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Industrial Metals Outlook

Demand Factors Make Industrial Metals Unusually Risky. Industrial metals (including zinc, copper, iron, etc., but not precious metals) are expected to exhibit weak price growth in the near-term. The World Bank forecasts a 0.2% price decline for an index of industrial metals in 2019 compared to 1.3% and 1.5% increases for energy and food respectively.

Impacts of Growth Concerns and Trade Tensions

Growth Concerns, Not Trade, Have Driven Much of Commodities Recent Slump. Several major developments in trade tensions, including President Trump’s May 5 tweet threatening to raise tariffs and Thursday’s night’s threat to hit all Mexican imports with 5% tariffs, have clearly contributed to the poor May performance of crude oil, industrial metals, and many other commodities.

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Impact of Trade Tensions Revisted

This week, with tensions near another high point (despite rumors or yet another truce) we check again to see if trade tensions is directly impacting asset and commodity prices or if their impact is only indirect.

Impact of Term Premiums

Our focus here is on another driver of lower U.S. interest rates in 2019. Term premiums, the compensation investors need to hold longer-term debt, have unexpectedly fallen as well with the 10-1 year term premiums, as estimated by New York Fed economists, falling by 14 bps since May 1 to -43 bps. This is the lowest level since at least 1961.

Impact of Geopolitical Risk on Oil Prices

Because supply disruptions may be related to geopolitical risk, we decided to see how political and economic uncertainty affect a forecasting model for crude oil. We consider both U.S. economic policy uncertainty, and Caldara and Iacoviellos’ (2017) measures of geopolitical uncertainty for the world, Saudi Arabia, and China.

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