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WCU: July weakness fueled by reflation and virus variants
Summary: The commodity sector has faced a challenging beginning to a new quarter and this past week all sectors apart from precious metals traded lower, led by renewed losses across the agriculture sector, while in energy the prevailing positive narrative paused in response to a brewing OPEC feud clouding the outlook just as the spread of the delta virus variant sapped the general level of risk appetite.
The commodity sector has faced a challenging beginning to a new quarter and this past week all sectors apart from precious metals traded lower, led by renewed losses across the agriculture sector, while in energy the prevailing positive narrative paused in response to a brewing OPEC feud clouding the outlook just as the spread of the delta virus variant sapped the general level of risk appetite.
During the first half of the year, physical as well as investment demand for raw materials surged on the prospect of a strong growth comeback, rising inflation and governments stepping up their efforts to combat climate change. An effort that will require a massive amount of industrial metals and investments.
However, during the past few weeks the rally has started to stumble, with improved weather developments sending the prices of key crops sharply lower, OPEC-fueled uncertainty hurting bullish oil bets, and signs the post-pandemic recovery in China has started to cool hurting the short-term prospects for China-centric commodities such as copper, iron ore and steel. A development that on Friday led the People’s Bank of China to cut its reserve ratio requirement, or RRR, by 0.5% and a move that will inject RMB 1 trillion liquidity into the system to support small and medium sized enterprises as well as growth in general.