Head of Commodity Strategy
Summary: The prospect for a Phase One trade deal between the US and China received a major setback yesterday and it helped drive already under pressure crude oil down further while given tepid support to gold. Coffee is currently caught in a tug-of-war between improving fundamentals and a weak BRL
The prospect for a “phase one” trade deal between the US and China received a major setback yesterday after the U.S. Senate passed the Hong Kong Human Rights and Democracy Act. The bill drew a rebuke from China and the standoff is likely to complicate discussions about a growth stabilizing trade deal. The markets reacted by sending bond yields and global stocks lower. Adding to the negative sentiment yesterday was the disappointing earnings report from Home Depot, a major U.S. retailer.
Crude oil already under pressure dropped further with Brent and WTI both breaking the uptrends from early October. Weakness was seen already before the Senate vote as the market was growing increasingly worried about the lack of concrete progress in U.S.-China trade negotiations. With demand growth once again being questioned the real damage was inflicted by a report from Reuters which said that Russia was unlikely to agree to further production cuts. Without deeper cuts from the OPEC+ group of producers the International Energy Agency forecast a 2020 production surplus of more than 1 million barrels/day. This in response to a continued rise in 2020 non-OPEC production from countries led by the U.S., Norway and Brazil.
Ahead of today’s “Weekly Petroleum Status Report” at 1530 GMT the American Petroleum Institute yesterday released their update. It showed a bigger than expected rise in both crude oil and gasoline stocks. We maintain the view that Brent crude is likely to remain rangebound around $60/b ahead of yearend. In the short-term, support, using Fibonacci retracements of the October to November rally, can be found at $59.90/b followed by $59.00/b.
Gold continues its slow recovery after recently finding support at the technical important level just below $1450/oz. A rejection at this level – if confirmed - sends a signal that the correction seen since the September peak has been a relatively weak one. The lack of firm buying response to the mentioned developments which have sent bond yields and stocks lower highlights a current wait-and-see approach ahead of yearend. Investors and traders who have booked profit, either in futures or exchange-traded funds are, given the time of year, unlikely to re-build major longs unless the yellow metal breaks back above $1516/oz. A break that could be triggered by renewed weakness in stocks or a repricing of the prospects for future U.S. rate cuts.
As we highlighted in our daily podcast on November 19 the short-term outlook for coffee has deteriorated once again. Improved fundamentals, being the outlook for a supply shortfall during the 2019-20 season, helped boost prices in recent weeks. This despite Brazil, a major producer of the high-quality bean, having seen its currency slide towards the weakest level since 2015. The weakness began on November 6 after Brazil’s largest-ever auction of oil deposits flopped and for a while it broke down the otherwise strong positive correlation between coffee and the Real.
Arabica coffee remains one of the favorite hedge funds short due to slope of the forward curve. The steep contango provides a carry for holding and rolling a short position. During a two-week period up until November 12 hedge funds cut their net short position in coffee by 80% and the short-term risk is that these could now be reinstated following yesterday’s technical break of support. Fundamentals are improving but until the mentioned contango is further reduced the outlook remains challenged. The one-year roll yield from holding a short position is currently close to 10% but down from 16% earlier in the year.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
