Risk assets and oil remain under pressure on Monday while gold and other safe heavens are marginally higher. Among numerous market developments we would note stabilization of commodity prices after the rapid growth in April - early March:

The Bloomberg commodity index posted a local top on May 12 and then started to retreat. At the same time, we saw a pullback in a number of market bets associated with expectations of accelerated consumer inflation. First, the yield on long-dated US Treasury bonds started to ease last week:

As it can be seen on the chart, the yield jumped last week on US CPI report release, however it couldn’t sustain gains - having climbed to 1.70%, the yield steadily declined in the second half of the week. Material pro-inflationary surprise in US retail sales on Friday was apparently discounted by the Treasury market as the yield continued to slide on Friday.

Second, commodity currencies, which uptrend were fueled by the rise in commodity prices, embarked on a downtrend: at the time of writing, AUDUSD is down 0.41%, NZDUSD is 0.66%, USDCAD is up 0.23%. At the same time, their weakness could not be attributed to the broad strengthening of the dollar, as the US currency declined against the EUR and GBP.

The commodity market could be under pressure due to the increase in the incidence of Covid-19 in the Asian region last week and related new restrictions. In addition, PPI and the component of input prices in manufacturing PMIs in the US, Europe, and some Asian economies rose strongly in April. For example, in deflationary Japan, wholesale prices rose at their fastest pace in six and a half years, data showed on Monday. High prices for production factors could become an inhibiting factor for activity in the sector, as a result, the demand for raw materials could find a local high. Also, worth noting is the weak data on the Chinese economy, released on Monday. Growth in retail sales has lagged well behind forecasts, dampening risk appetite.

Earlier I wrote that overheated by historical standards commodity market is poised to cool down, which can hit primarily commodity currencies. Taking into account synchronized developments in commodity and Treasury market, commodity dollars, correction could be already under way, which creates selling opportunities. Particularly vulnerable in this regard are CAD, AUD and NZD, which advanced by an average of 9% against the USD since the start of “commodity supercycle” in November 2020.

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