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Will commodities continue to shine in 2017?

Analysis from Thomson Reuters looks at the three main factors behind strong commodity performance last year: fiscal stimulus from China, speculative trading and the election of Trump in the US.

As these graphs show, the price performance of a variety of asset classes (energy, base metals, precious metals, equities, agriculture, dollar, US 10-year bond index) has shown far stronger performance in 2016 compared to 2014 and 2015. A blog by Thomson Reuters looked at what was driving bullishness in commodities and how this trend might play out in 2017.

Three factors boosting commodity prices

The following three factors boosted commodity prices in the following ways:

  1. The fiscal stimulus from the Chinese government, together with monetary easing and lifting restrictions on buying property, helped to stimulate the Chinese economy, which in turn boosted demand for commodities.
  2. Speculative traders were attracted to commodities in 2016 partly because of the renminbi's loss of value. Commodities analyst Ling Wong explains in this Thomson Reuters blog: “Against a backdrop of a depreciating renminbi and unappealing returns in stocks and bonds, speculators were prompted to search for higher yielding investments elsewhere.”
  3. Donald Trump's election win also boosted commodity prices because investors presumed a Trump presidency would mean further fiscal stimulus for the US and a faster rate of inflation.

The year ahead for commodities

So what should businesses look out for in commodities in the coming 12 months? Wong suggests focusing on four factors:

  • Keep an eye on the value of the dollar compared to oil price. A stronger dollar could offset bullishness in commodities markets.
  • Yields on 10-year government bonds began rising during 2016, meaning that investors will want to sell and reallocate cash to alternative vehicles. Wong says that investors could choose to invest this cash in commodities.
  • Economic measures – such as infrastructure spending – to stimulate the economies of the US, Europe and Japan are expected this year. This will fuel demand for commodities.
  • Political uncertainty will also affecting commodity pricing, from the unknown quantity of Trump in the US, to elections in Europe and the UK's handling of Brexit negotiations.

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