June's wash-out in commodity markets – sparked by fears of that the Federal Reserve may scale back stimulus earlier than thought – has largely ran its course and the eventual withdrawal of bond purchases may ultimately be bullish for commodities, Societe Generale (SG) said this week.
According to the French bank, the wind-down of asset purchases implies a durable economy creating "eventual strength in total U.S. aggregate demand."
The post-FOMC "correction has been largely completed in commodities," SG said in its monthly commodity investor report on July 16, tellingly entitled 'It's the end of QE as we know it… but we feel fine' in homage to the eighties-era apocalypse-laden hit by rock band REM.
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Commodity investors should feel fine too, even as the markets and policymakers debate the 'when' not 'if' pertaining to the timing of stimulus withdrawal, the bank's strategists say.
The Fed's policy of QE (Quantitative Easing) "would likely be drawn to an end only when there are strong signs that the economic recovery in the U.S. is sustainable," said SG strategists led by Michael Haigh, Head of Commodities Research. "Moreover, the end of QE in this scenario would likely be positive for commodity prices, despite increased bond yields and a likely stronger dollar, as economic growth historically is the more dominant driver of commodity prices."
The strategists added: "U.S. QE may be at the beginning of the end, but expectation and actual 'tapering' may only front-load commodity bearishness."
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Markets, however, may not necessarily share such an optimistic appraisal of the post-QE environment, Warren Gilman, Chairman & CEO of investment firm CEF Holdings, told CNBC's 'Squawk Box' on Wednesday.
While Societe Generale's view is "absolutely a fair assessment…the market is not interpreting it that way," Gilman said. "Eventually the market is going to have to wean itself off (QE). Commodities prices will get back to fundamentals…so I fully agree with SG, it's just a question of timing."
Still, reversing QE "has been incredibly bearish for commodities and I expect it's going to continue to be interpreted as being bearish for the next several months even though in the long run it is a good thing," Gilman added.
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For the month ahead, Societe Generale's key overweight recommendations are aluminum, Chicago and Kansas wheat futures, feeder cattle and nickel. The bank is 'underweight' corn, gold, natural gas, silver and U.S. crude futures.