Bond market turmoil a wake-up call for commodities

A spike in government bond yields and subsequent sell-off in equity markets caused the broad-based rally in commodity prices to go into reverse late in the week. That said, most industrial commodity prices still managed to end the week higher. Nevertheless, it is too early to sound the all-clear. After all, as we have consistently cautioned, much of the recent rally in commodity prices has been driven by investor optimism rather than a material improvement in the underlying fundamentals. As a result, we wouldn’t rule out further pullbacks in the weeks ahead, particularly among the industrial metals where net-long positions held by investors in the futures market have surged and prices are currently at multi-year highs. Next week brings the usual monthly deluge of PMI data. We expect a small rise in China’s manufacturing PMI, while data for the US are likely to remain strong. Otherwise, the main event for oil markets is the OPEC+ meeting scheduled for Thursday. The group had previously planned to raise output by around 2m barrels per day in Q2, but there is a risk that the leg-up in oil prices prompts a faster relaxation of output cuts. Finally, China’s National People’s Congress begins on Friday, which will bring with it a new “Five-Year Plan”. We expect self-sufficiency and the environment to be two key themes, both of which would have several implications for commodities. We will have more to say on this as the details emerge.