Hopes of second half rebound have weak foundations

With the notable exception of the impact of the dry weather in the US on grain markets, macroeconomic and financial factors continued to drag commodity prices lower in the second quarter. The consensus view is that fears about the global backdrop are overdone and that prices will now rebound strongly as the euro-zone crisis fades and additional policy stimulus takes effect. However, we continue to expect the problems in Europe to escalate, with one or more smaller countries leaving the single currency altogether. What’s more, while extra global policy support should mean that commodity demand is higher than it would otherwise have been, it will still be sluggish, maintaining the downward pressure on prices.