jacob Sonenshine at [email protected]