Don't Buy The Dip In Commodities, Prices Heading Lower: Barclays
(Kitco News) - Investors should not buy the dip in the commodity sector as price performance is skewed to the downside for the rest of the year, said Barclays Commodities Research.
The main drivers keeping commodities prices at bay are deleveraging in China and weakening synchronous global growth, Barclays said in a recent research report.
“The commodity rally that ensued in April has stalled since mid-May, and we are skeptical of anything close to stunning outperformance through the balance of the year,” analysts at Barclays said.
Commodities, as a basket, have rallied in 2018, peaking in mid-May. The Goldman Sachs Commodity Index rose 12% from January to its peak in May, but has since fallen to its April levels and stalled.
Since February, individual commodity sectors started seeing diverging performance, with livestock being the worst performer, down 7% on the year, and energy being the best, up 7% year-to-date. No other sector achieved more than 5% returns on the year.
Barclays noted that with the exception of energy commodities, the risk to the downside is growing, and investors should be wary of buying in at currently depressed levels.
“In previous editions of the Global Outlook, we have cautioned against buying the dip, and we are not changing our tune,” the report said.
The continued weakness in commodities can be attributed to rising protectionist policies around the world, as well as a stronger U.S. dollar, China deleveraging, and weakening macroeconomic indicators, according to the research.
Industrial metals, in particular, are likely to take a hit as demand from China, the world’s largest consumer of base metals, weakens.
“Copper has found temporary support from the perennial labor issue at the Escondido mine, but is likely to face headwinds as the Chinese economy continues to slow down and protectionist concerns mount,” analysts said.
The only commodity sector that the British bank remains bullish on is energy, as OPEC’s mandate of production cuts has successfully shrunk global oil oversupply.
“The stated mandate of production cuts by OPEC and its NOPEC allies was to reduce the inventory overhang in global oil markets. They have more than achieved that target in our view,” the report said.