Commodity Market Outlook: Cautious Sentiment Amid Economic Uncertainty
Investor sentiment towards commodities has become more cautious according to analysts at Citi Research. Despite anticipated interest rate cuts by the Federal Reserve, commodity prices have remained stable. Market volatility has decreased, especially for call options, with many investment firms holding short positions in the sector. Concerns about a potential U.S. economic downturn and a slowing Chinese economy have contributed to a more conservative outlook on commodities.
Analysts at Citi Research stated, “A softening China has impacted base metals and bulk commodities. US hard landing fears have also spiked, which may exacerbate price volatility and potential gap risk for macro-sensitive underliers heading into quarter-end.”
The US labor market plays a crucial role in this scenario, with a weakening labor market potentially tipping the scales towards a recession. Historical data analyzed by Citi shows that during US recessions, commodity markets typically experience significant volatility, with energy sectors being particularly hard hit.
However, commodities typically stage an impressive recovery in the six months following a US recession, with precious metals leading the way. Precious metals have averaged gains of 26%, followed by industrial metals and energy with gains of 25% and 24%, respectively.
In terms of asset flows, there were outflows of $4.8 billion from commodity index and ETF trading for the week ending August 13, 2024. Despite current challenges, Citi maintains a cautiously optimistic outlook for commodities in the medium term.
While base metals may struggle in the near term, Citi expects a rebound as physical markets tighten and a manufacturing recovery takes hold with expected rate cuts. Copper, for example, is forecasted to recover to $9,500 per ton by November and could potentially reach $11,000 per ton within the next 6-12 months.
**Analysis:**
The article discusses the cautious sentiment towards commodities in the market due to factors such as a potential U.S. economic downturn, a slowing Chinese economy, and fears of a US recession. Despite stable commodity prices and decreased market volatility, there is a more conservative outlook on commodities. Historical data shows that during US recessions, commodity markets experience significant volatility, with energy sectors being hard hit. However, commodities tend to recover in the six months following a recession, with precious metals leading the way. Citi expects a rebound in base metals in the medium term, with copper forecasted to reach $9,500 per ton by November and potentially $11,000 per ton within the next 6-12 months.