Global Commodities Strategy

  • The Q313 rally in industrial metal prices has limited room to run and we think the time to re-enter a bearish industrial metals view in our strategy table is approaching . This is underpinned by our conviction that China is in the throes of a multi-year, structural economic slowdown.

  • With US military action against Syrian targets likely, we continue to highlight upside risks for oil prices. That said, a move by Brent up as far as the Arab Spring highs of US$128-130/bbl is unlikely as we do not foresee any material supply disruption.

  • Gold prices should find stiff resistance around US$1,500/oz and w e expect a move down towards US$1,100-1,200/oz in the coming quarters. Silver looks vulnerable to an even more severe decline.

  • In the past week w e initiated a bearish view on front-month CBOT rough rice in our commodities strategy table and expect prices to head significantly lower in the coming quarters.

  • H aving declined steadily since Q412 in line with our view, we believe grain prices will find a base in Q413 , although they will remain volatile in the coming weeks leading up to the US corn and soybean harvest s .

  • We believe the softs index is close to a bottom . Cotton and cocoa will remain the best supported among softs on the back of China's ongoing stockpiling policy (cotton) and subdued supply prospects in West Africa (cocoa).

  • Commodities will continue to underperform equities over the coming quarters . W e expect the ratio between the MSCI World Equity index and the CRB commodities index to move steadily higher in favour of equities.

The Q313 rally in industrial metal prices has limited room to run. While we called for a bounce in metal prices back in July , we have consistently highlighted that any recovery would be temporary and that headwinds will mount towards the end of the year ( see 'Monthly Metals Strategy', July 18 ) . In our view, the time to re-enter a bearish industrial metals view in our strategy table is approaching due to two key factors:

First , t he unimpressive bounce in metal prices despite a string of consensus-beating China manufacturing PMI readings reinforces our view that economic stimulus measures are having a diminishing impact on end-user metals demand ( see 'Our Take On the Latest Stimulus', August 13 ) . For instance, the industrial metals index has failed to break back into its Q113 range and from a technical perspective , remains locked in a secular downtrend.

Diminishing Returns Of Stimulus
S&P GS Industrial Metals Index (Weekly) & China Economic Stimulus
  • The Q313 rally in industrial metal prices has limited room to run and we think the time to re-enter a bearish industrial metals view in our strategy table is approaching . This is underpinned by our conviction that China is in the throes of a multi-year, structural economic slowdown.

  • With US military action against Syrian targets likely, we continue to highlight upside risks for oil prices. That said, a move by Brent up as far as the Arab Spring highs of US$128-130/bbl is unlikely as we do not foresee any material supply disruption.

  • Gold prices should find stiff resistance around US$1,500/oz and w e expect a move down towards US$1,100-1,200/oz in the coming quarters. Silver looks vulnerable to an even more severe decline.

  • In the past week w e initiated a bearish view on front-month CBOT rough rice in our commodities strategy table and expect prices to head significantly lower in the coming quarters.

  • H aving declined steadily since Q412 in line with our view, we believe grain prices will find a base in Q413 , although they will remain volatile in the coming weeks leading up to the US corn and soybean harvest s .

  • We believe the softs index is close to a bottom . Cotton and cocoa will remain the best supported among softs on the back of China's ongoing stockpiling policy (cotton) and subdued supply prospects in West Africa (cocoa).

  • Commodities will continue to underperform equities over the coming quarters . W e expect the ratio between the MSCI World Equity index and the CRB commodities index to move steadily higher in favour of equities.

Diminishing Returns Of Stimulus
S&P GS Industrial Metals Index (Weekly) & China Economic Stimulus

The Q313 rally in industrial metal prices has limited room to run. While we called for a bounce in metal prices back in July , we have consistently highlighted that any recovery would be temporary and that headwinds will mount towards the end of the year ( see 'Monthly Metals Strategy', July 18 ) . In our view, the time to re-enter a bearish industrial metals view in our strategy table is approaching due to two key factors:

First , t he unimpressive bounce in metal prices despite a string of consensus-beating China manufacturing PMI readings reinforces our view that economic stimulus measures are having a diminishing impact on end-user metals demand ( see 'Our Take On the Latest Stimulus', August 13 ) . For instance, the industrial metals index has failed to break back into its Q113 range and from a technical perspective , remains locked in a secular downtrend.

Rally On Borrowed Time
China Iron ore Import Price, 62% (US$/tonne) & Fortescue Metals Share Price (AUD)

Second, investor sentiment towards industrial metals has recovered significantly from the bearish extremes of Q213. From a timing perspective, this indicates to us that the market is becoming ripe for a resumption of its multi-quarter downtrend. Indeed, while net speculative long positions for COMEX copper were at 2009 lows in June, they have since rebounded strongly. We see this as a sign that short base metal positions have been significantly unwound in recent weeks. This view is reinforced by the substantial bounce that mining equities have enjoyed in recent weeks.

Global Commodities Strategy
Entry Date Entry Level Gain/(Loss) Rationale
Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg
AGRICULTURE
Bearish Rough Rice (front-month CBOT) 29-Aug-13 16.65 5.14% Thailand will release its stocks and scrap its subsidy policy, very well-supplied global market.
ENERGY
- - - - -
METALS
Bullish Platinum (spot) vs Gold (spot) 29-May-2013 1.055 2.70% Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold.

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Sector: Country Risk
Geography: Turkey, Global, Turkey, Global, Global
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