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Wall Street Analysts Predict Another Commodity Rally This Year

commodity rally this year
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EDITOR'S NOTE: At the speed with which commodities have sharply fallen over the last few months, it’s hard to imagine that the rest of 2022 might yet be another commodity rally year. But according to Wall Street analysts, that’s precisely what’s on the horizon. In other words, the commodity plunge wasn’t a downside trend reversal but a mere pullback; what financial media pundits call a “breather.” What happened? After all, didn’t most hedge funds reverse positions from net long to net short? Commodities surged as supply chain constraints pushed up prices. This trend reversed course as fears of a global recession and slackening demand took hold of the market. But still, there was this underlying suspicion that low supply levels may end up exceeding the pricing power of lower demand. Years of underinvestment, weather factors, and geopolitical factors (like the war in Ukraine) drove the counter-thesis to “peak inflation.” Plus, there’s also the possibility that segments of the global economy may experience growth as other segments recede. And as you know, growth spurs on demand. So, how high are analysts expecting commodity prices to rise? And which commodity classes are more likely to surge more than others?

KEY POINTS
  • As of Friday, the UBS CMCI (Constant Maturity Commodity Index) had fallen by around 11% from its peak in early June, while performance in July was flat, but was still up 16% year-to-date.
  • UBS maintains expectations for 15-20% returns across commodities over the next six to 12 months.
  • Goldman therefore forecasts the S&P GSCI commodity index rallying 23.4% by the end of the year.

Commodities have broadly pulled back from their recent peaks, but Wall Street analysts say the fundamentals are pointing to another rally by year-end.

As of Friday, the UBS CMCI (Constant Maturity Commodity Index) had fallen by around 11% from its peak in early June, while performance in July was flat, but was still up 16% year-to-date.

In a research note Friday, UBS Global Wealth Management strategists said the supply-side constraints that underpinned the surge in commodity prices in the first half of the year had taken a backseat to the deteriorating outlook for global economic growth, a strengthening U.S. dollar and China’s housing predicament.

Although commodity prices could fall further in the event of a deep recession for the global economy, UBS GWM Chief Investment Officer Mark Haefele and his team suggested a “soft landing” is now as likely as a pronounced slowdown.

They added that “overly bearish calls on commodity markets do not fully account for supply-side dynamics.”

“In general, commodity supply is constrained due to years of underinvestment — official inventories are low across multiple sectors — and because of weather-related and geopolitical factors. Meanwhile, we see positive demand trends,” Haefele said.

For instance, UBS expects Chinese demand to rebound, with manufacturing and property data indicating that more fiscal stimulus is required. While acknowledging that a policy “bazooka” is unlikely, Haefele suggested more support will be forthcoming from Beijing in the months ahead, which should stabilize demand for commodities such as iron ore and industrial metals.

The bank’s strategists also see talk of a U.S. recession as premature, and felt vindicated by the bumper nonfarm payrolls report published earlier this month.

The U.S. economy added 528,000 jobs in July, well ahead of consensus forecasts, while consumer price inflation slowed, indicating that the Federal Reserve may not have to tighten monetary policy as aggressively as previously expected.

“While growth is slowing, the U.S. economy is also returning to pre-pandemic patterns and
in doing so is experiencing a divergence between goods and services,” Haefele said.

“As manufacturing slows, services are growing. While diverging, the data reflect the normalization of goods and services activity.”

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