Does the general decline in commodities other than energy since the second quarter of 2022 mean that the bull market in commodities is coming to an end?

We believe that although the supply side is still positive, the current trend of commodity prices is still in line with the characteristics of the latter period in history.At this stage, with the increasing headwind of macro fundamentals, we are more optimistic about the continued topping of oil prices and the first suppression and then rise of gold.

Although commodities are the best-performing assets so far in 2022, they are clearly divided so far this year.

As figure 1 shows, the Bloomberg Commodity Index rose 18% in the first half, mainly supported by energy (58%) and agricultural products (13%), while base metals (- 10%) and precious metals (- 5%) have become a drag. But the overall commodity index has fallen (- 6%) since the second quarter, as varieties other than energy (7%) fell generally, especially base metals (- 26%).

We believe that the current trend of commodities is in line with obvious post-cyclical characteristics, that is, copper prices peak ahead of oil prices.As figure 2 shows, whenever a commodity rally meets an economic downturn, copper prices have peaked earlier than oil prices, which has long been seen as a leading indicator of recession, while oil prices have been more disturbed by supply-side factors.

As a result, the sharp fall in copper prices since 2022 (- 17%) does not contradict the rise in oil prices (44%).We think this is likely to mean that the commodity rally is running out after the epidemic and that we need to focus on the varieties that will benefit in the post-cycle in the future.

Energy prices are still at their peak:Although the risk of recession in the United States and Europe is increasing, energy prices are probably still in the peak stage. Behind this is the interpretation of the war between Russia and Ukraine. Although Russia's foreign wars have witnessed the peak of oil prices (figure 3), if it is not a quick decision, but into a protracted war like the 1979 invasion of Afghanistan, oil prices are still likely to fluctuate.

Second, OPEC's strategy to increase production, considering the EU's crude oil embargo on Russia and the slim prospect of resuming the Iran nuclear agreement, OPEC is likely to continue to maintain a tight balance in the crude oil market. therefore,Under the condition of spot discount, any sharp fall in oil prices in the short term is an opportunity.

The price of agricultural products peaked and fell:As the world's two major agricultural exporters, the war between Russia and Ukraine at the beginning of this year spawned a surge in agricultural products, which was also fuelled by rising energy prices. after all, tractors use diesel, and natural gas is an important raw material for chemical fertilizers.

However, the decline in agricultural prices since the second quarter, especially the accelerated decline in the third quarter, suggests that the positive is weakening. Behind this is that Russia has agreed to liberalize Ukraine's grain shipments with conditions; second, other major agricultural exporters in the world are expected to have a bumper harvest in the second half of the year. therefore,We expect agricultural prices to peak and fall in the second half of the year.

The headwind of the base metal increases:While the sharp fall in base metals in the second quarter has sniffed out the risk of recession, we don't think the process is over.

Take copper as an example, the latest World Bank forecast and IMF forecast global GDP growth of 2.9% and 3.6% respectively in 2022. As shown in figure 4, when global GDP growth is less than 3.6%, the annual return of copper price is basically negative, with an average annual return of-10%.

Given that the above forecasts are still based on the assumption that the US and European economies can avoid recession, even if the Chinese economy rebounds in the second half of the year, we do not think there is much room for base metals to rebound.

Precious metals first suppress and then rise:Although the decline of precious metals has widened along with the decline of base metals since the second quarter, we believe that the headwind they are facing is weakening.

In the case of gold, for example, its trend this year has always depended on rising inflation and rising real interest rates, but since the third quarter, with the increased risk of recession in the United States, we believe that although inflationary pressures have not eased significantly, but the period of rapid rise in real interest rates has passed, and the potential geopolitical risks represented by the US mid-term elections are still likely to increase.

Historically, gold has tended to perform well in US recessions and geopolitical crises, so we are bullish on gold's performance in the fourth quarter.