With the US payroll report surprising the trade with better than expected results for the month of July, new highs in US equities and anecdotal evidence of a possible bottoming in the Chinese economy (positive Alibaba earnings and a rise in iron ore and copper imports), it would seem like the groundwork has been laid for an improvement in “animal spirits.”
Copper
How Will Commodities in the Summer of 2016 Be Defined?
Since the March lows, several physical commodities have forged rallies that few expected, and with even fewer anticipating the magnitude of those rallies.
Gains in Commodities Historically Hint at Inflation
Seeing silver, sugar and soybeans forge strong price gains has historically hinted at inflation, but that type of forecast seems foolhardy in the current environment.
Commodities Should See Fewer Negative Outside Influences
After a slight brightening of the skies, the US Fed has stepped in and stoked recovery efforts further with a reduction in the number of anticipated 2016 rate hikes and a nod to the importance of international headwinds in their future policy decisions.
The US Economy is Slowly Progressing
Just as US scheduled data has continued to be mixed, the Fed had added confusion regarding their intentions on monetary policy. The general consensus is that the US economy is slowly progressing.
Commodity Markets Seeing Bearish Factors
Commodity markets are seeing nearly a perfect storm of bearish factors during the first 2 weeks of 2016.
Classic Physical Commodities Under Spillover Pressure
The markets have seemingly become comfortable with a “one and done” rate hike from the Fed in December or sometime in early 2016.
Markets Poised to See Declines in Equities, Gains in the Dollar
An important junction lies ahead as fears about China have returned to the marketplace despite two days of Chinese holidays finishing out the week.
Commodity Sentiment Was Overdone
We won’t suggest that the recent lows in many commodities are solid, but value-hunt buying of copper assets by Carl Icahn, a $4.00 single-day rise in crude oil prices, and a 1,000-point, 2-day bounce in the Dow suggest that sentiment was overdone on a number of fronts.
Ongoing Evidence of Slowing in China
Bearish sentiment toward China, equities and commodities is clearly justified in the wake of ongoing evidence of slowing in China, consistent deflationary signals from the crude oil and copper markets, and weak global shipping rates.