Weekly Commodity Update: Strong November led by metals

Weekly Commodity Update: Strong November led by metals

Ole Hansen

Head of Commodity Strategy

Summary:  The Bloomberg Commodity Index Total Return index traded up 2.7% in November, thereby driving the index to a 19% gain on the year. Led by precious and industrial metals which following several challenging months found support as the dollar weakened and bond yields dropped in response to lower-than-expected CPI and emerging weakness in US economic data. Developments leading to speculation that the US Federal Reserve may soon slow its pace of rate hikes. Also, China signaling a more pragmatic approach to Covid controls potentially laying the fundation for additional metal support in the coming months


The Bloomberg Commodity Index Total Return index traded up 2.7% in November, thereby driving the index to a 19% gain on the year. The strong gains among industrial and precious metals offset the minor decline in energy and grains prices. Following several challenging months, the metal sectors found support from a weaker dollar and sharply lower bond yields, both driven by a lower-than-expected US CPI print last month. The emerging weakness in US economic data has led to speculation that the US Federal Reserve may soon slow its pace of rate hikes.

A development that was confirmed by Fed Chair Powell in a speech on Wednesday when he signaled a smaller December rate hike as he presented a case for achieving lower inflation without tipping the economy into a deep recession. Whether successful or not may turn out to be a major driver of risk sentiment into 2023, with precious metals especially standing to benefit should he fail.

The industrial metal sector jumped 14.5% on the month, thereby reducing the year-to-date loss to 4.5%. The primary driver, apart from the softer dollar, is the optimism that China may shift away from Covid Zero policies and provide additional stimulus to boost demand in the top metal-consuming economy. Copper jumped 11% last month to record its best month since April 2021 and its first monthly advance since March. Having started the year on a high note driven by post-Covid optimism, the subsequent and prolonged Covid zero focus in China drove the price sharply lower from March onwards. The result of this is a metal that, despite the strong November, remains down 17% on the year.

The precious metal sector also recorded a strong month of November as the Bloomberg Precious metal index rose by 8%, thereby reducing the annual loss to just 5%. Silver led the charge with a 16% gain to $22.16, clawing back half of the losses that was seen between the March peak at $30 and the September low at $17.50. Gold, out of favor for months by traders and investors as the dollar and Treasury yields surged higher, managed a strong turnaround, rising 8% to reach $1768 – thereby reducing the year-to-date loss in dollar terms to just 3.3%. This is impressive in a year that, despite the recent weakness, has seen the dollar surge by 8% while US ten-year real yields have surged higher by around 2.3%.

Silver’s impressive rally has continued into December with the price breaking above $22.25 – a 50% retracement of the March to September selloff – and on route to the next level of resistance at $23.35. Meanwhile, gold is currently working its way through a key area of resistance between $1788 and $1808. However, with the market increasingly focusing on a Fed pivot, potentially without getting inflation under control, an upside break would confirm a cycle low around $1615 and with that a potential push higher. 

Source: Saxo

Crude oil recovers from unwarranted China demand scare

The energy sector suffered a small setback in November but remains up 55% on the year due to very strong gains in diesel and gasoline as well as natural gas. In November, all the major contracts, with the exception of natural gas, traded lower as the market took fright from continued lockdowns in China, a seasonal slowdown in demand and a steeply inverted US yield curve increasingly pointing in the direction of a sharp economic slowdown next year.

Crude oil spent the week recovering from a ten-month low after renewed and, in our opinion, unfounded worries about a deteriorating demand outlook in China. The bounce was supported by a weaker dollar and traders assessing signals that China may soften its Covid Zero policy after China’s Vice Premier in charge of fighting Covid acknowledged the Omicron variant is less deadly.

These developments forced a reduction in recently established short positions ahead of Sunday’s OPEC+ meeting. A meeting that is likely to be strong on words but low on actions, considering the unclear impact of an EU embargo on Russian oil starting on 5 December. In addition, US crude stocks fell by 12.6 million barrels last week, the biggest decline since June 2019, while US crude and product export hit a record close to 12 million barrels per day – highlighting continued strong demand from buyers looking for alternative supplier than Russia. In addition, the US government is likely to halt sales of crude from its Strategic Reserves soon, thereby removing an important source of supply which has seen 205 million barrels flow into the market this year.

Recession versus tight supply

The risk of an economic downturn at a time of tight supply of several major commodities will be one of the key battlegrounds that, together with the strength of a post-Covid recovery in China, will help determine the direction of commodities in 2023. Following months of aggressive rate hikes, the US Federal Reserve is now signalling a slowing pace of future rate hikes – with the eventual peak rate being determined by incoming data. From an investment perspective, the commodity sector has beaten most other asset classes this year and, despite a recent softness and easing of tightness, we maintain the view that investors should maintain a broad exposure to commodities into 2023.

The one-year implied roll yield, using a weighted average of the 23 commodities in the Bloomberg Commodity Index, remains positive, albeit lower than at the start of the year. The positive roll yield or backwardation signals a tight market outlook across most commodities currently led by commodities from energy, grains and softs.

Backwardation and its positive impact on investment returns

A positive roll yield, i.e. selling an expiring futures contract, at a higher price than where the next is bought, has supported the strong return investors have achieved through an investments via futures and ETFs this year. The chart below shows the year-to-date performance of an ETF tracking the Bloomberg Commodity Total Return Index and the Bloomberg Spot index which excludes the extra income achieved from the roll yield. Year to date, the ETF has realised a 17.6% return while the underlying spot index has delivered a six percent lower return. We expect the tailwind from tight markets trading in backwardation will rise again over the coming months. Not least driven by increased tightness across the energy complex as the embargo on Russian oil and, from next year, fuel products increasingly adds upward pressure on the front end of the forward curve.
Source: Bloomberg

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.