The best ‘taper trade’

Raw materials got a big boost from the Fed’s decision to delay its taper. Of the 17 commodities in the benchmark Thomson Reuters-Jefferies CRB Index, all rose. Gold and silver jumped at the prospect of looser monetary policy for longer, but base metals rose strongly too, with copper gaining 4%.

Yet this market reaction looks “over the top”, says Barclays. It’s become clear in the past few years that liquidity tends to flow into equity markets and is “not a driver” of commodities in the same way that it is for other asset classes. Raw materials “need growth”.

And there isn’t a great deal of that around. The outlook in China, the main source of metals demand, looks shaky despite a recent uptick. The rebound is built on yet more credit and shows no sign of spreading to private sector investment and consumption, as Capital Economics points out. Growth elsewhere is hardly very impressive. Then there are the fundamentals to consider.

Supplies are expected to rise significantly this year, with copper mine output to increase at its fastest rate in nine years. Expect the red metal, now at $7,200, to slide below $6,000 a tonne next year. Indeed, agrees Barclays, if there is a post-Fed non-taper trade, “it is probably to short copper”.