• Most commodity prices have held steady since mid-March. But earlier in that month, oil prices took a leg-down mainly because of a resurgence of virus cases and the threat of tighter containment measures in the EU weakening the demand outlook there. Higher bond yields in the US and an appreciation of the US dollar, as well as speculation about a revival of the US-Iran nuclear deal leading to higher Iranian output, possibly also exerted some downward pressure on prices.
• We still expect oil demand to strengthen as economies reopen, deepening the market deficit and pushing up prices. In fact, the rally in oil prices in the past day or two was driven by weekly US data showing a pick-up in crude demand. But with OPEC+ production rising from May, and Iranian production set to increase, we have revised down the Q3 peak in the price of Brent from $80pb to $75pb. Further ahead, steady increases in OPEC+ output should cause prices to fall to $70pb by end-21 and to $60pb by end-22.
• The prices of industrial metals have been fairly stable this past month despite a fall in investors’ net-long position in the futures market. This suggests that resilient physical demand has put a floor under prices, which chimes with data showing that Chinese commodity imports remain strong. But as fiscal support is reined in and credit growth decelerates, we expect slower growth in China to weigh on industrial metals prices. Meanwhile, with US real yields broadly steady, the price of gold has stayed around $1,740 in recent weeks. We think that the gold price will come under pressure as long-dated real yields rise a bit further.
• A sense of calm has been restored to global bond markets which has facilitated a renewed rally in risky assets. Over the past couple of weeks, major government bond yields have generally stopped rising, and have dropped back a bit in the US. In recent days, data showing that the ECB failed to step up its asset purchases by as much as expected meant that euro-zone yields have ticked up. Core yields are up by only a couple of basis points, but yields of “peripheral” government bonds have risen by slightly more. We think that there is scope for peripheral spreads to fall as recoveries progress and risky assets rally further.
• In the stock market, Developed Market equities have generally risen – the Developed Market MSCI equity index is up almost 4% on the month – with the sharpest rise in occurring in the US. The sectoral breakdown showed that tech stocks have underpinned the recent surge. But we expect that the rotation away from stocks that benefitted from the lockdowns, including tech, and back towards more traditional cyclical sectors such as energy will resume in the months ahead. Other risky assets have also performed well – investment grade corporate credit spreads, for instance, have remained very close to historical lows.
• Movements in the bond market have also impacted the dollar over the past couple of weeks. With US yields falling while yields elsewhere have changed little, US yield differentials have narrowed, causing the dollar to depreciate against most major currencies.
10-Year Government Bond Yields (%)
An excerpt from from the Global Economics Chart Book - Capital Economics, issued 16th April 2021
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