Commodities Will ‘Drift Lower’ as Stimulus Ends, UBS Says

Commodities will decline this quarter as central banks in the U.S. and Europe refrain from adding further stimulus, removing the driver that helped to lift prices in the first three months, according to UBS AG. (UBSN)

“In the absence of further injections in the second quarter, we expect prices to drift lower,” analysts led by Hong Kong-based Peter Hickson said in an e-mailed report today. Crude oil, copper, nickel and cotton may decline, the report said.

Goldman Sachs Group Inc. cut its three-month outlook on commodities to neutral from overweight on March 28, saying that most raw materials reached targets after gaining and economic growth may soften in the second quarter. Commodity-exporting nations face the risk of lower prices in the coming months, the International Monetary Fund said on April 10.

Statements from the Federal Reserve’s Open Market Committee “suggest the likelihood of further quantitative easing is minimal,” the UBS analysts wrote. “A more durable global economic recovery has heightened concerns about rising interest rates and a stronger U.S. dollar.”

The Standard & Poor’s GSCI index of 24 raw materials has lost 1.2 percent since the end of March, eroding the 6.8 percent rally in the first quarter. Brent crude for May was little changed at $120.22 a barrel at 5:14 p.m. in Singapore, with the most-active contract 2.2 percent lower this quarter. Brent may lose $10 on higher Saudi oil output, UBS said.

Supply Cuts

Minutes from the Fed’s March policy meeting, which were released on April 3, showed policy makers will probably hold off on increasing monetary accommodation unless the U.S. economic expansion falters. The U.S. central bank has set rates at a record low since 2008, and bought $2.3 trillion of debt in two rounds of quantitative easing to boost growth and employment.

“The ending of European and U.S. liquidity stimulus is a key concern,” the UBS analysts wrote. There may be “further liquidation of speculative and exchange-traded fund positions built up to historically high levels,” they said.

The U.S. economy grew in all 12 of its regions from mid- February through to late March as hiring, manufacturing and retail sales showed signs of strength in the face of higher fuel prices, the Fed said in its Beige Book business survey yesterday.

The economy in China, the largest base-metals user, probably grew at the slowest pace in almost three years in the first quarter, expanding 8.4 percent from a year earlier, according to the median estimate of 41 economists surveyed by Bloomberg. The data is due for release tomorrow.

‘Mixed Bag’

“A mixed bag of economic numbers presents a dilemma to central bankers around the world, whether or not to loosen,” said Sun Yonggang, an analyst at Everbright Futures Co., a unit of China’s largest state-owned investment group.

Zurich, Switzerland-based UBS recommended soybeans, corn and platinum group metals, according to the report. Aluminum and zinc may get support from supply cuts, the analysts wrote. Soybeans in Chicago, which traded at $13.67 a bushel, have rallied 13 percent this year as drought cut supplies.

Higher soybean oil prices would help to support palm oil in the second quarter, the analysts wrote. Palm oil, which traded at 3,569 ringgit ($1,163) a metric ton on the Malaysia Derivatives Exchange, has rallied 12 percent this year.

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net; Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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