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December 31, 2015 - Weekly Pricing Pulse
Thin trading poses volatility risk for the week ahead, although near-record index lows indicate this is still a good time to buy.
Last week the MPI broke a four-week losing streak to finish flat. This means that we are still hovering just above December 2008 lows for the second week in a row. Oil prices showed some resistance around $36–37/barrel levels, so that sub-index was only down 1.6%. Other commodities managed to etch out modest gains, among which we counted a 0.9% increase in chemicals, a 0.5% increase in ferrous metals, and a more robust 2.1% increment in nonferrous metals, occurring partly on the back of a near 3% increase in aluminum prices.
Markets were more bullish on China, hoping that policymakers would tackle overcapacity problems in heavy industries. This development also comes on the back of earlier news that Chinese smelters might curtail production of aluminum and steel. Iron ore thus finished up by some 0.6%, which provided a boost to the ferrous index.
Monday's news-flow from Saudi Arabia came through on the downside, though. The Saudi budget deficit reached 15% of GDP in 2015 ($90 billion). While this could put pressure on the kingdom to abandon its market share strategy, large deficits may in fact strain the riyal peg, resulting in short-term efficiency gains from Saudi wells and temporary fiscal relief if there is devaluation. While we do expect further MPI weakness for the week ahead, thin holiday trading could produce some considerable volatility during the last few days of 2015.