Fed easing not a panacea for commodities

Driven in large part by investors pricing in a greater degree of interest rate cuts in the US, the gold price leapt to its highest level in over a year this week. That same anticipation of policy support probably also explains the sharp recovery in the S&P 500. We agree that the Fed is likely to cut rates before the year is out, but we doubt that it will act soon enough to prevent a substantial slowdown in the US economy. As such, we expect US equites to plunge by end-2019. While the accompanying rise in risk aversion would be another headwind for most commodity prices, gold should receive a further boost. There could be a relief rally in commodity markets early next week if the US and Mexico reach an agreement and US tariffs are avoided. Otherwise, markets are likely to focus on a raft of economic data out of the world’s two largest economies. Taken together, Friday’s figures on US industrial production and retail sales look set to be fairly tepid. Turning to China, we also think that data on trade, economic activity, and broad credit growth will probably paint a fairly subdued picture. All of which could act as a further drag on the prices of most industrial commodities.