Monex BMO Securities (MBMOS) - Beware the Commodity Trap

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Independent investment and wealth management firm, Monex BMO Securities, offers their professional insight into the current trends of the major commodities market.

Gold is pulling back at the moment from highs near $1280 an ounce to $1220 but we fully expect a resumption of the uptrend towards the recent highs within the coming days and weeks - David Knightley, Head of Institutional Equities, Trading and Research

Investors tempted back into commodities like iron ore, crude oil and copper by recent gains should be on their guard for a potentially sharp pullback in prices says Toronto and Tokyo-based investment manager Monex BMO Securities (MBMOS).

The firm says that, while it is fairly convinced that hard assets have already reached their nadir, the advances seen so far in 2016 are not fully rooted in improved fundamentals. Commodities are on course for a quarterly advance amid speculation that prices may have bottomed after they plunged 11% in the final quarter of 2015 and 14% in Q3.

Crude oil has staged an impressive 50%+ rally from lows in the mid-$20 region set in mid-January. With prices currently hovering at or close to the $40-a-barrel mark, more investors are asking what it is keeping prices at these levels when the global oversupply problems at the heart of crude’s painful decline over 18 months remain largely unsolved.

Copper and iron-ore, in particular, could be set for sharp corrections suggests David Knightley, Head of Institutional Equities, Trading and Research for MBMOS corporate division in Tokyo and directly responsible for the allocation of $2bn of corporate and preferred clients funds. “The bearish cases for these commodities are well-known and in the absence of a change in the fundamentals, one has to assume that the impetus for recent gains has come from somewhere else,” Mr. Knightley stated.

“We see neither sufficient Chinese demand for copper and iron ore nor a large enough decline in global supply to sustain prices at current levels. We think the push higher is related to changing expectations for US interest rates going forward.”

David Knightley added “Commodities are priced in US dollars so any fall in its value is inversely mirrored in prices for those commodities. The Federal Reserve scaled back its expectations for interest rate rises in 2016 from 4 to just 2 which weakened the dollar but recent comments from some officials are sending mixed signals which are impacting upon commodity prices.”

Sharp pullbacks in crude oil prices are possible despite hopes for a coordinated output freeze by OPEC and non-OPEC producers but, with the number of US shale oil drilling rigs falling to near-historic lows, Knightley believes the supporting fundamentals are slightly stronger than those for copper and iron ore.

“In the absence of supporting fundamentals, sentiment can change suddenly and when investors do head for the exits, there’s a distinct possibility that prices could overshoot to the downside raising the possibility of a retest of January lows,” cautioned Knightley.

Commodities the firm is more positive towards include gold which has rallied sharply this year after a four-year slide. It has rallied by as much as 16% in 2016 buoyed by expectations for a slower-than-expected pace of US interest rate hikes.

“Gold is pulling back at the moment from highs near $1280.00 an ounce to $1220.00 but we fully expect a resumption of the uptrend towards the recent highs within the coming days and weeks,” said Knightley. “Its fundamentals are clear; more monetary easing is on the way despite Fed pretensions to the contrary”.

Monex BMO Securities is a privately held, fully independent investment and wealth management leader, with retail operations based in Toronto, Canada and corporate trading division headquartered in Tokyo, Japan.

monexfinancial.com

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Tetsuji Hasguratani
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