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Pakistan Commodities_Global Commodities reflecting signs of flattening, (AKD Daily, Oct 14, 2021)

AKD Daily

Pakistan Commodities: Global Commodities reflecting signs of flattening

• Global commodities measured by TRJ Commodity Index has gained 4.9%MoM during Sep’21. However, a more important trend is emerging with the outgoing quarter marking the slowest increase in Commodity prices (Ex-Energy) over the past 3Qs (in percentage and in absolute terms) with TRJ Commodity Index and Bloomberg Grain Index reporting a change of +7.5%QoQ and –ve 3.3%QoQ, respectively, indicating that the curve could be flattening. 
• This can also be verified by downtick in Baltic Sea Freight Index (down 4.8% from peak values), which has been an important lead indicator signaling turning points in commodities historically with statistical p-value near zero. Lastly, Saudi Arabia has cut oil prices for Asian deliveries by US$1-1.5/bbl citing demand flattening in these economies.
• The potential ease-off in key commodities casts positive overtures on macro front (Base case FY22 CAD estimated at US$11.6bn) where slowdown in price accumulation in major food commodities, (FAO: +2.2%QoQ – the slowest in past 5Qs) with Grains already undergoing correction, (down 3.3%QoQ) should moderate inflationary pressure in the coming months (FY22E: 8.7%YoY).
• The market has corrected 7.3% since the beginning of this fiscal year, turning valuations attractive in our view. We advocate of building positions taking a medium term view, betting on successful conclusion of IMF review moderating uncertainty on macro front. We like Banks as SBP in line with global Central Banks roll back monetary relaxations, Techs (perfectly hedged against commodity and macro risks), and Cements/Steel & Construction-Allied (commodity risks priced-in to valuations).

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