Commodity prices
Comment of the Day

August 10 2011

Commentary by Eoin Treacy

Commodity prices

Eoin Treacy's view
Commodity prices - Commodities have been described in this service for at least the last couple of years as the next big opportunity but also the next big threat to the global economy. We are in a secular bull market for commodity prices. However as prices advance they increasingly pose a headwind in terms of inflationary pressures. Energy prices in particular act as a tax on consumption as well as leading to higher input costs for manufacturing and agriculture.

The selling pressure evidenced in stock markets over the last two weeks has resulted in a deep questioning of investment positions. Considering the bear market activity currently in evidence, the best case scenario is now a loss of downside momentum followed by a short covering rally held for more than a day or two and subsequent finding of support above the nadir. Lower commodity prices are a necessary precondition to lower corporate input costs Crucially for Asia, lower commodity prices would allow regional central banks to moderate their tightening stance.

Industrial resources in particular have sold off aggressively. Nickel prices have been among the weakest of the industrial metals but most of the others have pulled back to the lower side of their respective ranges. Copper has pulled back to the $8500 level but needs to continue to find support in this area if the medium-term uptrend is to remain consistent. Lumber and cotton prices have also been weak.

However in the agriculture sector, rough rice broke out of a more than 2-year range in July, found support near the psychological $16 and hit a new recovery high today. Despite a sharp pullback in June, corn prices continue to push back up and remain at historically high levels. Soybeans are testing the lower side of the 8-month range but remain quite elevated.

Brent crude prices have pulled back to test the 200-day MA and are flirting with the $100 level. However they need to sustain a move below that area to corroborate a return to medium-term supply dominance.

Industrial commodities are sensitive to economic conditions and have pulled back in line with the rout in stock markets. However, prior to the various sovereign debt crises resurfacing the fundamental case for agriculture prices was quite bullish. Subsequent events have not changed these facts. Widespread deleveraging may pressure some traders to close positions in commodity tracking funds. While this is a possibility, there is not a great deal of evidence to support this view at present.

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