Further weakness ahead

The recent slump in the prices of most commodities mainly reflects worries about the near-term outlook for economic activity, rather than any deterioration in financial conditions. We expect global growth to stay subdued, with hopes of a sustained recovery in China in particular continuing to fade. What’s more, financial conditions could still deteriorate in the second half of the year, perhaps due to a renewed escalation of the crisis in the euro-zone or an over-reaction to the likely tapering of QE in the US. This suggests that commodity prices will generally remain weak, with some notable exceptions including continued gains for US natural gas and at least a partial rebound for gold.