From Capital Economics via Fairfax:
The renewed weakness in global commodity prices, notably oil and copper, is obviously a concern for producers but the current pessimism looks overdone, says Capital Economics.
Key commodity prices have been slipping over the past weeks, pulled down by worries about China’s growth and as chances grow that the Fed will start lifting US rates in December, which has strengthened the greenback and in turn weighed on commodities.
The falls have been sufficient to drag the most closely-watched commodity indices down to their lowest levels since the depths of the global financial crisis in 2009.
“We still expect prices to recover gradually over the coming months, while remaining low enough to provide a substantial boost to spending on other goods and services,” says chief global economist Julian Jessop.
This bigger picture isn’t quite so clear for copper, Jessop concedes.
“But even so, the recent declines in the prices of industrial metals have been much smaller than those earlier in the year. It would therefore be misleading to characterise these markets as being in “free-fall”, despite the new post-crisis lows.”
This is also important when looking at the impact on inflation, he adds.
“The drag on inflation from lower energy costs will fade over the coming months as the much bigger declines a year ago drop out of the annual comparison,” Jessop says. “In most cases the outcome will be a rebound in headline inflation from near zero, although inflation will remain low.”
The condition is that commodity prices don’t continue to fall. But Jessop is fairly confident that it’s more likely commodities will start to recover soon, listing three main reasons:
- Supply is starting to be cut in response to the previous slump in prices. The pace will vary by commodity, largely depending on cost structures, but the old adage that “the best cure for low prices is low prices” still holds true.
- Markets have become too pessimistic about the outlook for demand. We expect the news from China in particular to improve over the remainder of the year and into 2016.
- Investor sentiment towards commodities had (at least until very recently) shown signs of bottoming out. Indeed, compared to high-priced equities and bonds, many commodities now look attractively valued.
Deary me, more attempts at catching the falling knife:
- Cuts to date to commodity production are self-evidently not enough. There is no single commodity that I can point to where this is the case.
- Chinese data remains dreadful and deteriorating. Forward looking indicators such as credit have not improved. The property rebound is slowing in tier one cities and never got traction in the lower tiers. Even if there is a little rebound on fiscal measures it will be brief. The glide slope to lower and less commodity intensive growth is intact and is the only investment story that matters.
- Investor sentiment for commodities has taken a blow but it is nothing like the utter revulsion we will see at the bottom of a major bear market.
Remember the advice of Jesse Livermore, when in a bull market be bullish. Conversely, when in bear market be bearish.
