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This rally in commodities will fade

Ben Moshinsky   

This rally in commodities will fade
Finance2 min read

Shares in commodities companies had a near-death experience earlier this year as Chinese markets and the oil price crumbled, hitting confidence and profit margins at the same time.

Bank of America had a great chart to show what this looked like:

BAML commodities

Bank of America Merrill Lynch

But for the past month, shares have rallied as have commodities prices.

Oil hit three month highs, while gold has soared:

gold 2016

Investing.com

Despite this, it's too soon to get excited for a lasting return to a bull market, according to Dominic Rossi, global chief investment officer of equities at Fidelity International, one of the world's biggest fund management companies.

He believes the market activity, and rally in commodities, is driven by hedge-fund traders covering short bets - which involves buying commodities and shares to close out previous bets that the price will fall. This temporarily boosts prices but doesn't have a lasting effect because it doesn't signal a big change in market confidence.

On a call with reporters on Wednesday, Rossi said:

"A lot of this rally is technically driven. The hedge fund industry was very short the sector and they've seen a significant squeeze. I think this rally in commodities will fade, whether it's next week or next month I don't know."

Rossi's views chime with those of analysts at UBS. They told clients, in a note published on Tuesday, to get out of the US stock market now because the rally is about to come to an end.

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