Citi expects Chinese stimulus will support commodity prices

Despite recent sharp falls, for most commodity prices it was hard to argue that a trough had been reached for the year, according to one of the world’s largest brokers.

The most likely scenario according to the broker was that the economic policies put in place by the People’s Republic of China would boost the economy by year end with a positive impact on energy, industrial commodities, and bulks, with the exception of iron ore.

However, “the likelihood and severity of a hard landing in China remains highly uncertain for now and would pose a significant risk to the global economy,” the Commodities Strategy team led by Edward L.Morse said in a research report sent to clients.

Quarter-to-date, Bloomberg’s Total Return Commodity index had fallen by 15% but many markets still looked exposed to further downside in the final three months of 2015, repeating the pattern of second half weakness seen in 2013 and 2014, Citi said in their fourth quarter outlook for the sector.

Indeed, severely depressed prices for many of the world’s key commodities had already contributed to negative growth in the likes of Russia, Venezuela or Brazil.

Interestingly, should the US Federal Reserve maintain its current policy of zero interest rates that could prolong the “flightiness” of capital in search of a higher yielding home, the analysts said.

“Significant inflows into commodities via index swaps and commodity ETFs (mostly crude oil) sustained what turned out to be a false hope – namely that the commodity cycle had turned, that a bottom had passed and that a recovery was on its way.”

Citi estimated that the combined assets under management of final retail and institutional agents dropped by a “massive” 11.5% month-on-month in July to reach $271bn, the lowest tally since the end of 2009, although the sell-off slowed somewhat in August.

Energy exchange traded funds were the exception to the trend of redemptions seen in the commodity space during the third quarter.

Morse's team estimated that copper futures would gain to trade at $5,550 per metric tonne in the last quarter of the year versus $5,284 in the previous three months, fetching a price of $6,200 by the end of 2016.

Both corn and wheat futures traded on the Chicago Board of Trade were seen dipping to $370 and $490 per bushel, respectively, in the last three months of 2015, but then recovering to chaneg hands at $395 and $500 per bushel at the start of 2016.