Cautious Sentiment Towards Commodities Amidst Market Volatility: Citi Research Analysis
Investor sentiment towards commodities has become more cautious since mid-2024, as per analysts at Citi Research in a note dated Monday. Despite anticipated interest rate cuts by the Federal Reserve in September, commodity prices have remained relatively stable. Market volatility has decreased, especially for call options, with many investment firms holding short positions in the sector. The combination of a slowing Chinese economy, concerns about a potential U.S. economic downturn, and fears of a US hard landing have contributed to a more conservative outlook on commodities.
According to analysts at Citi Research, a softening China has impacted base metals and bulk commodities, while fears of a US hard landing have increased. The US labor market plays a crucial role in this scenario, as a continued weakening could tip the scales towards a recession, significantly impacting commodities. Historical data analyzed by Citi shows that during US recessions, commodity markets typically experience significant volatility, with energy sectors being particularly hard hit.
However, in the six months following a US recession, commodities typically stage an impressive recovery, with precious metals leading the way. Precious metals have averaged gains of 26% during past post-recession periods, followed by industrial metals and energy with gains of 25% and 24%, respectively. Despite challenges, Citi maintains a cautiously optimistic outlook for commodities in the medium term.
In terms of asset flows, Citi notes that for the week ending August 13, 2024, there were outflows of $4.8 billion from commodity index and ETF trading, bringing year-to-date inflows to $26.5 billion. While retail and institutional commodities assets under management (AUM) increased by 5.7% year-over-year, they fell by 3.7% month-over-month in July to $716 billion. The commodity ETP market cap, dominated by gold tickers, saw a jump of 2.4% month-over-month and 8.3% year-over-year to $396.5 billion.
Despite near-term struggles for base metals, Citi expects a rebound as physical markets tighten and a manufacturing recovery takes hold with expected rate cuts. For example, copper 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:
- Investor sentiment towards commodities has become cautious due to various factors like a slowing Chinese economy and fears of a US economic downturn.
- Historical data shows that commodities tend to experience significant volatility during US recessions, but they typically stage an impressive recovery in the six months following.
- Precious metals lead the recovery post-recession, followed by industrial metals and energy.
- Despite challenges, Citi maintains a cautiously optimistic outlook for commodities in the medium term.
- Copper is forecasted to recover in the coming months, reaching $9,500 per ton by November and potentially $11,000 per ton within the next 6-12 months.