This week’s sell-off a sign of things to come

Commodity prices fell sharply this week following a more hawkish than expected Fed meeting and a disappointing batch of activity data out of China. Both developments are in line with our forecast of higher real yields and a stronger dollar in the US, as well as slower economic growth in China as policy support there continues to be withdrawn. In turn, this supports our view that most commodity prices will end the year lower. What’s more, the scale of this week’s fall in commodity prices is also consistent with our assessment that much of the rally over the last year or so has been led by investor speculation as opposed to a genuine improvement in the underlying fundamentals. Following this week’s excitement, next week is likely to be quieter. The June flash PMI data for the euro-zone will be released on Wednesday, and we expect them to provide further evidence that economic activity there is rebounding as virus-related restrictions continue to be eased. If so, this could help commodity prices to claw back some of their losses from this week.