The Commodities Supercycle Is Over — Here's What's Next

REUTERS/Peter Andrews

Workers pour molten silver into moulds at the KGHM copper and precious metals smelter processing plant in Glogow May 10, 2013.

$('.icon-tooltip').tooltip();Sluggish global growth and a recent economic slowdown in resource-hungry China have hammered commodities markets this year, sending the price of everything from iron ore to copper tumbling. With those sharp reversals—as well as the Fed’s comments about tapering the size of the United States’ monetary stimulus—fresh in their minds, the 300 clients who convened last week at Credit Suisse’s New York headquarters for the bank’s third annual Commodities Day had plenty to talk about.

With few exceptions, the prices of commodities such as oil products, precious metals and industrial metals have been steadily rising over the past decade in what analysts have termed a “commodities supercycle.” That era is over, Credit Suisse experts say, and they expect prices to remain under pressure at least through the end of the year. What’s more, the prices of individual commodities will no longer rise and fall together as they have for the last five years, Credit Suisse’s commodities team explained in a June 25 research note (“Commodities Forecast Update: The Return of Fundamentals”). As a result, investors and traders are going to have to focus on the specific supply and demand dynamics for individual commodities.

Copper and iron ore prices, for example, are expected to decline because supplies of both metals are becoming more plentiful at the same time that demand is declining. Copper is used in wiring and electrical equipment, and is thus sensitive to both building activity and demand for electronics. And iron ore is an indicator of industrial activity of all kinds. Prices of both should soften as China’s building and manufacturing boom cools off. Demand for palladium, on the other hand, should stay strong thanks to the steadily growing Chinese car market, at the same time that labor unrest in South Africa looks likely to slow growth in supply. That points to higher prices.

The Attendees

Attendees at Commodities Day represented a wide variety of investors. Close to one-third were from hedge funds, while roughly one-fourth were institutional investors.

The Year Ahead

Out of four commodity sectors – energy, precious metals, industrial metals and agriculture – energy and agriculture nearly tied (37 percent and 36 percent, respectively) as investors’ pick for the most promising bet over the next year.

Most investors – 41 percent – think commodity prices will remain at their current levels a year from now. Perhaps more telling is the fact that nearly one in four respondents (23 percent) said they had absolutely no idea where commodity prices were going.

One thing is clear, though. Investors don’t expect the market to stabilize. More than half (53 percent) of those surveyed believed volatility would be higher over the coming year than it was in the previous year. About a third of investors thought volatility would stay the same, but only 15 percent thought it would decline.

Oil Markets

Brent crude oil prices have fallen from a high of $118.90 in February to just over $100 in early July. Most investors think that decline will continue.

Credit Suisse recently cut its Brent crude oil forecast for the next six months to $108 from $112, due to concerns about how much consumption can rise given a still-fragile U.S. recovery as well as the risk of a slowdown in emerging markets. But in the medium term, Credit Suisse’s oil analysts are optimistic about prices, noting that global supply is likely to stay tight this year as international sanctions are successfully keeping Iranian crude off European and other key markets. Ongoing conflicts in large OPEC countries such as Iraq, Nigeria and Libya, have also tightened production. Credit Suisse expects Saudi Arabia, the world’s largest oil producer, would have to boost production by 1.2 million barrels per day in the third quarter to keep prices from falling.

In the long term, analysts say, developed markets will use less oil, not more, and emerging markets could see a similar decline within a decade. At the same time, a shale drilling boom in the U.S. will bring more supply of shale oil online. “The clear implication is that in a slower-growth world, still fraught with uncertainty, plentiful supplies eventually bring down oil prices,” analysts said in the “Return to Fundamentals” research note. 

Metals

Of the four base metals used for industrial and commercial purposes (copper, aluminum, zinc and lead), 35 percent of investors predicted that copper—which has shed 34 percent of its value since a 2011 peak—would be the best-performing base metal over the next year. But Credit Suisse’s commodities team said copper prices might fall further still. “Copper stands out as being the most overvalued of the LME metals, in our view,” analysts said the “Return to Fundamentals” research note. “Inevitably, we think prices must come under further downward pressure soon.”

Nearly half of attendees think the recent rout in gold prices isn’t quite over, and think the metal will be trading between $1,000 and $1,200 an ounce in a year. Gold has not dipped below $1,200 an ounce since 2010, but is currently trading around $1,246, down from a high of nearly $1,792 in October.

But if investors were pessimistic about gold, they were hot for palladium. More than half of the survey respondents—53 percent—thought palladium would outperform gold, silver and platinum in the coming year. Credit Suisse analysts are maintaining a long-term bullish outlook on palladium and believe that supply will fall short of demand through 2016, keeping prices high. But they also noted that ETF holdings, investors and funds account for 50 percent of annual palladium demand, making the precious metal vulnerable to a selloff if investor fears about a global macroeconomic slowdown return.

The Financialist is a digital magazine presented by Credit Suisse that looks at the trends and ideas that drive markets, businesses and economies.

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The Supreme Court's Gay Marriage Ruling Is Bad News For Some Gay-Friendly Financial Advisors

Robert Libetti/Business Insider

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors. For more visit Business Insider's new Wealth Advisor vertical.

