Since the March lows, several physical commodities have forged rallies that few expected, and with even fewer anticipating the magnitude of those rallies.
USDA
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.
Sentiment Was Overly Negative Going into the 2016 Equity Market Lows
Last week we suggested that the “long dark shadow” of deflation was starting to fade, and given the impressive rally off the February low through the end of the month, we would suggest that sentiment was overly negative going into the 2016 equity market lows, as the global swoon was mostly about disappointing forward momentum and not some major, difficult-to-solve obstacle.
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.
Prospect of a Global Currency War is On the Rise
On one hand the Chinese currency debacle has tripped up sentiment, but on the other hand the markets have not shown progressive anxiety, and the shelf-life of the crisis appears fairly short.
Strong Dollar, Burdensome Commodity Supplies
The challenges for physical commodities are slack global demand, the Dollar remains strong and commodity supplies are generally burdensome.
Macroeconomic Conditions Improving; Return to Growth
Macroeconomic conditions are improving, and the Fed Chairman feels confident enough to weigh in with her own “irrational exuberance” moment with respect to equity valuations.
Will the Global Economy Regain Momentum?
We had what appears to have been a watershed moment in financial markets over the last week.
The Outlook for Physical Commodities Might Remain Negative
Without a dose of improved US economic news and a reversal in the Dollar’s uptrend, the outlook for physical commodities might remain negative.