Back to fundamentals: We continue to see only a modest abatement in China-led commodity demand growth, not the capitulation that year-to-date price performances imply. The fact that economic activity everywhere remains buoyant, commodity trade flows are intact, and that producers are rapidly rebalancing their trades in reply to shock-low prices – tells us that downside price risk is limited. Historical benchmarks confirm this view. So after the investor exodus and speculative selling is done, robust fundamentals of Commodity World will again matter to its prices.

Likely catalysts for price recovery: Q1’s typically reliable seasonal restock alone has the capacity to terminate ongoing short-selling strategies. Other potential price supports include a demand-led recovery in the oil price (inflationary); resolution over the scale/duration of the US rate hike cycle (generally supportive within 12 months of the cycle’s start); and government backing for industrial activity in China (project approvals, funding, macro).

 

Eoin Treacy's view

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The Continuous Commodity Index, which is unweighted, remains in a consistent, albeit short-term overextended downtrend. However since this has been ongoing for nearly 4 years it tells us a good deal of the bad news has already been priced in. That does not mean the downtrend has ended but suggests the news will need to get progressively worse to expect the decline to persist.  
There is short-term scope for a reversionary rally but a sustained move above 400 will be required to indicate a return to medium-term demand dominance.