Drop in commodity prices may have a silver lining, oil is key, Macquarie says

Commodity markets were bathed in red following a sharp run-up in Fed hike expectations on the previous day, although by early in the evening on Thursday the latter had again come down significantly.

Tracking the ebb and flow in Fed funds futures, by 20:20 BST West Texas Intermediate for next month delivery was off by only a sliver, drifting 0.08% lower to $48.15 per barrel in NYMEX trading. Natural gas June 2016 futures were up by 1.90% to $2.04/MMBtu.

RBOB gasoline futures were seeing the largest fall in the energy complex, losing 1.01% to $1.63 per gallon.

In parallel, Bloomberg's commodity index was 0.84% lower at 170.84, led by drops in the prices of the most heavily-traded precious metals and in agricultural futures.

Among precious metals, June gold futures on COMEX were down 1.44% to $1,256/oz., while similarly-dated silver futures were getting walloped by 3.63% to $16.51/oz. Spot platinum was off by 1.28% to $1,015.29/oz.

Three-month LME-traded copper futures closed down by 0.7% to $4,585 per metric tonne in London trading.

Prices for iron ore with 62% content in Qingdao dropped like a ton of bricks once again, to end at $53.47 a dry tonne, according to Metal Bulletin.

July 2016 CBoT corn futures dropped 2.38% to $3.90 per bushel, alongside a retreat of 2.34% to $4.6875 a bushel in CBoT wheat for July.

On Euronext LIFFE, robusta coffee futures lost 0.6% to $1,630 per metric tonne and those for cocoa 1.0% to £2,120 per metric tonne. White sugar futures dropped 0.8% to $473 per metric tonne.

ICE traded Coffee "C" futures sank 4.2% and cotton No.2 futures 1.9%.

Macquarie expects gold and silver to outperform market expectations

Acting as a backdrop, Macquarie’s head of commodities research, Colin Hamilton, told clients in a research note that: “In the near term, we are highly cautious across all almost all commodities as headwinds return. In particular, steel and raw material prices are likely to feel downward pressure as the Chinese cycle turns.”

Looking out to the second half of 2016, Hamilton said he and his team expected price gains in nickel and zinc - which might extend into 2017 - and that gold and silver would “outperform market expectations over the coming years.

The analyst continued to recommend "structurally avoiding" steel, aluminium, potash and nitrogen.

"Oil remains crucial for the wider commodity cycle, as it does two things for other commodities – drives industry cost structures and also attracts (or dissuades) commodity investment. While it is too early to say that the oil rally has broken the wider deflation cycle pervading cost curves, it has helped to attract interest back towards commodities as a whole."