Commodity prices have rallied strongly since COVID first hit the world in Q1 of 2020 with the huge stimulus being pumped into the system by central banks helping to lift the price of commodities almost across the board. The attitude of “whatever it takes” without the usual caution towards inflation we believe will eventually undo the post GFC bull market for asset prices but for now the influence is very positive as we enjoy a liquidity driven rally in both equities and commodities, and especially companies whose profitability is determined by commodity prices.
Our core view at the start of 2021 of rising inflation has recently been embraced by bond yields and while MM believes their rally will take a rest short-term we remain bullish implying commodities should follow suit and test their 2010/11 highs in the coming 1-2 years i.e. MM intends to maintain a core overweight stance towards the Resources Sector this year with a few tweaks along the way as we look for optimum positioning e.g. what base metal will outperform next.
“Doctor Copper” has led metals higher over the last 12-months although we feel the recent 11% correction by the industrial metal is a warning that sellers are finally emerging and from a risk / reward perspective another move up towards $US450/lb might be time to reduce our very bullish exposure.
MM has enjoyed being long the COPX ETF in our Global Macro Portfolio, our position is currently showing a paper profit well in excess of 100% but we are now considering taking profit on all / half of our holding into fresh 2021 highs.
With copper remaining bullish, although in need of a rest, this morning we’ve turned our attention to bulk commodity iron ore which has supported the Australian economy over the last decade. In our opinion the picture is a little more clouded here as the metal struggles to rally away from the 1100 CNY / MT area, no major surprise considering its already rallied ~50% in only 4-months i.e. we are not bearish but would not be chasing strength in the sector.
Prominent local iron ore producer FMG has been consolidating in a similar manner to iron ore, we continue to like the stock but want lower entry levels at this stage.
