Will commodities rise defy European solvency issues?

Posted on 29. Dec, 2010 by Jean Jacques Ohana in Weekly Focus | Comments Off

As presented in the following charts, the average 1 year curve on a diversified basket of 17 commodities has dropped to record levels. This curve evolution to backwardation reflects depletion in global commodities inventories and supply tensions among various materials. Cotton and Sugar show the most significant 1 year backwardation to 40% and 30% respectively, thus bring light to major supply disruption combined with buoyant demand.

As some commodities are presently in a bubble situation, such as cotton, others, mainly in the energy complex, are identified in a strong trend without bubbles, besides combined with positive curve evolution. When commodities curves were in such a configuration (backwardation over 2%), the distribution in returns was highly positively skewed as demonstrated in figure 3.

These highly bullish prospects are mitigated by risk aversion vulnerabilities developing on European Governments and banks solvency. Should systemic contagion hit the financial system or China undertake required policy tightening through rates increase, commodities will not resist the resulting financial storms.

Figure 1


Figure 2

Figure 3


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