Investor sentiment towards commodities has become more cautious since mid-2024, according to a memo from Citibank’s research department. Commodity prices have remained relatively stable despite the expected interest rate cuts by the Federal Reserve in September.
Market volatility, especially related to call options, has decreased, and many investment firms have maintained short-term positions in this sector. These factors, along with the slowdown in the Chinese economy and concerns about a potential economic downturn in the United States, have contributed to a more conservative outlook on commodities.
Analysts at Citi said, “China’s weakness has certainly impacted base metals and commodities. However, concerns about a sharp downturn in the U.S. economy also increased in August despite some stronger-than-expected macroeconomic data last week (such as retail sales).”
The analysts added that “this could exacerbate price volatility and potential gap risks for macro-sensitive core assets (such as oil, copper, and gold).”
The U.S. labor market, a key indicator of economic health, plays a crucial role in this scenario. Citi Research suggests that continued weakness in the labor market could tip the scale towards a recession, which could have significant impacts on commodities.
Historical data analyzed by Citigroup shows that during U.S. recessions, commodity markets typically experience significant volatility, with the energy sectors particularly affected. On average, the Bloomberg Commodity Index recorded annual losses of about 28% during recessions, with industrial metals and agriculture also seeing sharp declines.
However, in the six-month period following a U.S. recession, commodities typically experience an impressive recovery across the board, in line with a strong rebound in economic activity and investor sentiment, according to the analysts.
Precious metals, known for their resilience, often lead this recovery. For example, during past post-recession periods, precious metals posted average gains of 26%, followed by industrial metals and energy with gains of 25% and 24%, respectively. This cyclical nature of commodity markets underscores their close link to economic recovery and inflation.
Regarding asset flows, Citi notes that during the week ending August 13, 2024, there were outflows of $4.8 billion from commodity index trading and exchange-traded funds.
The market value of exchange-traded commodities, dominated by gold indices, rose by 2.4% on a monthly basis and 8.3% on an annual basis to $396.5 billion. Despite the current challenges, Citi maintains a cautiously optimistic outlook on commodities in the medium term.
While base metals may face difficulties in the near term due to weak manufacturing sentiment and recession fears in the United States, Citi expects a recovery as physical markets tighten and manufacturing rebounds with the anticipated interest rate cuts.
