Commodities: Too early to become positive, says Credit Suisse’s Merath

Tobias Merath, head of Commodity and Alternative Investments Research at Credit Suisse, says market conditions for commodities remain challenging.

In late June, prices sold-off following a period of stabilization. The
broad-based commodity indices are all down year-to-date. We
think a rebound is possible in some markets but would not
expect a broad move higher. Instead, leading economic indicators
suggest that investors should remain cautious for now.
In order to assess the outlook for commodity markets, we
mainly look at three factors: cycle, valuation and technical
analysis. On the cyclical side, there is currently not much impetus.

The recent increase in long-term bond yields, falling
inflation expectations and downward surprises in Chinese economic
numbers are all negative for commodities. At the same
time, quantitative easing programs continue, and new monetary
easing programs are being implemented in countries such
as Japan.

At a global level, growth seems to have bottomed,
and in the second half of the year we could see higher growth
rates than we did in the first, which is good news for commodities.
Overall, we would argue that the cyclical situation is
neutral with some factors supportive and others outright negative.

If anything, cyclical factors speak in favor of a bit more
caution near term and more optimism longer term.
Technical analysis paints a similar picture. Many commodity
markets (e.g. gold) are already in a technical downtrend,
others are on the brink of breaking key support levels. Technical
momentum is negative in many cases, pointing toward
more near-term risks, while the longer-term situation is not as

The last factor is valuation. Our fair value model shows
significant divergences among the individual commodity markets.
Metals in particular appear undervalued at current prices,
while energy and agriculture are generally above fair value.
Overall, we think it is too early to become more positive on
commodity markets.

Technical analysis and cyclical factors
suggest that a rather cautious approach is still warranted.
Longer term, valuation indicates that some markets – particularly
metals – are already undershooting to the downside. Our
one-year outlook for the asset class therefore remains neutral.
Near term, there is more downside risk than upside potential.

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