The political worries in the US, with President Trump looking increasingly isolated, and broad tightening of monetary conditions in China has been detrimental to commodity prices, leading to a significant unwinding of exceptionally high speculative positioning. Trump fade represents a commodities buying opportunity
CFTC (Commodity Futures Trading Commission) positioning data had highlighted commodities reaching a peak bullishness sentiment end-February 2017, as expressed in our February blog. Since then, due to the aforementioned issues, this bullish sentiment has unwound considerably, remaining just above it’s long-term average balance between bull and bears.
Commodity speculators became very bullish after the Republican win in November with the promise of a US$1tr spend in infrastructure over the next 10 years. Recent press reports highlight that this spend is likely to include US$200bn from Federal Funds with the remaining being investment incentives for US$800bn from the private sector and local governments. It is becoming evident from press reports that the US$200bn will likely begin to be delivered in late 2018, whilst the additional US$800bn is very much uncertain due to it being at the discretion of the private sector and local governments. As investors have begun to realise that much of this spending will be delayed and potentially at much lower levels, it has contributed to this speculative unwind.
Another contributor to the deteriorating sentiment has been tightening policy and weakening economic growth in China. Although we see evidence of stabilising growth in China, in recent years official growth data appears smoothed to some extent, our growth proxy, using freight volumes, electricity output, traffic volumes and retail sales suggest that growth in recent years has probably been overstated, although it looks to be improving despite the recent tightening of policy. The “Belt and Road” strategy recently announced by President Xi Jinping suggests a continued commitment to its US$150bn spend on infrastructure.
More broadly in Emerging Markets (EM), in contrast to China, we are seeing Libor rates gradually decline as inflation eases, helping boost economic growth. The Emerging Market LEI (Leading Economic Indicator) leads commodity prices by 6 months with a high historic correlation, rises in the LEI imply that the recent commodity price weakness is temporary.
We continue to believe that the fundamentals of increasing supply-side destruction, attractive valuations and buoyant demand for commodities remain intact. The Trump debacles have prompted a much needed speculative unwind, and in our view, recent price weakness represent a buying opportunity. We continue to see industrial metals as offering the best upside in the coming 12 months.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
