Over the month of August crude oil prices have continued to creep up notwithstanding some consolidation recently on speculation that the US may release some emergency reserves to counter recent price moves. Base metals have remained remarkably stable, although both copper and aluminium have edged higher in recent days despite dismal data out of China. Grains have in contrast seen prices move lower, as US weather conditions have become slightly more favourable, although the latest Gulf of Mexico hurricane threatens some crops as well as oil production. On the whole, our forecasts are largely on track despite a weaker outlook for China than we envisaged a month ago. We have kept our commodity-price forecasts largely unchanged: the only changes this time round are a downward revision to our forecast for LME steel billets, which has been burdened by a persistent decline in iron-ore prices and a lower forecast for CBOT wheat due to our FX strategists updating their EUR/USD profile to include a 1.27 peak on a 3M horizon.

Support to our call from the Fed


In our last Commodities Quarterly: Stronger in H2, weaker in 2013 (6 August) we outlined three factors that should prove supportive for commodities in H2: more Fed easing, stabilisation in China and the ECB providing a backstop to debt-ridden sovereigns. Since then we have little news on the latter – markets are still waiting to see whether Spain will ask the European Financial Stability Facility (EFSF) for help, whether the German constitutional court will approve the EFSF setup and – conditional on the former two – exactly what the ECB plan is. However, the August Fed minutes in our view largely confirmed that unless the data flow improves markedly, a third round of quantitative easing now seems highly likely. This should continue to support risk assets including commodities in the near term and should also hold a floor under dollar- denominated prices due to the upward pressure on EUR/USD that we continue to see materialising.