Bullish sentiment cooling on commodities
The commodity asset class is set to continue to underperform in the near term, writes Norbert Ruecker, Head Commodities Research, Julius Baer.
The reflation euphoria remains the common denominator on commodity markets but the bullish sentiment is cooling. The latest futures market positioning data published over the weekend shows that hedge funds reduced their long exposure to commodities across the board. The data confirms that the early-March setback had been amplified by profit-taking on the futures market.
That said, further downside looms. Sentiment remains elevated despite the recent setback and there are still significant long positions held by hedge funds at risk from profit-taking. The market mood tends to follow short cycles with sentiment shifting between optimism and despair within a few months. History suggests that the profit-taking will continue over the coming weeks.
At least in the oil market the fundamentals are increasingly scrutinised and concerns about the supply surplus are growing. The latest drilling activity data published late on Friday suggests that the US shale industry maintains its strong momentum and that production is set to expand robustly over the coming months, partially offsetting the Middle East’s supply restriction efforts. We still believe that the asset class will continue to underperform as price headwinds persist and roll headwinds are picking up.
Although the bullish sentiment is cooling, the fundamentals remain overhyped and the futures market positioning stretched, bearing further profit-taking risks. With more downside looming for oil, gold and industrial metals, the commodity asset class is set to continue to underperform in the near term.