Is the bull market in commodities already about to top out?
Commodities saw a rapid rise at the end of the year and early in the year, and some institutions even shouted that with the weakening of the dollar, commodities will usher in a nine-year-long bull market.
But Societe Generale Securities doesn’t see it that way.
Societe Generale Securities believes that the dollar, as a pricing currency, affects global commodity prices and that a weak dollar is a necessary condition for commodities to rise.
The dollar trend reversal is still too early, but the fastest phase of the Fed’s release has passed.
The current fundamental trend repair in the background, the Fed is difficult to further expand QE purchases. But the dollar liquidity trend reversal is also premature, therefore, the dollar index and liquidity inflection point have not yet arrived, the relatively weak dollar and easy liquidity environment can still be maintained.
However, since no further easing will be added, the fastest phase of pushing up commodity prices by dollar liquidity has passed.
In addition, in terms of supply and demand, the marginal contribution of liquidity has weakened and the impact of demand changes on commodity prices has risen.
According to Societe Generale, although supply and demand jointly influence commodity pricing, they can be divided into two categories: “demand-led” and “supply-led”, taking into account history.
After the outbreak, the demand side has changed dramatically and become the main factor affecting the commodity price volatility in this round. Stock demand change: Due to the high proportion of the stock of global commodity consumption in the two economies, the change in demand depends on the sustainability of the bottoming out of the US and Chinese economies. Incremental demand changes: 1) the expansion of the global new energy chain; 2) the U.S. infrastructure program.
Therefore, the demand side is weaker, but the upside of commodities sensitive to dollar liquidity may be limited, and vice versa.
According to Societe Generale Securities, three points of concern in this round of commodity price increases are.
The Epidemic brings demand recovery has a “rhythm difference”, commodity rises also have a “rhythm difference”. Demand recovery “rhythm difference” for: 1) China recovery ahead of overseas; 2) cross-border services demand recovery lag. As a result, demand related to China rises the earliest, such as rebar and iron ore, while demand related to overseas and cross-border demand rises the slowest, such as Crude Oil.
Despite demand dominance, the supply side affects commodity rallies. Demand-led means that almost all commodities have risen to varying degrees, but the supply side determines which commodities see greater price increases.
High asset correlations and high sensitivity to liquidity amplify price volatility in the background. Any “breeze” affecting dollar liquidity could lead to a synchronized decline in assets, which is easily further amplified by the high leverage of commodity futures.
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