What The DOMA Ruling Means For Financial Advisors (Wall Street Journal)

Financial advisors are wondering what the Supreme Court's historic decision overturning the Defense of Marriage Act will do to business. For some firms that offered niche estate planning for same-sex couples, the decision — which effectively extends to gay couples the same federal tax breaks that heterosexual couples enjoy — might actually harm short-term business. Still, plenty of firms could get new clients now that federal marriage rules will encompass more Americans.

Advisors could also benefit from some of ambiguity surrounding the ruling, since it still isn't clear if same-sex partners will be recognized by states that don't acknowledge gay marriage, if the couple married in another state that does recognize it.

Now Might Be A Good Time To Buy Junk Bonds (BlackRock)

With interest rates surging and bonds undergoing a massive sell-off in recent weeks, now might be just the right time to get in on junk bonds once again. "High yield has been a popular trade for several years given the economic recovery and low default rate," write the analysts at BlackRock. "With the recent shift in interest rates and the economy still growing, the sector is attractive. Can investors continue to reap returns? We believe so."

Here Are 3 Reasons Why You Should Still Own Bonds (Vanguard)

Keep holding onto Treasuries, says Vanguard's Joe Davis. Here's why:

1.It has taken time for interest rates to rise. So just because they are low it doesn't mean that they will jump over the next two days. 2. "Secondly is that with low interest rates, that did imply muted return for bond portfolios over the next several years, and that there was more risk of a one-year or one-month loss going forward than there had been over the past 30 or 40 years just because the low-income cushions in those portfolios, and that has played out at least in the past day or two." 3. "Bonds are just inherently, as a broad asset class, less volatile than equities, and that played out yesterday."

FINRA Increased Enforcement in 2012 (Financial Planning)

2012 was a banner year for FINRA, which brought a grand total of 1,541 disciplinary actions. The self-regulator took home almost $70 million in fines, and ordered $34 million in restitution to investors. According to its annual report, the regulator expelled 30 firms, 294 individuals, and suspended another 549.

Medicare Related Mistakes Can Really Hurt Retirees (FA Mag)

Financial advisors should be well versed on Medicare and related insurance plans — such as Medicare Advantage — before advising clients, according to Brian Hanby who heads a Utah-based insurance agency. "A lot of people do not realize how much health care can cost even with Medicare. It can be a nightmare if you have serious health problems,” Hanby told FA Mag.

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EL-ERIAN: Anyone Following Egypt Needs To Keep An Eye On One Useful Measure, And It's Not The Stock Market

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Markets More: Mohamed El-Erian Egypt EL-ERIAN: Anyone Following Egypt Needs To Keep An Eye On One Useful Measure, And It's Not The Stock Market Mohamed El-Erian, Contributor Jul. 3, 2013, 1:29 PM 3,917 Tweet!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs");EmailShare on Tumblr

REUTERS/Fred Prouser

Mohamed A. El-Erian, CEO and co-CIO of PIMCO, takes part in a panel discussion titled "Global Markets in Uncertain Times" at the Milken Institute Global Conference in Beverly Hills, California April 29, 2013.

$('.icon-tooltip').tooltip(); Mohamed El-ErianMohamed El-Erian is CEO and co-CIO of PIMCO.

Recent PostsEL-ERIAN: The Next Few Days Will Be Critical For The Global...EL-ERIAN: The Fed Better Be Right About The EconomyEL-ERIAN: The Market 'Sucking Sounds' Are Getting Louder As Four...With all the focus on Egypt today, people are scrambling to find a simple market-based measure that speaks to both the extent of the economic disruptions and the potential financial spillover effects on other countries.
The most commonly-viewed Egyptian chart – stock market prices – is not the right one. There is another one; and while better (and, maybe, even the best in relative terms), it is far from comprehensive.

This better data series measures the spread on the 5-year CDS (credit default swap). It is a good – not perfect – market indicator of sovereign risk; and it dominates the information content provided by the much more popular stock market index.

The higher the spread (and it just traded at around 1,000 basis points), the harder it is to encourage investment in new plant and equipment; the more difficult and expensive it is to secure trade financing (including for critical imports of food stuffs and other basic needs); and the lower the job and income opportunities for average Egyptians. And all this speaks to the bigger issue: A struggling economy is both a source and a consequence of Egypt’s current political tensions.

As insightful as this data series is, it does not capture however the potential spillover effects. Indeed, even the analytics of this particular contagion question is quite complex.

Measured by traditional economic and financial variables, Egypt’s regional and global network effects are quite limited. This is true in terms of the usual measures, including trade links, global demand and supply influences and cross-border financial interactions.

But this does not mean that Egypt has no systemic effects. It remains the largest and most influential country in the Arab region. It is a significant geo-political actor in an important part of the world. And the demonstration effects could extend quite far and wide.

The bad news is that there is no single simple measure that comes anywhere near to capturing all this. The good news is that the CDS spread provides useful insights into one of the underlying contributing factors.

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The better indicator of sovereign risk.

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