Commodity Focus Q3 2017 Commentary
|Investment Style:||Trends, Systematic|
|Quarterly Return:||-0.97% (gross of service fee and any applicable performance fee)|
|Q3 2017 daily return volatility:||1.50%|
|Average Trades per week:||9.5 (since inception)|
After the decade-long bear market post-2008, the Bloomberg Commodity Index has been consolidating its base in a range for 18 months. The dip down out of the range at the end of Q2 2017 turned out to be a false break, and Q3 2017 has been an exasperating churn back to the middle of the range.
Commodity prices broadly have been undecided in Q3 whether they should take their lead from (i) reflation and the normalization of monetary policy, or (ii) the geopolitical concerns about North Korea. In broad terms, given how central the US dollar has become to most investors’ thinking on commodities, the macro theme of normalisation of monetary policy overshadowed the idiosyncratic factors in most commodities.
"Agri's are driven by the weather, Energy by politics and Metals by economics".
Agriculture & Soft commodities:
There were few surprises in Q3 from the supply & demand for agricultural commodities, and the dominant price driver across the sector has been the US dollar. Dollar weakness early in the quarter gave way to US $ strength late in the quarter, and resulted in corresponding price reversals in this sector.
Against expectations, the crude oil price rose 10% in Q3. From storms in the Mexican Gulf to a forward curve described as a “mullet” hairstyle (graph on right) and Saudi Arabians visiting Russia for the first time ever to discuss continued manipulation of the oil market, there have been more anomalies than normalities this quarter.
Industrial metals strengthened as if responding to global inflation, but were in fact more driven by idiosyncratic supply-side tightening e.g. Chinese capacity cuts. Precious metals and PGM’s mimicked the agricultural sector by performing inversely to the US $ i.e. they were driven by the anticipated monetary policy normalization, and not the geopolitics regarding North Korea.
The portfolio began the quarter short of most commodities, long positions in copper & palladium being the only exceptions. However the directionless September resulted in most positions being closed and the portfolio finished the quarter with very little exposure.
Typical of this strategy, it was difficult to string consecutive profitable months together in a ranging market. Happily the portfolio completed the quarter relatively unscathed.
The strategy manager believes that the decade-long bear market in commodities is over, although also believes being patient to trade in the current nascent bull market will be more profitable than being rash. The strategy is will continue taking trades as they are signaled by the systematic investment process, and stopping them out if & when they fail. More trades are expected to be bullish than bearish, and these will be on the confirmation of breaks from the range, rather than predictions of breakouts.
As usual, trailing stops will be moved in the direction of the price trend, and exposure will be reduced in the event of counter-trend moves - not because the trend has changed, but in order to reduce the volatility of portfolio returns.