"Sticky summer" begins - Greek and Chinese turmoil will weigh on commodities this week
July 2, 2015 - Weekly Pricing Pulse
The IHS Materials Price Index (MPI) finally made some headway last week with a small but significant gain of 0.6% to lift it from near January lows. While oil and nonferrous metals prices edged lower, the index got a boost from freight rates (up 6.7%), chemicals (1.9%), and ferrous (1%). Oil and nonferrous metals declined, not surprising considering the "financialized" nature of these commodities, especially with the risk-off mood in global markets channeling investors into safe-haven bonds.
The week's focus remains on Greece as the country's standoff with creditors comes to a head. Developments there have already seen oil prices down by 2-3%, with Brent again eyeing the $50-60 range. Instead of bringing closure, hopes of a deal stalled last week and over the weekend plans were laid out by the Greek government to hold a referendum on bailout terms. The country faces a major payment to the IMF on Tuesday, which it appears set to miss. At the same time Greek authorities are hoping that capital controls and a bank holiday will be enough to stem the financial hemorrhage until this week's vote. A rejection of the bailout plans in the referendum will almost certainly result in a Greek exit, meaning that when banks open again they could be issuing drachmas. Even assuming a "Yes" vote, the country faces months of economic and political turmoil as it attempts to get back on track.
The week ahead will probably be a volatile one for exchange-traded commodities as markets start eyeing the demand-side impact of Grexit and a (possible) broader European slowdown. Other bilaterally traded commodities such as steel could however continue to gain, driven more by a recovery from cost-floor levels and tariff protectionism rather than genuine economic bullishness. Dollar strength is also likely to emerge with renewed vigor; in addition to the European uncertainty Chinese financial markets are appearing increasingly vulnerable, with the Shanghai composite down more than 20% since early June. This fall was enough to provoke a rate cut by the People's Bank of China, with possibly more easing to come--thus sending a bearish economic signal that, together with a stronger dollar, will lead to more downward pressure on commodity prices.
The "sticky summer season" bear has been with us over the last few years, with negative economic news also being compounded by thin market activity as people head for the sun. It is thus worth noting that sharp downswings during the summer months may give way to a broad rally in autumn as normal activity resumes.
Global Pricing Summary - Week of 2 July 2015
Key Prices & Demand Drivers