BCA Research postulates that commodities are in a bull market consolidation and that it does not appear to be over. The consolidation of commodities prices has caused a fair bit of confusion for those who are long commodities or commodities stocks. In the meantime, financials appear to be doing the opposite, staging a bear market rally.
This activity in the market provides a clear view of the unfolding dichotomy; Commodities Bull vs. Financials Bear. The following piece from BCA does a good job of describing the commodity side of the story.
10:42:00, September 11, 2008
The recent commodity price weakness is a bull market consolidation but does not appear over. Signs of continued cyclical downside risks are allowing for a selling climax.
The deteriorating cyclical demand backdrop for oil and related products, signaled by declining U.S. demand and decade-low SUV sales, allows for a washout in energy prices. Commodities could overshoot to the downside if economic weakness continues to spread, causing a further liquidation in global decoupling bets. In addition, the waning "paper demand" for commodities as an asset class is a near-term wild card. The U.S. political attacks and the price correction itself may spur further liquidation before the wave of index-related inflows resume. That said, a notable offset is that lower energy and food prices will ultimately allow global policymakers to become more dovish and protect growth. Bottom line: It is unlikely that the cyclical trough in commodity prices has been reached. A renewed dollar plunge, improved Chinese economic expectations and/or geopolitical stress events would bring forward the bottom. Barring that, commodities are likely to face downside risks until later this year.
Source: BCA Research
