Commodity

Commodity Focus Q1 2017 Commentary

SaxoSelect Commentaries
Instruments traded:CFDs
Asset Classes:Commodities
Investment Style:Trends
Quarterly Return:-21.3% (net of service fee but gross of any applicable performance fee)
Q1 2017 daily return volatility:1.55%
Average Trades per week:11 (since inception)


Market Overview

The final quarter of 2016 (Q4 2016) and the first quarter of 2017 (Q1 2017) saw the greatest sequential reversal of ETF flows in history. Over $11.5bn left the commodity markets in Q4 2016, and almost $8.5bn flowed back in Q1 2017 resulting in a $20bn reversal.

Initially, this seemed counter-intuitive when put into the context of the on/off ‘reflation trade’, which was ‘on’ during Q4 2016 and then ‘off’ during Q1 2017. The USA, Japanese & German economies grew in 2016 and then ran out of steam in Q1 2017. Those economies’ bond markets responded to these changing inflationary expectations with breakeven rates declining throughout the Q1 2017.

It is difficult to tell whether the commodity flows were in anticipation to, or in response to these changing reflation expectations. In any case, the result is that the diversified Bloomberg Commodity Index remained range bound throughout H2 2016 and Q1 2017.

Portfolio Performance

The Commodity Focus trading strategy had a disappointing quarter. Performance has been a direct result of the range bound movement in commodities, as the trading strategy is most likely to perform positively in trending markets. Moreover, the model seeks to identify medium-term trends. Upon reflection, an example of this is during the bear market of 2014 & 2015 and also the bull market during the first half of 2016, when performance was positive over both periods, but has struggled in the recent ranging market. A more anecdotal note is that financial & commodity markets seem to have displayed substantially more price static, or ‘white noise,’ than usual. 

Outlook

It is difficult to tell how long the existing range bound behavior will continue in commodity markets. In today’s conditions interpreting data including weather, politics & economics, which influence the agriculture, energy & metals commodity sectors, remains challenging. 

Commodity markets have now had three consecutive range-bound quarters to digest. This movement follows a 23% rise in the first half of 2016 and a painful bear market before that, from the mid-2008 highs to Q1 2016 lows, during which the index lost 66% of its value. 

The strategy manager’s view is that the commodity market is waiting for a catalyst to break the range bound movement, and that geopolitics could break the deadlock. Moreover, the Trump-lead USA has just taken the first step to reassert American global power, evidenced by the recent missile strikes in Syria and sending a warning signal to Syria, North Korea, Russia & China.  

Any information found in this document, including performance information and statistics are subject to change. You can find the latest updated pricing information on the description page for each available portfolio. In providing this material Saxo Bank has not taken into account any particular recipient’s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses, and all capital is at risk. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisors in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure of risks nor a comprehensive description of such risks. Any expression of opinion may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without notice (neither prior nor subsequent).

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