Commodities looking for direction from China

Commodity prices have generally risen this week, in large part due to optimism about further economic stimulus in China. We are more cautious as we expect the expansionary impact of stimulus to only feed through into the real economy in the second half of the year. What’s more, it is only likely to stabilise the economy rather than give a marked lift to growth. As such, we remain of the view that most commodity prices will end the year lower. The focus is likely to remain on China next week as markets look for any detail on the economic stimulus or any indication of the direction of trade talks with the US at the end of the month. Meanwhile, we expect China’s activity and investment data, scheduled for Monday, to confirm the weakness in December, which may act as a lid on commodity prices. That said, December data are not always a useful indicator of actual activity in the month given that they are often the residual needed to tie into annual data.