Head of Commodity Strategy
Summary: The commodity sector traded higher for a second week, thereby setting the sector on track for a second monthly gain and the best run in more than a year. On an individual level silver, crude oil, fuel products and copper were among the winners, and apart from Chinese policymakers repeating calls to support the world’s biggest commodity-consuming economy, the key driver this past week was undoubtedly the positive boost to risk sentiment that followed a lower than expected US inflation print for June. The data helped send the dollar and Treasury yields sharply lower after raising optimism that the US rate-hike cycle may be nearing an end, thereby reducing the risk of a recession and its potential negative impact on demand.
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The commodity sector traded higher for a second week, thereby setting the sector on track for a second monthly gain and the best run in more than a year. In our recently published Q3-23 Outlook we asked whether the commodity sector was bottoming out following a year-long decline. While some potential negative drivers still exist, we are nevertheless seeing emerging signs across the different sectors pointing to support.
The Bloomberg Commodity Total Return index trades up 3.7% on the month, thereby reducing the year-to-date loss to just 4.4%, with an all-sector rally being led by industrial metals and energy. On an individual level silver, crude oil, fuel products, platinum and copper also stand out.
Apart from Chinese policymakers repeating calls to support the world’s biggest commodity-consuming economy, the key driver this past week was undoubtedly the positive boost to risk sentiment that followed lower than expected US inflation and PPI prints for June. The data helped send the dollar and Treasury yields sharply lower after raising optimism that the US rate-hike cycle may be nearing an end, thereby reducing the risk of a recession and its potential negative impact on demand.
However, with the dollar currently down around 2.5% on the month compared with the gain in commodities, it not only highlights the important support the weaker dollar has provided, but also some short-term vulnerability should traders decide to book some profit on their dollar short positions. Not least against the euro which has reached a 16-month high above €1.12 against the dollar and, equally important, an all-time high in trade-weighted terms (nominal effective terms according to ECB measures).
Crude oil prices are heading for a third weekly gain with unplanned supply disruptions in Libya and Nigeria being added to a list that already includes voluntary cuts from Saudi Arabia and Russia. The impact of this is starting to be felt with some crude varieties showing increased signs of tightening. Together with the improved market sentiment triggered by a softer dollar following the weaker-than-expected US inflation print, it has helped move the focus from China and recession-led demand concerns towards a price-supportive focus on tightness.
With regards to demand, monthly oil market reports released this past week from the IEA and OPEC both pointed to a strong second half for global demand. While the IEA trimmed its forecast and OPEC lifted its expectations, they both agree that demand this year will rise by more than 2 million barrels a day, and together with production cuts, the market seems be moving towards a more price-supportive phase.
In our latest crude oil update we noted that Brent crude trades back above $80 and WTI above $75, both for the first time since early May. The positive momentum this has created is currently providing support, with funds being forced to reduce bearish oil bets originally established as a hedge against an economic slowdown. The combined net long in Brent and WTI held by managed money accounts in the latest reporting week to July 3 was 280k contracts and near the lowest belief in higher prices in more than ten years.
Brent extended its gains above resistance-turned-support at $78.50, and further gains will bring resistance at the 200-day moving into focus, in Brent at $82.55, and WTI at $77.60.
Gold and especially silver raced higher after the weaker June inflation and PPI reports helped send the dollar sharply lower while once again bringing forward the timing of a US peak rate scenario. Gold was heading for its best week since April, yet it is worth noting that the 1.8% advance was less than the 2.2% broad dollar decline – highlighting the risk of a pullback should short covering lift the greenback. Silver meanwhile rallied hard before finding some resistance ahead of $25.25, a level that if reached could see the white metal challenge the downtrend from the 2011 high just below $50.
Our long-held bullish view on precious metals has only been strengthened by recent developments but we remain cautious about calling an end to the current correction. Not least considering the risk the FOMC may throw another spanner in the works by sticking to their hawkish view on rates at their next meeting on July 26. In the short-term, gold’s weak dollar-dependent recovery is unlikely to step up a gear until we see it break above $1980 at a minimum – an area of resistance defined by several recent highs and lows. Read more in our latest gold specific update here.
Copper was heading for its best week since March while the 4.5% jump in the Bloomberg Industrial Metal Total Return Index put the sector on track for its best week since early January when the focus on China’s reopening triggered a strong start to the year before disappointment eventually led to fresh selling. The prospect of easing US inflation raising optimism as the current and aggressive rate hike cycle may be nearing an end was the main catalyst. It helped weaken the dollar while lowering the risk of recession that has weighed on the market in recent months. In addition, the metal market also took comfort from Chinese policymakers repeating calls to support the world’s biggest commodity-consuming economy.
Copper traded back above its 200-day moving average, however there is narrowing room for maneuver – potentially forcing a technical breakout within the next few months. Copper stocks monitored by the three major futures exchanges in New York, London and Shanghai dropped for a tenth consecutive week to 226k tons and near the 201k ton multi-year low reached last December. Despite seeing the global manufacturing sector – the key engine for global metals demand – in contraction for the tenth month in a row, the copper market has been holding up very well amid low stockpiles and surging green demand replacing the dependency on traditional drivers such as property construction and home appliances.
Bond. Long Bond(s)
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Steen Jakobsen,
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Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
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