Our macro-driven model of expected industrial commodity returns (the CRB Raw Industrials Index includes non-exchange traded commodities such as burlap, rubber and lead scrap) has turned persistently negative, triggering the regime to shift to bearish from neutral (top left chart). This has been driven by tight Chinese liquidity conditions and the peak in global growth. The top-right chart shows that our BCFI Index has peaked and turned down, suggesting headwinds for global growth and commodity prices. Slowing EM real money growth (bottom-left chart) will also be a headwind, as is slower Chinese growth indicated by our leading indicators (bottom right chart).

So far this year, commodity markets have held up very well despite rising real yields and the recent rebound in the US dollar. This is likely reflective of late-cycle inflationary dynamics which tend to help commodities outperform as the economic cycle matures going into recessions. However, given the negative signal given by our forecast model and weak China leading indicators, for investors with industrial commodity exposures, it makes sense to buy puts to hedge against industrial-commodity price falls over the next 6 months.

(Click on image to enlarge.)

Industrial Commodity charts

Source: Bloomberg, Macrobond and Variant Perception