Commodities investing is back in fashion

Commodity markets have witnessed extreme price action during the past 12 months, from historic highs to price reversals driven by a weakening global economy and investor risk aversion. While some optimists are forecasting the start of a recovery, the opaque global economic outlook still poses many questions for commodity producers and consumers in Asia. Simon Grenfell, head of commodities for Asia at Deutsche Bank, shares his views on the challenges facing the region and the broader development of commodity markets in Asia. 

What has been the reaction to recent rises in commodity prices? 
Sparks of optimism have supported a sustained rally in financial markets over recent months, with suggestions that the worst of the financial crisis may be over. However, debate over what is driving the rally continues; is it liquidity-driven or are markets correctly predicting a turnaround in the global economy? 

If we presume an economic recovery is the main driver, the rise in oil prices to $70 per barrel was clearly supportive, although we have since seen this ease to $60. Freight rates, a measure of the expectation for global trade activity, have risen strongly with the Baltic Dry Index up 413% from its low in December 2008. 

However, looking at the overall economic climate, of which demand for commodities is dependent, then the fog surrounding the recent rally becomes more entrenched. US unemployment, while slowing, was at 9.5% in June. Unemployment in the Eurozone hit 9.5% in May. China's exports fell 26% year-on-year in May. The fall in global stock markets caused by the World Bank's downward revision to its global economic outlook on June 23 showed just how fragile the rally is.