CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.
Summary: The Fed- and China-fueled risk rally has boosted commodity prices despite evidence of a global slowdown.
Global stocks and risk appetite in general witnessed a major comeback in January. The MSCI World Index rose by almost 8% after dropping by the same percentage amount in December. The Bloomberg Commodity Index, meanwhile, shrugged of its 6.9% December loss to return 5.4%, its best month in almost three years. All three sectors of energy, metals and agriculture recorded gains with cocoa being the only out of 24 commodities showing a loss for the month.
The sharp recovery was supported by the US Federal Reserve chairman Powell’s U-turn on further rate hikes and the outlook for further quantitative tightening, as well as the Chinese government enacting several key stimulus programmes in the form of cutting taxes, interest rates and banks’ reserve requirements. Adding to these developments were the latest trade talks between the US and China, which showed signs of making progress.
The recent change in tone from not only the Fed but also central banks in China, Australia and Europe highlights nervousness about the increased risks to global growth and the need to arrest the slide towards recession. A US recession probability index issued by the New York Fed has risen to the highest level since 2008 while economic data in China continue to deteriorate.
A warning that things may get worse before improving was found in the Chinese manufacturing PMI which fell more than expected to a three-year low. In Europe, Italy fell into recession for the first time since 2013 while the UK economy starts to feel the pain of the Kafkaesque political situation surrounding Brexit.
The strong returns in commodities witnessed during the early parts of January faded somewhat during the final week. Despite one of the coldest winters on record in parts of the US, natural gas priced out of New York nevertheless slumped by more than 9%.
Crude oil, meanwhile, remained rangebound after failing to receive a ‘lower-supply-driven’ boost from US sanctions against Venezuela’s state oil company and Saudi Arabia saying they were cutting production by more than they had agreed to.
Industrial and precious metals enjoyed the tailwind from the progress in US-China trade talks and the aforementioned change in tone from the Fed. Gold broke higher as the prospect of future rate hikes were slashed while copper was boosted by the rally in emerging market bonds, stocks and currencies.
Iron ore initially surged by more than 15% following the disastrous dam burst in Brazil. The facility run by Vale, a top global producer, forced the company to suspend 40 million tons/year of production (this sounds like a lot, but it only accounts for 0.2% of annual seaborne trade). Gains were pared towards the end of the week as the production impact was reassessed and after a continued drop in the Baltic Dry Index pointed towards a potential weakening in demand for transport of iron ore and coal.
Gold reached a nine-month high at $1,325/oz after the Fed returned to a neutral stance on rates. It concluded a two-month, $110 rally which was supported by the worst December drop in US stocks since the 1930s. It continued into January after Powell’s January 4 speech in which he made a significant U-turn by acknowledging that the Fed was open to ending quantitative tightening faster than anticipated while saying that it was also the listening to the market’s call for a pause in interest rate hikes.
Gold’s ability to move higher this month despite a strong recovery in global stocks highlights the continued appetite for tail-end protection amid macro-economic and geopolitical worries. Following the US government shutdown, the weekly Commitments of Traders report, which provide insights about speculative positions held by money managers, is not expected to return to normal until early March. This pause in data has left the market somewhat blind in terms of gauging how the major players see the landscape.
Data covering demand for exchange-traded funds backed by gold however continue to show strong demand. During the past two months, total holdings have risen on all but four days to reach 2,280 tons, a near six high.
Having reached $1,325/oz, gold once again needs to consolidate, potentially back towards $1,300/oz. However we maintain an overall bullish outlook and at this stage would only express a correction view using put options.
Crude oil posted its strongest monthly advance since 2015 but despite multiple events and comments providing support it failed to break higher. Having been rangebound for the past three weeks, the short-term direction could be lower as both WTI and especially Brent continue to consolidate within the established $5 ranges. During the past week, the following comments and events failed to give oil the needed boost to break higher.
• US sanctions against PdVSA potentially reducing crude oil exports further • Saudi Arabia said in an interview that it would cut February production below its voluntarily agreed limit at 10.33m b/d • The Fed joined other central banks in turning more dovish thereby supporting the growth and demand outlook. • US weekly crude oil inventories rose by less than expected as Saudi Arabia cuts supplies • Stabilising risk sentiment with trade talks between China and the US appearing to gain some momentum
WTI crude oil is currently stuck in a $50/b to $55.50/b range.
Some movements were seen in the spread between WTI and Brent crude, which narrowed to $7/b, the tightest level since August. The US sanctions against PdVSA, Venezuela’s state-owned oil company, helped lift North American prices including WTI, not least due to US refineries being forced to source other heavy crude oil varieties such as Mexican Mars and Western Canadian Select.
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Equities: The AI fever pushes market to new extremes
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
China faces challenges from generative AI amidst the fragmentation game
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Japan’s riposte to aging and productivity headwinds: robots with generative AI
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Fixed income: To hike or not to hike, that is the question
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Your browser cannot display this website correctly.
Our website is optimised to be browsed by a system running iOS 9.X and on desktop IE 10 or newer. If you are using an older system or browser, the website may look strange. To improve your experience on our site, please update your browser or system.