Alroy Commentary - The upside potential of commodity is limited
The upside room of commodity is limited, although developed countries showed signs of recovery. The performance of commodity markets was lag behind other asset, especially compared to equity market. The restriction of commodity prices is mainly because slow economic growth and concerning about tapering.
Even though economy recovery is positive for commodities, weak growth rate limits the upside potential. Over the past few years, commodity markets were driven by emerging markets and China. High demand in emerging markets led commodity price to increase. However, the current economic recovery is mainly driven by developed countries, particularly US. Those economies growth is less commodity-intensive. Therefore, commodity prices are reacting less to the recovery.
“Tapering” is the risk of commodity prices. If economic data is strong enough, Fed may start tapering early. Then interest rate usually starts to go up and it is negative to commodity prices. Higher interest rate discourages investors to hold commodities.
In the situation, commodities are torn between two opposing factors. Stabile growth is positive, but restricts the upside room. Strong growth and tapering will bring negative influence for commodity. Therefore, we do not think the commodity price will increase significantly.
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