By Hal M. Bundrick
NEW YORK (MainStreet
)--The re-stocking of Chinese inventories helped stage a swift about-face in commodity markets for the month of July as the choppy sector staged a rally. The Dow Jones-UBS Commodity Index Total Return increased 1.36% for the month. More than half, 13 out of 22, of segment indices posted positive returns. Precious metals saw the most upside in July, up 5.61%, supported by a weaker U.S. dollar and a sense that the Federal Reserve will maintain a loose monetary policy for the near term. Energy gained 4.22%, led by gasoline and crude oil, on the back of strong U.S. economic data and a continued draw-down of domestic inventories. Industrial metals ended the month 0.92% but livestock decreased 1.62%.
"The U.S. economy continues to improve, though at levels not emphatic enough to ensure Federal Reserve tightening," says Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy. "The Federal Reserve continues to express desire to tighten its extraordinarily loose monetary policy, yet is reluctant to do so too early and risk derailing the recovery. Interest rates continued to rise throughout the month in anticipation of eventual policy changes and improving economic conditions. As a result, the Federal Reserve and markets in general do not currently seem concerned with inflation. This may increase the risk of inflation overshooting expectations should the Federal Reserve tighten its policies too slowly; especially should economic growth materialize stronger than is currently expected."
July saw a bit of relief from all of the recent hand-wringing over China as Asian buyers, including those in China, became more active.
"Based on the July Purchasing Managers Index reports, global growth momentum may expand a bit faster in the second half of the year than the first," says Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management. "China may be able to maintain a reasonable pace of growth in the near term, supported by improving external demand, still resilient domestic consumption, a steadily expanding service sector, and incremental growth-friendly policy initiatives. However, caution remains as the Chinese government has been reticent to provide further stimulus measures due to concerns over inflation. While China's growth rates are still the envy of many other nations, they are significantly lower than the elevated rates markets had grown accustomed to. The period of adjustment will likely continue."