In Q4 of last year we saw selloffs in industrial metals, commodity markets and stock markets. In Q1 2016, we are witnessing a recovery in these markets. However, so far, the recent rally in these markets looks normal within the context of a bear market. Indeed, rallies like the one seen this quarter are pretty normal in bear markets.
After a price selloff, it’s pretty normal to see new buyers coming into the market. After prices hit new low levels, talks about supply cuts, economic stimulus, demand improvement start to come up. That brings some optimism to the market, short sellers cover positions and bargain hunters see an opportunity to buy, lifting prices.
Many people get overexcited during these price rallies and unnecessarily lose focus on the big picture. Once prices reach more “normal levels” sentiment can change quickly. Those supply cuts don’t really materialize, economic stimulus doesn’t work as expected and the expected improvement in demand doesn’t come.
Markets are in that stage now, and we believe Q2 will give us some clues as to whether this rally is just thanks to bargain hunters or a real fundamental recovery is taking place:
A recovery in oil prices led the broad rally in global markets in Q1. However, in 2015 we saw oil prices climbing just like they are doing now to then fall to multiyear lows. Now that prices are near $40/barrel, this seems to be a level where prices could struggle. Whether oil prices can continue to climb in Q2 or they actually succumb again will be critical for metal price trends.
China’s Stock Market
Global stock markets have also seen a recovery since February amid stabilization in commodity markets. China is the biggest producer and consumer of industrial metals. Therefore, investors’ sentiment on the future of the country is critical to metal prices.
China’s stock market rallied in Q1 but, similar to oil prices, this could be another dead cat bounce like the one we saw in 2015. Q2 will probably a big test for Chinese markets. We’ll have to wait and see if this is a real turn around or we are yet to see lower prices. Another sell-off in China’s markets would have a depressing effect on metal prices and stock markets around the globe.
U.S. Dollar: Bounce or Breakdown?
A key factor to watch is the dollar. A weaker dollar in Q1 contributed to higher oil and metal prices. As we see in the chart above, the dollar index is now nearing a key support where we have seen it bounce previously. In Q2, the dollar will probably test this area. A rising dollar would make oil and Chinese markets fall.
What This Means For Metal Buyers
We still consider the recent rally in metal prices normal in the context of a bear market. Prices are now rising to levels where they might struggle to break through.
Q2 will give us good clues on whether this rally is for real or prone to fall short. Buyers should closely monitor the macro drivers mentioned above.