Half Time Report: Commodities in the Lead

In a surprising turn of events, just like an underdog story, the commodities sector has emerged as the top-performing asset class at the end of June. After a disastrous 2015, where it was all dull and gloom, the various commodities have inclined in value at the half way mark. Pressured by the strengthening greenback, plunging oil prices, ambiguity in the emerging markets and the overall glut in commodities around the world had resulted in bearish sentiments in the asset class as a whole during the preceding year. What a difference half a year makes is testimony in the commodity markets. Fast forward to contemporary times and the commodity markets seem to be resurrected and is on bullish grounds again. However, the question rises as whether this is the beginning of a recovery period or just another flash in the pan?

Changing Fortunes

Given that many analysts had predicted further doom in the returns of the commodity markets, many of them are now eating their own words and exclaiming that recent developments were not factored into forecasts. In comparing the returns across various asset classes, commodities have even outperformed traditional asset classes, especially equities and bonds. Not so long ago, crude oil and natural gas were the underperformers in the league table. The assets have managed to roll the dice in their favour, recently attaining the highest levels since July 2015 and May 2015 respectively. Although the US has continued pumping more oil into global markets, supply disruptions from other economies combined with accelerating demand from major consuming nations has resulted in crude oil prices treading bullish territory. Production outages in Canada, Nigeria and Iraq among others have also contributed to the incline in prices. An important factor was also robust automobile sales, which had set a six-month record in the US. In the first half of the year, sales reached an all-time high of 8.65 million units, an incline of 1.5% from the same period in 2015. The sales of vehicles in China recorded an astonishing 10.7 million, a 7% increase in the year-on-year comparison. Natural gas, an unheralded commodity in the energy bracket, has returned 30% this year, in the process attaining the highest prices since May 2015. Platinum and palladium has benefitted from record surge in auto sales across the world, with both commodities used as auto-catalysts in vehicles. Since the commencement of the year, prices of platinum and palladium have increased by 22% and 15% respectively. Agro-commodities including coffee has also had supply problems in major producing nations leading to incline in the prices in the review period. Brazil, being a major producer of coffee, has had above-par monsoons in the producing areas. The subsequent result was a hike in the prices to $1.4210 per pound, a 19% increase in prices since the beginning of the year.

Impact of BREXIT

While the world watched in anticipation of the developing stories from Britain, traders in the commodity markets refused to let the referendum spoil the party. The equity markets and the currency markets did bear the full brunt of the forces when Britain surprisingly voted for exit. However, during uncertain times, the bullion markets came to rescue and ushered traders to place positions in gold and silver-as instruments for safe haven status. Gold, took the cake inclining by 6% on 24 June to attain a price of $1358.33 per troy ounce, the highest since March 2014. Silver, often termed as the poor man‘s gold, had also increased to reach $ 19.24 per troy ounce in the aftermath of the decision, the highest since September 2014. With fading expectations of the rate hike by the Federal Reserve in the immediate future, the bullion prices are forecasted to skyrocket higher in ensuing days. Analysts opine that the impact of the once in a lifetime decision has already been priced in and the once oversupply of commodities has slowly shrunk thereby resulting in the re-balancing of market fundamentals.

Signs of Recovery or False Dawn

One school of thought opines that most of the top performing commodities at the half way stage had bottomed out in the final quarter of 2015 while others reached the bottom in the first quarter of 2016. While the rally in the agro-markets have been apparently driven by sluggish supply due to weather patterns in South America, the rally in other commodities have been attributed to other factors other than the fundamentals. In 2015, the strengthening US Dollar had hammered commodities into abyss since most commodities are traded using the greenback. However, this year due to the weakening of the US Dollar, numerous commodities have benefitted leading to the rise in value. When Leicester City was languishing at the bottom of the table at Christmas 2014, not many gave them much chance of escaping the relegation. Fighting the odds, Leicester City not only miraculously escaped the relegation that year but marched on to record one of the favourite underdog stories next season, becoming the champions. Hence, commodity markets have recorded a fairy tale season so far. The challenge now is to complete the process and become the best performing asset class by the year end. The question is - can they?

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  The author is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]